FDIC Raises Estimate of Bank Bailout and Taps Banks to Bolster Reserves

The FDIC announced two significant pieces of information today: it estimates that the cost of bank failures would rise to $100 billion over the next four years, and that it was going to pre-assess banks today for payments through 2012. The result of this is that the FDIC will have an estimated $45 billion in extra cash to use in insuring bank deposits at failed banks.

FDIC Chairman Sheila C. Bair said, "First and foremost, bank customers should know that their insured deposits have and always will be 100 percent safe, no matter what. This commitment to depositors is absolute. The decision today is really about how and when the industry fulfills its obligation to the insurance fund. It's clear that the American people would prefer to see an end to policies that look to the federal balance sheet as a remedy for every problem. In choosing this path, it should be clear to the public that the industry will not simply tap the shoulder of the increasingly weary taxpayer. This proposal is a vote of confidence for the banking industry's resilience, and it will continue to recover its strength as we work through the significant challenges ahead."

An analysis done by the FDIC indicates that this prepayment strategy is likely to impair bank lending than a special one-time assessment.

If you own banks, look for a one-time hit to profitability as banks make the payment, but increased ongoing profitability. Of course, if bank's financial conditions continue to deteriorate and the Fed has to do a special assessment on top of this pre-payment, then all bets are off.