FDIC Seeks 500 Billion Loan

A bill before Congress would allow the Federal Deposit Insurance Corp. to borrow up to $500 billion from the US Treasury.

The measure, supported by Democratic Senator Christopher Dodd, of Connecticut, and chairman of the Senate Banking Committee, would help the FDIC rebuild the fund that insures individual bank deposits.

Earlier this week, FDIC Chairman Shelia Bair proposed new bank fees that could raise as much as $27 billion this year.

The fund dropped to $18.9 billion in the fourth quarter from $34.6 billion in the previous quarter due to 25 bank failures.

The proposal to raise fees immediately drew criticism. The Independent Community Bankers of America said the new assessments could swallow 50% to 100% of some bank’s 2009 earnings.

If Dodd’s bill becomes law, it would represent an alternative to higher FDIC fees charged to member banks.

The bill would permit the FDIC to borrow as much as $500 billion until the end of 2010 if the FDIC, Federal Reserve, Treasury secretary and President Barack Obama agree the money is needed. The bill would permit the FDIC to borrow as much as $100 billion without such approval.

A 1991 law permits the FDIC to draw on a $30 billion line of credit at the US Treasury. The FDIC hasn’t tapped the credit line in about 10 years but the amount may be too small to handle bank failures in the current downturn.

Congress has temporarily increased FDIC coverage to $250,000 from $100,000 per depositor through December 31.

The Certificate of Deposit Account Registry Services – CDARS, or “cedars” like the trees – provides up to $50 million FDIC coverage through multiple CDs split into amounts below the FDIC limit and divided among member banks to ensure full coverage. However, all paperwork is handled at one bank and this saves you running around town and dealing with several banks to keep your CDs below the threshold for FDIC coverage.

CDARS is a deposit-placement service offered through Promontory Interfinancial Network. It’s designed to help community and regional banks attract and retail large deposits. CDARS is available through about 3,000 banks in all 50 states and the District of Columbia. In general, major banks don’t offer CDARS.