I want to thank you for inspiring me to read and understand a ‘FFIEC 041’ from the FDIC… This is interesting (no pun intended) stuff. It will definitely make me a better Bank consumer.
I do not agree that ‘higher deposit fees’ will be paying a ‘big chunk of this’. The FDIC only covers deposits. It does not cover bad loans. The $800 BILLION bailout package for mortgage-backed securities (not deposits) last year creates a governmental deficit which will be paid back in taxes by my children. I expect even more Bailouts to be presented as the need arises. Private screw ups paid off by We, the People.
And I am sure the stating of your personal economy concern was for your own benefit as well. Your bank must have made a large profit last year. What was that bank name again?
Lucky In OC
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I’m glad when I can inspire someone to dig into the minutiae of banking nomenclature.
You mentioned that the FDIC “only covers deposits,” and that “it does not cover bad loans.” This betrays a rather considerable misunderstanding of a bank’s balance sheet and how the FDIC’s receivership process works. I’ll provide an example, but to cut to the chase: the reason the FDIC ends up covering deposits is because the loan losses are large enough to cut through the capital structure of the bank and into the deposit base. So, in “covering the deposits,” the FDIC is, in effect, “covering the bad loans.”
An example. Bank ABC has $100 million in assets, of which $70 million is loans, $20 million cash and securities, and $10 million “other assets”. ABC has $7 million in common equity, $3 million preferred, and $90 million in deposits. ABC has a bunch of bad loans and a liquidity run leads to the bank getting shut down and put into receivership.
So, the FDIC has another bank willing to buy ABC’s deposits for a 4.5% deposit premium ($4 mil.), but first the FDIC has to figure out how big the hole is. So, it has $20 million in cash and securities (let’s say, worth par), “other assets” worth maybe $5 million, and loans that it can sell at an average discount of 30%. So, total “liquidated assets” are $20 mil. + $5 mil. + $49 mil. (loans) + $4 mil. (dep. premium) = $78 million. But, liabilities and owners’ equity total $100 million. So, common equity is wiped out, preferred stock is wiped out, and there’s a hole in deposits of $12 million. The FDIC insurance fund covers that $12 million hole (for simplicity, we’ll assume all of the deposits are insured). So, you see, in insuring the deposits, the FDIC insurance fund is really paying for the loan losses. Does that clear things up?
Now, regarding TARP and other bailout programs that exist outside the FDIC’s purview, that’s 100% taxpayer-funded at the end of the day.
Regarding the name of the bank previously mentioned, I had Rich remove that thread, as it was a mistake to offer services here. We are a relatively new bank and made a small profit last year. But, since you’re interested, we reached break-even status at a near-record pace for a new bank and are one of the best-capitalized banks in the United States. Period.
I didn’t state what my personal economy was – as you imply – but rather that I was not concerned about it. But specific to your post, my investment in said bank is a meaningful, but not particularly large, portion of both my net worth and one of my partnership’s total assets. But I do appreciate your concern on the matter.
