Monday, March 28, 2011

Is a Large Bank Going Down?

An email discussion among some Fed watchers began with this question: Why and Why Now?

The reference was to this to notice from the FDIC:

Temporary Unlimited Coverage for Noninterest-bearing Transaction Accounts

From December 31, 2010 through December 31, 2012, all noninterest-bearing transaction accounts are fully insured, regardless of the balance of the account and the ownership capacity of the funds. This coverage is available to all depositors, including consumers, businesses, and government entities. The unlimited coverage is separate from, and in addition to, the insurance coverage provided for a depositor’s other accounts held at an FDIC-insured bank.

A noninterest-bearing transaction account is a deposit account where:

•interest is neither accrued nor paid;

•depositors are permitted to make an unlimited number of transfers and withdrawals; and

•the bank does not reserve the right to require advance notice of an intended withdrawal.

Note: Money Market Deposit Accounts (MMDAs) and Negotiable Order of Withdrawal (NOW) accounts are not eligible for this temporary unlimited insurance coverage, regardless of the interest rate, even if no interest is paid.
Yup, the FDIC has suddenly, seemingly out of the blue, decided to insure ALL non-interest bearing accounts regardless of the size of the balance.

One respondent to the email, replied:

I talked to a former FDIC official (she has a Ph.D. in finance) who interviewed for a position on our faculty a few months ago. I told her that I thought the Fed should not have bailed out banks and should have let various banks fail in 2008. She said that the problem is that the FDIC is not organized enough to take over a bank with more than about $10 billion in deposits because they have to do it over a weekend and they can't do enough due diligence with a bank larger than that to figure out who gets 100 cents on the dollar and who doesn't.

So it might be that the FDIC thinks it will need to take over larger banks and this is the first step.
The respondent added that this comment was made just thinking the possibility out quickly, but it does make sense. If the FDIC doesn't have the capacity to determine who should be paid, and who shouldn't, well then, pay them all. Sounds like FDIC logic to me. This would make even more sense if any such big bank that were to go down had sizable deposits from the power elite.

UPDATE: I have received several emails pointing out that the FDIC notice is from December 2010. Yes, I am aware of that. In fact, I quote the FDIC above stating the insurance coverage would start as of 12-31-10.

Those of you not familiar with banking may not realize that often individual bank collapses may be seen well in advance.

Here's a very oversimplified example. A bank has $100,000 cash in its safe and no other assets. It owes to depositors a million dollars. Net-withdrawals are made at the bank on average of $1,000 per day. Thus it's clear the bank will collapse in 100 days.

It's pretty much the same thing with real more complex banks, you can see the trouble down the road.

Thus, if at the end of 2010 the FDIC saw problems developing later this year, they could have very well started to act at the end of the year to position themselves for an eventual large bank collapse(s).


  1. Oh, I don't know... Bank of America?

    By the way, what's the status of the info that Wikileaks was going to release about them?

  2. Are we sure this temp coverage is brand new? The website page says last update was 12/31/2010.

    Am I missing something?

  3. @Mike in Alaska

    I think the general point of the email discussion was why start this on 12/31/10 (just 3 months ago), when there was no obvious emergency at that point.

  4. I cannot hear myself whistling in the dark any more -over the racket of Freddy Krueger's chain saw.

    Don Robertson
    Limestone, Maine

  5. Especially since that was New Year's Eve, on a Friday, which is when the Washington creeps do all the stuff they don't want you to know about (e.g. bank closures) and release all the damaging information they don't want you to see.

  6. Bob,

    OK, but let's remember the logic of public sector regulators and the rest of us--they're on another planet as far as I'm concerned. They tend to write things and make decisions after it is too late. I think they're just covering themselves here.

    At a bank conference last year, an FDIC official explained that shutdowns were triggered on liquidity drying up for the institution, not some secret capital threshold that the bank fell through.

    I think if a major institution were about to be closed there would be tell-tale signs of it, like abnormally high interest given on deposit products.

    I think a likely scenario of major closure would be a result of a new flare-up in the financial crisis that takes down institutions that were trying to rebuild (I know that is painfully obvious to some). There are plenty of healing insitutions to choose from. It's a great idea for a bracket game, though.

  7. My guess is Wells Fargo, going down for the count. Somewhere I read that a 3% drop in a bank's assets would cause them to fail. WF has desperately tried to foreclose on thousands and thousands of mortgages that they have no legal standing to do. I'm sure that they are claiming the full appraised value of those loans on their asset balance sheet. Now the courts have decided to clamp down on these nefarious claims and these delusions of real property assets are disappearing quickly. In my opinion, I have more money in my wallet than Wells Fargo's net total worth.

  8. this program was implemented in 2008 with an expiration of 12/31/2010.0 this simply looks like an extension of that same program.

    do your research and stop crying wolf.