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FDIC head raises the specter of a deposit insurance crisis

FDIC chair Sheila Bair
FDIC chair Sheila Bair

Banks of all shapes and sizes are mad at FDIC chair Sheila Bair for levying a one-time fee that could come to $27 billion for the year. Bair responded on Monday with a letter to the industry in which she defended the charges on grounds that “the deposit insurance fund could become insolvent this year” without them.

Some numbers, from Bloomberg’s Alison Vekshin:

The FDIC last week approved a one-time “emergency” fee and other assessment increases on the industry to rebuild a fund to repay customers for deposits of as much as $250,000 when a bank fails. The fees, opposed by the industry, may generate $27 billion this year after the fund fell to $18.9 billion in the fourth quarter from $34.6 billion in the previous period, the FDIC said.

The fund, which lost $33.5 billion in 2008, was drained by 25 bank failures last year. Sixteen banks have failed so far this year, further straining the fund.

The emergency fee that’s being assessed hits small banks proportionately harder, and they’re all over Bair. In the words of Camden Fine, president of the Independent Community Bankers of America, “Community bankers are feeling like they are paying for the incompetence and greed of Wall Street.”

Join the crowd. A representative of U.S. PIRG, Edwin Mierzwinski, tells Vekshin he sees the chance of a looming public bailout of the deposit insurance fund. Bair denies that will be necessary; let’s hope she can hold that line.

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