FDIC safety net strengthens as banks weaken
The Federal Deposit Insurance Corporation (FDIC) announced recently that the Deposit Insurance Fund (DIF) is on track to meet reserve standards established by the Dodd-Frank Wall Street Reform and Protection Act. The DIF protects the assets of bank customers in case of a bank default, up to the limit of $250,000 per depositor for funds in savings accounts, checking accounts, money market accounts or CDs.
At the end of 2009, the DIF balance was negative $20.9 billion and has now risen by nearly $25 billion since that time. The balance grew to $3.9 billion by June 30, 2011, the first time the DIF balance was positive after seven consecutive quarters of negative balances. The DIF balance has increased for six quarters in a row, following seven quarters of decline.
"The assessment that the insurance fund remains on the path to recovery and on track to meet the goals established by Congress is welcome news," said Martin J. Gruenberg, acting FDIC chairman. "As we seek to stay on track, it's important to always be mindful of the challenges we face and ongoing risks to the insurance fund."
The FDIC's projected cost of bank failures from 2011 to 2015 is $19 billion, compared with estimated losses of $23 billion for bank failures in 2010. Based on these projections, the DIF should reach a balance of 1.15 percent of estimated insured deposits in 2018. The Dodd-Frank Act requires the DIF to have 1.35 percent of estimated insured deposits on balance by September 30, 2020.
Bank rates and bank health
While FDIC insurance provides a layer of security for bank customers, consumers looking for better interest rates and lower bank fees on deposit accounts may be disappointed. Financial reform has reduced the revenue banks can receive from debit card transactions and most banks are searching for new ways to raise revenue.
Third-quarter earnings reports are arriving this week from financial institutions, with the expectation that the revenue and profits have dropped at most major banks. Bank of America has already announced lay-offs of 30,000 jobs, and other financial institutions are anticipated to announce lay-offs as well, particularly in their investment banking divisions.
Bank stocks have dropped dramatically this year in part because of continued fall-out from the mortgage crisis and the anticipated revenue losses due to financial reform. Bank of America stock has fallen 52 percent so far this year, according to CNNMoney.com, while Citigroup stocks have fallen 44 percent. Wells Fargo stock has declined by 24 percent, while JPMorgan Chase stock has declined 15 percent so far this year.
A variety of factors influence bank rates on savings and money market accounts, including the actions of the Federal Reserve, which lately has sought to keep rates low. The weak economy has negatively impacted both the health of financial institutions and the possibility of higher interest rates on savings.
