Wednesday, August 05, 2009

Deposit Insurance Fund Depleted

This is a best guess from publicly available data. The FDIC does not release hard data on DIF balances. The FDIC Deposit Insurance Fund is nearly depleted. It does have a $500 million line of credit available through the Treasury. But the Treasury does not have that money so it will have to issue Treasury bills, notes, & bonds to fund any of the line that needs to be accessed. This credit has to be issued alongside the large amounts already being issued to cover the large budget deficits being run. Capital will have to be reallocated from equity to debt instruments or the debt has to be monetized. Further declines in market values would likely facilitate more bank failures, so my best guess is that the Fed will begin more monetization in order to save its own rear. Overall, I wouldn't be surprised to see the total budget deficit approach $2.25-2.5 trillion; higher than the $1.8 trillion in the President's budget and $2 trillion by the non-partisan Congressional Budget Office.

With 3 rather large banks, Colonial Bank, Corus Bank, & Guaranty Financial, set to fail in the next few weeks, and a hefty loss expected given these banks have negative equity, I expect a 40% loss rate on about $42 billion in combined assets, or about $17 billion. There are still many smaller regional and community banks that are likely to fail. So by the end of the year the line of credit could be tapped up to $20-25 billion.

No comments: