Banking: who saves the saviour? FDIC runs out of money

FDIC was created in the 1930s to reduce the risk of a run on banks during the Great Depression.

It's had a relatively quiet time for much of the past 80 years: the Savings and Loan scandal had a big impact but that's been a blip in an otherwise generally calm existence.

All that changed when retail banks started to collapse in the wake of the bad lending decisions that were seemingly the norm in US retail banking.

The headlines were all about the big, sexy names: Bear Sterns, Lehman Brothers, etc. These, after all, are the Ferraris of the financial world: bold, glamorous, at the forefront of technology. But, like Ferraris, if they were not properly serviced, they fell apart. Drive them for ever replacing oil with banana skins in the engine, and they blow up. That's exactly what happened with the Investment Banks: no one paid any attention to the fundamentals.

Worse, when the investment banks blew up, the focus was on the smoke and fragmented parts those events caused. No one paid enough attention to the underlying causes. No one questioned the quality of the banana skins - or even paid much attention to the fact that they were banana skins at all.

Worse, as governments all over the world panicked, they ran headlong into the rush to enter what may yet turn into seriously ill-advised responses, one of which was to guarantee all deposits in all banks. This was perceived as a logical extension of the original purpose of FDIC and similar support mechanisms. But it amounts to a blank cheque that underwrites historically poor business practices. It turns out not to be insurance, but a guarantee.

What is worse is that FDIC and similar systems are, in fact, a mutual fund organised and funded by the banking industry. Indeed, FDIC makes the point, every time it closes a bank, that no taxpayer funds are used, and that the industry supports itself.

But, underneath it all the major problems continued, and got worse. The result is that banks are failing at a rate that would have been regarded as impossible just a few months ago. And the rate of collapse is not showing any significant sign of slow down.

The end result is this: FDIC has, or is about to, run out of money. And the contributions that the banks have agreed to make are not keeping pace with the amounts required.

So FDIC wants banks to advance their contributions which would fall due in the next three years. And yesterday the FDIC board approved a measure to require that payment.

So far, banks have not responded to the suggestion. FDIC says that it needs USD100,000 million to keep afloat for the next three years. A rough estimate shows that the top three banks, BoA, Citi, BoNY Mellon will pay as much as USD30,000 million between them.

And other similar scheme organisers have not made any comment as to whether their own support schemes are in a similar position.