The insurance piggy bank at the FDIC is on the low side these days, so regulators have come up with an idea to fill the coffers- have the banks pay three years in advance: [Hat tip Freedom's Phoenix]
WASHINGTON (Reuters) – U.S. banking regulators proposed on Tuesday that banks prepay three years of fees to help cover the rising cost of bank failures, now put at $100 billion through 2013.
Banks would prepay $45 billion of regular quarterly assessments under the plan, but would not have to recognize the hit to their earnings until the fees are normally due.
Great thinking. Pay extra insurance this year in case you need bailing out next year. That way you can know the funds will be there when you need it. Maybe.
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One of the consequences resulting from this regulation is the possibility that banks may begin hoarding additional cash so as to be able to meet their new FDIC insurance payment obligation.
Cash being set aside for insurance prepayments is money that is not being lent for economic expansion.
So while the Treasury and Federal Reserve are making strenuous efforts to expand the money supply, the FDIC regulation will have the effect of working at cross purposes to monetary policy.
The Emperor’s new clothes are on display for all the world to admire.
So now they’re issuing the bank CFOs with peril sensitive sunglasses. Even Igor thinks that’s “ridiculous.”
Meanwhile, a quick scan of the web indicates that the only person who’s aware that CDARS is a Moral Hazard dagger pointed at Sheila’s heart is some guy I encounter on mornings that I shave. Am I missing something here?
And like I was saying earlier today in another forum, the additional bank capital required to offset these expenses will either have to come out of taxpayers or equities lemmings.
“I.M.F. Calls for Overhaul of Financial System”, by Carter Doughherty, New York Times, September 2009.
John-
I am having a terrible time with the math here.
Assuming that by “incoming cash” they mean “income”, I read that losses exceed income. How is that a “return to profitability”?
twist -
I think “profitability” refers to some modest net income from 2Q09. “Losses” would, I believe, refer to the epic financial disaster that struck in 3Q07 and continued the succeeding 6 quarters.
IF there is no relapse down the road and central banks maintain ZIRP over the next several decades, it might actually make sense to became an owner of banks’ common shares now. That’s possibly why everyone is so adamant about the Great Recession’s untimely end, when common sense would dictate we’re just starting a “Lost Decade.”
Thanks John-
It’s been a long day. I should know better than to comment when I’m half asleep!
An earlier trial balloon suggested that the largest banks lend money to the FDIC. Many commentators thought that this was letting the foxes into the henhouse. The biggest banks already get the benefit of making tens of billions in fees from new residential loans, which are government backed by Fannie Mae and Freddie Mac. I thought this was another missed opportunity to pressure the big banks into purging at least some of their toxic assets from their books. The largest banks are the ones most likely to buy the deposits of failed banks, while the FDIC sells off the failed assets. This certainly is healthy for the larger financial institutions. Uncle Sam could have re-examined this arrangement, or even threatened the big banks with a hefty assessment or deconsolidation. While this might smack of extortion or socialism to some detractors, the banking system’s errors of omission and commission nearly brought down the global economy. If Uncle Sam saved the banks from extinction, he can call in chits which will improve the economy. The commercial real estate market, and its attendant multifamily asset class, will not return to vibrancy until those toxic assets are purged. These toxic assets are like sour milk. Keeping them in the fridge is not going to make the milk good again.
http://bit.ly/H06Sw
[T]he banking system’s errors of omission and commission nearly brought down the global economy.–multifamily
Artificially low interest rates of the Greenspan fed misdirected productive capital and led entrepreneurs into pursuing unprofitable lines of production.
The banks may have contracted SIVilis, but Greenspan, et.al., were the source of the disease.
Don’t blame capitalism for socialism’s shortcomings.