The Federal Deposit Insurance Corporation's insurance fund has entered negative territory for the first time since the savings-and-loan crisis. It's in the red by a whopping $8.2 billion. But don't worry: deposits are perfectly safe. Still, this accentuates the need for revisiting premiums.

Why the FDIC's insurance fund is struggling should not be surprising: banks continue to fail in light of ongoing economic troubles. The FDIC's quarterly report says:

The number of institutions on the FDIC's "Problem List" rose to its highest level in 16 years. At the end of September, there were 552 insured institutions on the "Problem List," up from 416 on June 30. This is the largest number of "problem" institutions since December 31, 1993, when there were 575 institutions on the list. Total assets of "problem" institutions increased during the quarter from $299.8 billion to $345.9 billion, the highest level since the end of 1993, when they totaled $346.2 billion. Fifty institutions failed during the third quarter, bringing the total number of failures in the first nine months of 2009 to 95.



All is not well in retail banking. But fear not, the FDIC isn't really out of money, despite what their insurance fund balance might indicate:

The fund balance of negative $8.2 billion as of September already reflects a $38.9 billion contingent loss reserve that has been set aside to cover estimated losses over the next year. Just as banks reserve for loan losses, the FDIC has to set aside reserves for anticipated closings over the next year. Combining the fund balance with this contingent loss reserve shows total DIF reserves with a positive balance of $30.7 billion.



Moreover, the FDIC is going to be getting a huge $45 billion bank assessment at the end of December to provide some further cushion. As I recently noted, this is a prepayment of bank assessment fees for the next couple of years. Let's hope it's enough.

Of course, behind all of this is the fact that the FDIC is certainly not charging banks enough for the insurance they provide. It shouldn't need to drain its contingent loss reserve or force banks to prepay assessments. Once banks are healthy enough to pay higher premiums, the FDIC should correct this problem.

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