FDIC losses in bank failures: Has FDICIA made a difference?
Banks are generally failed and placed in receivership
when the value of their assets declines below the value
of their deposits and other debt, so that the value of
their capital (net worth) becomes negative. The losses
exceed the ability of the stockholders to absorb them.
As a result, some of their creditors, and in the United
States also the Federal Deposit Insurance Corporation
(FDIC), which stands in the shoes of, at minimum,
the insured depositors up to the insurance coverage
ceiling, are likely to suffer losses. Because the FDIC
is a federal government agency, if losses from bank
failure resolutions are sufficiently high to exceed both
the FDIC’s reserves and its ability to collect additional
revenues by levying sufficient premiums on insured
banks to replenish the reserve fund, the losses may
need to be paid by the government and thereby the taxpayers.
Indeed, taxpayers were required to pay some
$150 billion when losses incurred by the former insurer
of deposits at savings and loan associations (S&Ls),
the Federal Savings and Loan Insurance Corporation
(FSLIC), in resolving the large number of failures in
the S&L crisis of the 1980s exceeded its financial capacity
to protect all insured deposits at these institutions
against loss. Thus, the FDIC loss rate in resolutions
is of concern to the uninsured depositors and other
bank creditors who share in the loss with the FDIC,
to the banks that pay insurance premiums, and to the
taxpayers that are widely perceived to have backup
liability.1 It is in the best interest of all of these parties
that the FDIC minimize its losses in failure resolutions.