FDIC Lowers Budget as Bank Failures Slow

The number of bank closings has slowed in recent months, and that's given the ""FDIC"":http://www.fdic.gov reason to believe that the worst phase of institutional collapses is behind us and the agency won't need as much money next year to cover bank seizures.

[IMAGE]

The FDIC’s board of directors has approved a $3.96 billion ""operating budget for 2011"":http://www.fdic.gov/news/news/press/2010/pr10267.html, down slightly from the $3.99 billion budget approved by the board last December for the 2010 calendar year.

In December 2009, the FDIC boosted the 2010 budget by a hefty 55 percent from the previous year in order to cope with what they expected to be another round of excessive bank failures. Officials are touting the fact that no increase is planned for the upcoming year as an important sign that the financial sector is at least stabilizing.

""I am happy that we are able to see a slight drop in next year's budget while devoting new resources to implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act,"" said FDIC Chairman Sheila Bair. ""We appear to have turned the corner on financial institution failures, but significant post-resolution work remains….This budget provides sufficient funding to resolve additional failures as they occur and to position the FDIC for the new challenges that lie ahead.""

In conjunction with its approval of the 2011 operating budget, the board also authorized a staffing level next year of 9,252 employees, up about 2.5 percent from the 9,029 people that are currently employed by the agency.

[COLUMN_BREAK]

The FDIC says all of the new positions are temporary as are 40 percent of the total 9,252 authorized positions for 2011. Temporary employees have been hired by the FDIC to assist with bank closings, the management and sale of failed bank assets, and other resolution activities that the agency says are ""expected to diminish substantially as the industry returns to more stable conditions.""

There have been 151 bank failures so far in 2010. By comparison, there were 140 in 2009, when heavy losses on commercial and residential real estate loans began to riddle many banks' balance sheets. In 2008 there were 25 bank failures nationwide, and in 2007 there were only three. The ""FDIC recently disclosed"":http://dsnews.comarticles/fdics-list-of-problem-banks-grows-to-860-2010-11-23 that there are currently 860 banks on its so-called ""problem"" watch list.

""It is important for the public to understand that the FDIC's operating budget does not in any way involve the use of taxpayer funds,"" said Chairman Bair. ""All of the FDIC's operating expenses are paid from the Deposit Insurance Fund - the DIF - which is fully funded by the industry through deposit insurance premiums.""

On the same day of the budget approval, the board also put forth ""a proposed rule"":http://www.fdic.gov/news/news/press/2010/pr10266.html for the implementation of a Dodd-Frank Act provision referred to as the ""Collins Amendment,"" which establishes a floor for banks' capital requirements as mandated by regulatory rules, including international standards proposed by the Basel Committee on Banking Supervision.

Board members also voted to approve a final rule that sets the designated reserve ratio (DRR) of the FDIC's insurance fund at 2 percent of estimated insured deposits, up from 1.25 percent.

""[O]ur resources heading into the financial crisis were woefully inadequate,"" said Chairman Bair. ""This new rule will allow us to better prepare for the future. It will also give the industry greater certainty around the premium structure. While the two percent designated reserve ratio established by the board is higher, the trade-off will be lower, more predictable premiums over time.""

Bair added, ""By building higher reserves during the good times, we will significantly reduce the risk of pro-cyclical assessments when the inevitable next downturn occurs.""