FDIC looking for half a trillion dollar life line

With the following bank closings last week, it is estimated that the FDIC deposit insurance pool is close to or already in the red.

• Mutual Bank, Harvey IL
• First BankAmericano, Elizabeth NJ
• Peoples Community Bank, West Chester OH
• Integrity Bank, Jupiter FL
• First State Bank of Altus, Altus OK

The FDIC has two choices: raise the insurance premiums on banks or get the taxpayer to bail FDIC out. The banking industry, already under stress, points out that closings will only accelerate if the fees are raised. Most regional and small banks can not access capital markets, relying almost entirely on deposits. If the FDIC insurance charges on deposits were to increase, banks' margins could fall further (banks' margins come from the spread between deposit rates and loan/lease rates.)

It's a race between default rates and earnings. With higher deposit insurance fees, those who had hoped to "earn" their way out of losses on bad loans will take longer and potentially become defunct. This will in turn end up costing FDIC even more. Some had held out hopes for PPIP, but the difference between what investors would be willing to pay for loans and where banks are willing to sell them is just too great.

So the taxpayer is getting ready to extend a half a trillion dollar credit line to FDIC, some of which the agency may not be able to pay back. The FDIC will have to raise deposit insurance fee, but at a much later date, when the financial system becomes healthier (which may take years.)

Here is a video from CNNMoney describing the situation:

Many banks are blaming this whole problem on "Wall Street", yet the FDIC funds were depleted by failures of regional and community banks like WaMu, Indymac, and numerous others. With option arms recasts looming and construction and commercial real estate loan defaults increasing, the FDIC is going to need all the help it can get.