A few days ago, the Wall Street Journal reported that the Federal Deposit Insurance Corporation (FDIC) is recruiting its own retirees in order to beef up staff in anticipation of a sharp increase in bank failures, which could amount to 100 or more in the next 12 to 24 months. The FDIC, a federal agency created in response to Depression-era bank failures, provides insurance for depositors of FDIC-member banks and other financial institutions up to $100,000 per account. It also oversees the receivership and liquidation of failed banks. The number of anticipated failures is rather troublesome, particularly in light of the fact that there were no bank failures between July 2005 and January 2007 and only four failures in the past year.
Although these developments demonstrate the extensive reach of the current mortgage crisis and resulting credit crunch, it remains to be seen whether these anticipated bank failures will represent merely some of the unfortunate victims of the current economic situation or whether they are the tip of an iceberg that could sink the unsinkable U.S. economy. Although the FDIC and its erstwhile savings and loan counterpart, the Federal Savings and Loan Insurance Corporation (FSLIC), were designed to bolster consumer confidence in banks, it is safe to say that the deregulation-fueled malfeasance and misfeasance that led to the savings & loan debacle of the 1980s was probably not foreseen. That sad era resulted in over 1,300 savings & loan institutions failing and cost $160 billion, $132 billion of which was borne by federal taxpayers, and the FSLIC being sucked dry.
It could be argued that history is repeating itself, facilitated by more unforeseen malfeasance and misfeasance, this time on the part of the mortgage lending industry. Banks and other financial institutions are also feeling the pinch, however, and it will be interesting to see whether the 100-failure estimate will materialize. Moreover, will these failures represent the peak of the problem, or could they be the beginning of a downward economic spiral that will take us well past the feared recession? Depositors at FDIC-member banks have little to worry about regarding their deposits, as the FDIC will make good on their accounts in the event of a bank’s failure. However, whether the anticipated failures are isolated incidents rather than harbingers of a larger economic meltdown may provide plenty to worry about.