FDIC losses in bank failures: Has FDICIA made a difference?

Banks are generally failed and placed in receivership when the value of their assets declines below the value of their deposits and other debt, so that the value of their capital (net worth) becomes negative. The losses exceed the ability of the stockholders to absorb them. As a result, some of their creditors, and in the United States also the Federal Deposit Insurance Corporation (FDIC), which stands in the shoes of, at minimum, the insured depositors up to the insurance coverage ceiling, are likely to suffer losses. Because the FDIC is a federal government agency, if losses from bank failure resolutions are sufficiently high to exceed both the FDIC’s reserves and its ability to collect additional revenues by levying sufficient premiums on insured banks to replenish the reserve fund, the losses may need to be paid by the government and thereby the taxpayers. Indeed, taxpayers were required to pay some $150 billion when losses incurred by the former insurer of deposits at savings and loan associations (S&Ls), the Federal Savings and Loan Insurance Corporation (FSLIC), in resolving the large number of failures in the S&L crisis of the 1980s exceeded its financial capacity to protect all insured deposits at these institutions against loss. Thus, the FDIC loss rate in resolutions is of concern to the uninsured depositors and other bank creditors who share in the loss with the FDIC, to the banks that pay insurance premiums, and to the taxpayers that are widely perceived to have backup liability.1 It is in the best interest of all of these parties that the FDIC minimize its losses in failure resolutions.