Why Would The FDIC Want A Bailout From Banks?

There's some news out today that the Federal Deposit Insurance Corporation (FDIC) might turn the tables on banks and get a bailout from them. I find this prospect very, very confusing, because I can't understand why the FDIC would go to banks to borrow money. Better options exist.

Here's the news, via the Associated Press:

Healthy big banks may lend billions to shore up the government fund that insures regular deposit accounts, according to a report Tuesday.

The fund maintained by the Federal Deposit Insurance Corp. has suffered major losses from bank failures during the financial crises. The fund is at its lowest point since 1992, at the height of the savings-and-loan crisis.

The bank loans would allow the FDIC to avoid using a credit line with the Treasury that FDIC Chairman Sheila Bair is reluctant to tap, The New York Times reported, citing senior regulators. Bankers and lobbyists strongly support the plan.

Bankers and lobbyists supporting this plan is about as surprising as monkeys supporting free bananas. On one hand this would give them lending business from as safe a source as probably exists: the U.S. government. On the other hand, it would prevent this alternative:

Another possibility for replenishing the fund, which insures deposit accounts of up to $250,000, is a special assessment on banks, but that would hit profits at a time when the industry has just started to stabilize.

So to banks, making loans to the FDIC is a pretty obvious win-win situation. What I can't figure out, however, is why the FDIC isn't imposing that special assessment. Its funds are so depleted precisely because banks have been charged too little for the insurance it provides. I think banks are currently stable enough to handle that assessment. And even if it required several more to fail, then that's okay -- that's the fate which would have resulted had they been required to pay the proper insurance fees in the first place.

Even stranger, the FDIC is ignoring an alternative that would avoid forcing banks to pay a special assessment without also lining their pockets. As AP notes:

Congress in May more than tripled the amount the FDIC could borrow from the Treasury if needed to restore the insurance fund, to $100 billion from $30 billion.

That should be plenty of additional borrowing for the FDIC. But even if it isn't, as I noted in May, that borrowing amount was temporarily extended to a whopping $500 billion through the end of 2010. If the FDIC needs a loan bigger than that to resolve troubled banks then we're in far bigger trouble than anyone has imagined.