Bank Losses Growing

This weekend the FDIC took three more U.S. Banks into receivership. The losses absorbed by the FDIC were rather striking. Out of total assets of the three banks of $4,444,500,000 there was a total $1,437,500,000 in expected cost to the FDIC. Added to the FDIC losses are the losses born by stockholders and uninsured creditors of the banks. The total losses are thus well over 1/3 of the value of the assets.

The loss level of FDIC losses to total assets from all 57 U.S. bank failures since the Depression started stands at 5.16%, up from 4.84% last week. Excluding the costless WaMu operation, the level stands at 23.56%, up from 23.08%.

It is impossible to know how much worse the failed banks and not-yet-failed banks are than the survivors. Or indeed, what percent of banks will fail. Nevertheless, we will make a few 'back of the envelope' calculations.

Suppose 10% of the banking industry is slated for liquidation. This would constitute about one and a half trillion dollars of assets. If the FDIC can contain losses to the 5% level that would be 75 billion dollars - a lot of money, but manageable given its substantial credit lines from the U.S. Treasury. If losses are closer to the 25% level, that would be 375 billion, or a good chunk of those credit lines. Substantially more than 25% losses, or more than 10% of the industry doomed means the FDIC will need larger credit lines.

The subject of FDIC credit lines raises an interesting question. How is that money to be paid back? Formally, that means raising the (already high) premiums the FDIC charges banks for deposit insurance. The consequences will include lower savings rates, more bank fees (ouch!), and higher interest costs for borrowing. These effects will aggravate the Depression due to less income from savings, and from the greater disincentive to borrow.

As the Depression grinds on, we will continue reporting the FDIC loss statistics and their possible significance.