FDIC is funded by banks

Putting aside the nauseating condescension and Montagne's childish lead-in, there was something weird about the way Planet Money's Chana Joffe-Walt started her story on Friday's ME:

"One quick thing to clear up and then we can get to this weird banking drama that's playing out right now. Banking drama. You know you want to know. Okay, here's the one thing, the FDIC, the agency that insures our bank deposits...it's funded by banks. Maybe it's a name problem, the "Federal Deposit Insurance Corporation," but lots of people seem to think it's funded by taxpayers. It's not. Every bank that's FDIC-insured has to pay a fee for that insurance, and all those fees put them all together, they go into a deposit insurance fund that pays for bank failures.

"John Bovenzi is the chief operating officer of the FDIC. 'If you put a hundred dollars in a checking account in a bank, what the bank has to do is pay the FDIC an insurance premium.'

"Just like you pay a fee to get your car insured, the banks pay a fee to get their deposits insured. Now that we've cleared that up...banking drama."

To her credit, Joffe-Walt did point out that the banks will pay those premiums by increasing the fees you and I pay on our bank accounts. Also, she did mention that while the FDIC is funded by fees from banks, it also has asked Congress for an increased line of credit of up to $500 billion of U.S. Treasury funds (otherwise known as taxpayer money).

However, she failed to mention that the S&L crisis of the 1980s and 90s ended up costing U.S. taxpayers approximately $124 billion dollars, much of it through increased fees on our bank accounts, but also in large part through federal bailouts of federally insured deposits.

In the current financial crisis, with Citibank alone carrying over a trillion dollars in liabilities, it seems pretty clear that a single failed mega-bank would force the FDIC to call on its credit with the U.S. Treasury. Considering that the FDIC had only about 19 billion in funds by the end of 2008, and is expected to collect only about 12-13 billion in FDIC premiums this year, it seems far from certain that the FDIC would ever be able to pay back $500 billion in federal loans.

Much more likely, despite the assurances made by Joffe-Walt or by FDIC's Bovenzi (whose incentive to downplay this nasty possibility is glaring), such a "loan" would end as yet another gigantic bailout to the banks.