The FDIC has known for a long time that a greater-than-normal number of bank failures would be occurring this year. The Washington Post a year ago reported that the FDIC was increasing staffing because they expected an increase in bank failure:
Anticipating a surge in troubled financial institutions, federal regulators aim to increase by 60 percent the number of workers who handle bank failures...In fact, there were 25 bank failures in 2008. The FDIC website has a list of "failed banks," which you can review at this link. There have been 16 bank failures so far in the first two months of this year.
There are 76 banks on the FDIC's "problem institutions" list, which would equate to about 10 expected bank failures this year [2008], though FDIC officials declined to make projections.
That's the bad news. Now here's the ... worse news. Bloomberg reported last week that the FDIC itself may be insolvent.
March 4 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency...And finally, why might the FDIC not have sufficient funds to repay account holders in failed banks? Certainly because there are lots of failures, but more importantly because the FDIC didn't collect premiums from member banks for the past decade.
Smaller banks are outraged over the one-time fee, which could wipe out 50 percent to 100 percent of a bank’s 2009 earnings... “Community bankers are feeling like they are paying for the incompetence and greed of Wall Street...”
The deposit insurance fund won’t dry up because the government can get funds from the industry and congressional appropriations, and borrow from the Treasury... there is a chance the FDIC is going to have to ask taxpayers for money in the future...
WASHINGTON - The federal agency that insures bank deposits, which is asking for emergency powers to borrow up to $500 billion to take over failed banks, is facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006...Congressmen, whose reelection campaigns were heavily funded by banks and financial institutions, passed legislation saying the banks did not have to contribute funds to the FDIC to insure their deposits. This savings made the banks more profitable for their owners. The problem is pointed out to them in 2001; they ignore it for another 8 years.
Congress believed that the fund was so well-capitalized - and that bank failures were so infrequent - that there was no need to collect the premiums for a decade, according to banking officials and analysts...
...if the FDIC suddenly had to take over a giant bank such asCitigroup orBank of America , the fund would be drained "in a flash..."
Bair [head of the FDIC] said yesterday that the agency's failure to collect premiums from most banks "was surprising to me and of concern." As a Treasury Department official in 2001, she said, she testified on Capitol Hill about the need to impose the fees, but nothing happened. Congress did not grant the authority for the fees until 2006, just weeks before Bair took over the FDIC. She then used that authority to impose the fees over the objections of some within the banking industry...
If you're not mad about this, you're not paying attention.
A thoroughly reasonable scenario is that more banks will fail, exceeding the reserves of the FDIC, which will then tap the federal government for more funds, which will need to come from taxpayers or through the printing of additional money, which devalues the money currently in circulation, which weakens the dollar, raising the cost of imported good including oil, resulting in significant consumer price inflation.
TYWKIWDBI will bet you a nickel that before the Obama administration leaves office both interest rates and inflation will be in double digits.