Bill would raise credit limit for FDIC to cover deposits

WASHINGTON — As a buffer against systemic bank failures, the Federal Deposit Insurance Corp. is seeking to increase the amount of money it can borrow from the Treasury to compensate customers with deposits in banks that go under.

The legislation, sponsored by Sens. Mike Crapo, R-Idaho and Christopher Dodd, D-Conn., the chairman of the Senate Banking Committee, would permanently increase the existing line of credit from $30 billion to $100 billion. It also would allow the FDIC to temporarily access up to $500 billion in loans from the U.S. Treasury through the end of 2010.

Twenty-five banks went under in 2008, but already in 2009, 17 have failed. The increased FDIC credit line merely acknowledges the current economic reality, and is designed to boost confidence in the system, said Crapo, who's also a member of the committee.

"Anybody looking at today's economic climate and the threats facing us in the financial industry would have to consider the possibility that we could have one or more major failures," Crapo said.

FDIC spokesman David Barr called it careful contingency planning, noting that since the $30 billion pool was established in 1991, the FDIC has never had to seek access to it.

"You want to be prepared for whatever may come your way," he said.

The FDIC board recently voted to increase the insurance fees assessed on banks to rebuild the insurance fund, which has been depleted by failing U.S. banks. The fund was at $19 billion at the end of 2008, compared with $52.4 billion at the end of 2007.

In October, the FDIC increased the insurance on bank deposits from $100,000 to $250,000. That temporary increase is set to expire at the end of the year.

Federal regulators are conducting so-called stress tests on the 19 largest U.S. banks, each of which boasts assets of more than $100 billion. If regulators determine these banks lack sufficient capital to weather a deepening economic storm, they'd be given time to seek help from private investors or could immediately ask the government for more bailout money that would give taxpayers a greater ownership stake.

Raising the FDIC cap to $100 billion and allowing that to be exceeded under certain circumstances would give the government a funding backstop should it have to take over one of the banks.

To exceed the $100 billion line of credit, a supermajority of both the FDIC board of directors and the board of governors of the Federal Reserve would have to agree to the loan. Any loan over $100 billion would also have to have the approval of the Treasury secretary, in consultation with the White House.

The Obama administration has said it doesn't want to nationalize banks, but an FDIC takeover remains a possibility that could be more doable if the Dodd-Crapo legislation becomes law.

Crapo was careful to note that depositors who have accounts at failed banks are made whole by the FDIC insurance fund that banks pay into, not by taxpayers.

If the FDIC borrowed money from the Treasury to pay back depositors at failed bank, the money would be repaid with insurance assessments imposed on the banking system, Barr said.

"No depositor has ever lost a penny of insured money as result of a bank failure, and that's not going to change," he said.

(Kevin G. Hall contributed to this article.)


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