On Friday, FDIC Chairman Sheila Bair sent a letter to Senate Banking Committee Chairman Christopher Dodd (D-CT), offering her support for S. 541, “The Depositor Protection Act” (the “Act”). Chairman Dodd, along with Senator Michael Crapo (D-ID), are spearheading the legislation that would, in part, permanently raise the FDIC’s borrowing authority with the U.S. Treasury Department from $30 billion to $100 billion in the event losses from failed institutions exceed the resourses of the Deposit Insurance Fund. Despite the fact that assets in the banking industry have tripled since 1991 from $4.5 trillion to $13.6 trillion, the FDIC borrowing authority has not increased since it was set at $30 billion in 1991. The Act would also, upon approval from the FDIC, Federal Reserve Board, and Treasury Department, in consultation with the President, temporarily allow the borrowing authority to exceed $100 billion, with a cap at $500 billion. The Act additionally would make permanent the increase in deposit insurance coverage, temporarily increased from $100,000 to $250,000 as part of the Emergency Economic Stabilization Act of 2008.
In her letter, Bair commented that the current limit imposed on the borrowing authority commanded the FDIC’s recent action of special assessments. She noted that increasing the borrowing authority would give the FDIC flexibility to decrease the recent assessment in a manner that would support the Deposit Insurance Fund with bank funding. While banks would continue to pay regular assessments, Bair noted that a lower special assessment would ease the financial impact on banks during this economic downturn. Bair concluded by expressing her confidence that passage of the Act would, “leave no doubt that the FDIC will have the recourses necessary to address future contingencies and seamlessly fulfill the government’s commitment to protect insure depositors against loss.”
Bair’s letter comes on the heels of the House’s approval of H.R. 1106, “Helping Families Save Their Homes Act,” a measure that would increase the FDIC’s borrowing authority to $100 billion and permanently increase deposit insurance coverage to $250,000.
This Act comes at a time when the strength of large banks is largely questioned. In 2008, twenty five banks failed, including Washington Mutual, the largest bank failure in U.S. history. The closing of Freedom Bank of Georgia last Friday marked the 17th bank failure of 2009.