FDIC Falls Into the Red

Yesterday, the FDIC said the fund which protects consumer bank deposits has fallen into the red and will remain there until 2012. This has only happened once, in 1991 during the savings-and-loan crisis, and it shows how U.S. officials may have underestimated the impact of the credit crisis on the government's cash needs.

Most experts believe the banking crises has yet to hit bottom. "Though some of our largest bank failures have already taken place, there are still hundreds and hundreds of banks that are going to fail in this cycle," said Gerard Cassidy, a bank analyst at RBC Capital Markets. The FDIC had 416 banks on its "problem" list at the end of June, and the number is expected to grow.

The FDIC has already taken more than $30 billion out of the fund to cover bank failures over the next year. On Tuesday, government officials estimated that bank failures from 2009 through 2013 will cost the FDIC $100 billion. FDIC officials estimate the deposit insurance fund wouldn't be back to comfortable levels until 2017.

However, it is important to note that FDIC officials stressed that the fund's depleted state wouldn't affect depositors because federally insured deposits are backed by the full faith and credit of the U.S. government. Essentially, the government will do what is necessary to make sure depositors are paid, whether that is infusing the FDIC fund with cash or printing more money.

The FDIC also has a plan to address the problem. On Tuesday, it proposed the unprecedented step of having the banking industry prepay $45 billion in fees by the end of the year to give the government more breathing room to handle future bank failures. The FDIC is asking most banks to hand over their deposit-insurance fees for 2009 through 2012 by the end of the year.

Surprisingly, most banks liked the idea. It seems they would rather prepay their fees rather than be hit with an emergency charge of $5.6 billion on top of their regular fees...

To relate this information to financial planning, the point is that investors should remember that we aren't out of the woods yet. We had a great third quarter (the S&P 500 is up approximately 15% from July through September), but investors need to be aware of the risks that are currently prevalent in the marketplace. Now would be a great time to re-evaluate your tolerance for risk and ensure your portfolio reflects that risk tolerance. As usual, I recommend speaking to an independent fee only financial planner for assistance with accomplishing these tasks.