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FDIC: Cost of bank failures to exceed $40B

Federal regulators believe U.S. bank failures will cost the deposit insurance fund more than $40 billion over the next four years as the economy weakens, a government official said.
/ Source: The Associated Press

Federal regulators now believe U.S. bank failures will cost the deposit insurance fund more than $40 billion over the next four years as the economy weakens, a government official said Tuesday.

Federal Deposit Insurance Corp. Chief Operating Officer John Bovenzi said the agency's estimate last fall of $40 billion in losses through 2013 probably will be surpassed. He also said in testimony for a House hearing that Congress should more than triple the agency's line of credit with the Treasury Department to $100 billion from the current $30 billion.

The FDIC has never drawn on that credit line, but such an increase would ensure "that the public has no confusion or doubt about the government's commitment to insured depositors," Bovenzi said.

Twenty-five U.S. banks failed last year, far more than the previous five years combined. Three banks failed last week alone, the same number of failures in all of 2007.

Six federally insured institutions have collapsed so far this year and it's expected that many more will succumb amid the pressures of tumbling home prices, rising mortgage foreclosures and tighter credit. Some may have to merge with other institutions.

The FDIC's original estimate of around $40 billion in losses to the insurance fund includes an $8.9 billion loss from last July's failure of IndyMac Bank, a major thrift.

"That estimate is low," Bovenzi said at the hearing by the House Financial Services Committee. "Our losses over an extended period will be higher."

Since the estimate was made, another three months of data on banking industry performance — combined with evidence of deteriorating economic conditions — have pointed toward heavier losses, he said.

The FDIC has raised insurance premiums paid by banks and thrifts to replenish its fund, which now stands at around $34.6 billion, below the minimum target level set by Congress and the lowest level since 2003.

The agency in October established a program to guarantee as much as $1.4 trillion in U.S. banks' debt for more than three years as part of the government's financial rescue plan. Under the program, which is meant to thaw the freeze in bank-to-bank lending, the FDIC is providing temporary insurance for loans between banks, guaranteeing the new debt in the event of payment default by the borrowing bank.

Of the roughly 8,500 federally insured banks and thrifts, the FDIC had 171 on its confidential list of troubled institutions as of Sept. 30 — a nearly 50 percent jump from the second quarter and the highest tally since late 1995.

As part of the agency's contingency planning, Bovenzi testified, it is asking Congress to increase the Treasury line of credit to $100 billion.

"The uncertain and changing outlook for bank failures and the events of the past year have demonstrated the importance of contingency planning to cover unexpected developments in the financial services industry," he said.

If it were necessary to tap the taxpayer funds, the FDIC is required by law to repay any money borrowed through fees levied on the banking industry, Bovenzi said.

Since October, the Treasury Department has been using most of the first half of the $700 billion federal bailout fund to buy stock in banks and other financial institutions, with the idea that cash injections will spur them to get lending again.

Officials have been considering several programs, including a government-run "bad bank" that would buy up troubled assets clogging banks' balance sheets, additional guarantees against losses like those granted to Bank of America and Citigroup Inc., and more capital injections.