The Federal Deposit Insurance Corporation (FDIC) recently released its fourth-quarter banking summary, giving us the opportunity to examine trends in the FDIC-insured banking industry during 2008. Total deposits at insured institutions rose 10.9 percent to $4.76 trillion from 2007 to 2008. Most of this increase in deposits took place in the third and fourth quarters of 2008, when the financial crisis hit its full stride and widespread risk aversion led to an increase in deposit holdings.
The Deposit Insurance Fund (DIF) ratio took a tremendous hit in 2008, as 25 insured institutions failed and were placed in receivership by the FDIC. Since deposits have also increased dramatically, the DIF ratio—now at 0.40 percent of insured deposits—has fallen further. In order to replenish the DIF, the FDIC recently agreed to increase premiums on insured banks, and lawmakers have also proposed to increase the established credit line that the FDIC has with the Treasury Department. The FDIC targets a DIF ratio of at least 1.15 percent of total insured deposits.
In response to bank-funding difficulties and depositor concerns, the FDIC last year instituted the Temporary Liquidity Guarantee Program (TLGP), which would, for a fee, insure financial institutions’ non-interest-bearing transaction deposits and eligible senior unsecured debt. Because these programs are funded and cushioned by their service fees, they do not rely on the DIF.
The 25 depository institutions that failed and were placed into receivership by the FDIC in 2008 are more than double the number of banks that failed in 2002. That year had the highest number of failures (11) in the 12 years preceding 2008. Furthermore, the bank failures of 1995-2007 were predominantly small institutions with assets in the hundreds of millions of dollars (see chart). However, the failure of banks as large as IndyMac pushed the total assets of failed banks in 2008 to $372 billion, up from $2.3 billion in 2007. In many cases the FDIC was able to find existing depository institutions that would take over the deposits of failed banks and, in some cases, some portion of balance sheet assets.
The number of troubled institutions also increased sharply in 2008. A total of 252 banks with total assets of $159 billion were on the FDIC’s “problem list,” up from 76 institutions with $22 billion in assets during 2007. So far, 2009 has seen 17 banks closed in less than three months.