Thursday, September 3, 2009

Who is the FDIC? The Next step for banks

What you need to know about the agency that is assuming the vast majority of bank losses

The Federal Deposit Insurance Corporation (FDIC) is the Government agency providing insurance, which guarantees the safety of deposits in member banks.
Americans are hearing more and more about this once quiet agency, which was set up in 1933 to maintain consumer confidence.

In the last 12 months, the insurance fund that secures banks has seen a huge knock in its value. It fell by 20% to $10.4 Billion in the second quarter, as banks across the US collapsed at a combined cost of $3.7Billion. With 109 banks failing this year, the federal fund is at its lowest since the Savings & Loans Crisis of 1992.

With this current situation, economists believe that the agency may have to tap into Government money or worse - taxpayer dollars – to cover future bank losses.

It’s not a pretty picture, especially as the FDIC estimates that bank failures will cost the fund $70 billion through to 2013. This year with over one hundred banks collapsing, analysts have predicted there will be hundreds more that follow, especially as we still haven’t seen the effect of the real estate crash.

To top that the FDIC has made a pact with firms – many equity firms – that they will take on mortgage losses for companies that take over failed banks. They believe this is a cheaper option than letting banks liquidate their assets.

The prospect of easing losses or at least giving the FDIC more time, these pacts with firms could provide some protection for the agency fund. James Wigand, deputy director of the FDIC's division of resolutions and receivership's said: “It's a great opportunity for banks........It's a great opportunity for us."

The flipside to Mr Wigand’s optimism is if the economy doesn’t recover as quickly and effectively as we would like, then the FDIC will carry this burden for a long time and ultimately it could cost the taxpayer – because we are the ones paying for the losses now.

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