Bank-Bailout Fund Faces Years in Red as Failures Jolt System

By DAMIAN PALETTA and MICHAEL R. CRITTENDEN WASHINGTON -- The government said the fund that protects consumer bank deposits has fallen into the red and will remain there into 2012, a pointed symbol of how the aftershocks of the financial crisis will reverberate for years as banks continue to fail at a high rate. The negative balance is a headache for the Federal Deposit Insurance Corp., which runs the fund. 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 failures. The only other time the fund fell into the red was in 1991, during the savings-and-loan crisis, and it shows how U.S. officials underestimated the impact of this crisis on the government's cash needs. FDIC Looks to Fee Prepayments to Replenish Coffers 1:20 The FDIC, faced with a deposit insurance fund expected to be in the red, moves to raise $45 billion to replenish its coffers by having U.S. banks prepay premiums for three years. WSJ's Damian Paletta reports. More Real Time Econ: Key Point on FDIC Proposal "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. 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. The prepayment proposal was met with unexpected support from banks. Some saw it as preferable to another option the FDIC seriously considered -- an emergency charge of $5.6 billion on top of the regular fees. This would have likely come directly out of the capital reserves at thousands of banks. FDIC officials said banks would be able to spread the impact of the fee prepayment over several years by the way they account for it on their balance sheet. J.P. Morgan Chase & Co. Chief Executive James Dimon, in an interview, praised the FDIC's plan as "an elegant way for them to do it." In essence, the FDIC is proposing that most banks hand over by the end of the year their deposit-insurance fees -- the fund's standard source of income -- for the end of 2009 and all of 2010, 2011 and 2012. The FDIC said that without the new policy, its cash on hand would be outpaced by its cash needs sometime early next year. Bank failures are expected to hit their peak either this year or in 2010. Depleted Reserves View Interactive See the FDIC's deposit insurance fund balance over time. The FDIC continues to have cash even though its deposit insurance fund has fallen into the red. It has already taken more than $30 billion out of the fund to cover bank failures over the next year. This is the money that is expected to run dry early next year without the prepayment assessments. FDIC officials estimated the deposit insurance fund wouldn't be back to comfortable levels until 2017. Government officials on Tuesday estimated that bank failures from 2009 through 2013 will cost the FDIC $100 billion, up from a projection several months ago of $70 billion. Ninety-five banks have failed so far this year. The FDIC's proposal reflects a growing recognition from government officials that more money will be needed to mop up the mess than they projected just months ago. It is also a stark reminder of how the banking sector continues to be strangled by bad loans. There have been bank failures in most states since January 2008, hitting Georgia, Illinois and California particularly hard. The FDIC had 416 banks on its "problem" list at the end of June, and the number is expected to grow. FDIC officials project the deposit insurance fund will remain in the red into 2012, despite the prepaid assessments from banks. This is largely an accounting issue -- the FDIC has to count the prepaid assessments as both an asset and a liability because it is technically deferred revenue. Another option the FDIC considered was to borrow billions of dollars from the Treasury Department. Officials felt such a move would send the wrong message to the public. "I do think that the American people would prefer to see an end to policies that looked to the federal balance sheet as the remedy to every problem," FDIC Chairman Sheila Bair said. But for the first time, Ms. Bair said Tuesday that she had directed the agency to prepare the "mechanics" for borrowing from the Treasury in case it ever became necessary, although "today is not that day." The evaporating deposit-insurance fund had $10.4 billion in June, the latest figure available, down from $45.2 billion in June 2008. That posed a public-relations problem for Ms. Bair. She has had to both move rapidly to close failing banks, which is costly for her agency, while retaining public confidence in the FDIC. The rising number of bank failures has infuriated some politicians who have recently begun pressuring Ms. Bair's regulators to ease up on their increasingly close supervision of the industry. The FDIC said banks could ask for an exemption if they didn't have the cash on hand to prepay the fees. —David Enrich contributed to this article. Write to Damian Paletta at damian.paletta@wsj.com