Q&A about bank failures and the FDIC's role

A cascade of bank failures has magnified the role of the Federal Deposit Insurance Corp., which guarantees around $4 trillion in deposits in U.S. banks and thrifts.

More than 100 banks have collapsed so far this year, the largest number in a year since the early 1990s, at the height of the savings-and-loan crisis. Some experts say 300 to 400 more banks could fail in the next couple of years.

Here are some questions and answers about the independent agency born of the bank collapses of the Great Depression. The FDIC is funded by insurance premiums paid by the roughly 8,100 U.S. insured banks and savings institutions.

Q: What does the FDIC do?

A: The FDIC, like other bank regulatory agencies, sends examiners to banks and assesses their financial soundness to try to prevent problems. The agency has been using a combination of offsite monitoring and onsite exams to keep up. The FDIC has been urging banks overall to bolster their capital and reserves against losses on loans.

Q: So what happens when a bank fails?

A: Even before a wobbling bank is closed, FDIC staff often quietly seek buyers - stronger banks or private investor groups - for its deposits and loans.

Depositors' money is not at risk. The FDIC guarantees deposits up to $250,000 per account, and no holder of an insured account has lost a penny since the insurance fund was created in 1934.

The FDIC itself doesn't close banks. That decision is made by the state banking regulator, the U.S. Office of the Comptroller of the Currency or the Office of Thrift Supervision, depending on what the bank or thrift's charter. Once an institution is shut down, the FDIC is appointed receiver and takes over the process of selling its deposits, loans and other assets, sometimes keeping a portion of the assets to be sold later.

Responding to the spate of bank failures, which began to quicken in mid-2008, the FDIC has employed strategies such as sharing the losses on a failed bank's portfolio of loans with the bank that buys those soured assets. For 53 of the 124 banks that have fallen since January 2008, the FDIC has signed loss-sharing agreements covering about $80 billion in loans.

Each bank that fails will bring a cost to the deposit insurance fund, the difference between what goes out to make depositors whole and what the FDIC takes in from selling failed banks' assets and collecting insurance fees.

Q: Isn't that fund now in the red?

A: It has been drained by the wave of failures, which have cost about $25 billion this year. Flush at $52.4 billion at the end of 2007 - a year that saw only three banks fall - it dropped to $18.9 billion at the end of last year and fell into the red this year. That hasn't occurred since the savings-and-loan crisis of the late 1980s and early 1990s.

Besides the insurance fund, the FDIC has about $21 billion in cash available in reserve to cover losses at failed banks.

To replenish the fund, the agency last month proposed a plan to have banks prepay three years' worth of insurance premiums, about $45 billion. That follows a special emergency fee assessed earlier this year. The agency could tap a $500 billion credit line at the Treasury Department, but FDIC Chairman Sheila Bair has said that is the least desirable option.

Q: What about the 100 banks closed so far this year? What kinds of banks were they?

A: They were mostly smaller banks, though some were massive. Bad commercial real estate loans were a common cause. Failures peaked in July at 24, then fell to 15 in August and 11 last month. They were most heavily concentrated in Georgia, Illinois and California.

Q: How does the situation now compare with the S&L crisis?

A: More than 100 banks does sound like a lot, but more than 10 times that many - 1,368 - failed during the S&L debacle from 1989 through 1992.

The average cost to the insurance fund of a bank failure in 2008-09 has run higher than during the savings-and-loan crisis, FDIC officials say. That's partly because smaller banks generally have higher resolution costs than larger ones, and because the ongoing decline in home prices wasn't a factor in the earlier crisis.

Because of the tumble in prices, the loss rates on home loans and construction and development loans were higher for banks, with a domino effect on related securities.

Q: How many people does the FDIC have to handle this?

A: The agency has hired new staff since the crisis began and is now at around 6,400 employees. In 1991-92 at the end of the thrift crisis, the FDIC's ranks peaked at about 23,000 employees.