Banks May Bail Out the Bailout Bailing Out the Banks

Say that three times fast. Reports today suggest senior regulators, including the FDIC's Sheila Bair, are thinking about tapping the nation’s healthy banks to lend billions of dollars to rescue the insurance fund that protects bank depositors. The fund, overseen by the FDIC, is rapidly running out of money because of a wave of bank failures, and Bair would rather go hit up the banks themselves than go hat in hand to Tim Geither--who is, by all accounts, not her favorite person. There are a few reasons why this could be smart--for Bair and for the administration:

1. The debt ceiling limit is approaching, and needs to be raised. And it's always a time for the opposition to make mischief. Anything that limits the need for Treasury to ask for less borrowing capacity is a positive.

2. Bair has been tougher on the banks than Geithner or Treasury (or Congress), and is likely to continue to be. The more the FDIC is able to make and execute policy without having to rely on Treasury, the better.

3. In recognition that the healthy banks (such as they are) have been enormous beneficiaries of all the extraordinary efforts--guarantees, zero-interest rate policy, bailouts, etc.--they should make funds available to the FDIC at extremely low rates. The healthy banks have benefited enormously because the government has let them rent the government's balance sheet. It's fair to ask J.P. Morgan Chase to return the favor.

4. The great thing about the FDIC--historically, at least--is that it's self-funded. The banking industry essentially insures itself against debacles and failures. The problem in recent years is that, largely due to Congressional interference, the insurance was under-priced. Banks didn't pay nearly enough in insurance premiums. The principal going forward should be that that the industry is responsible for funding its own bailouts--whether it's through the insurance premium on deposits, which should be raised (especially for the big banks); and through the fees the FDIC is collecting for guaranteeing debt banks issue (about $9 billion so far and with the possibility of $30 billion over the life of the program). Premiums have to go up, and will. But there's a degree to which its counterproductive to jack them up sharply right now. Ultimately, the big, healthy banks will be paying more in premiums. If the FDIC borrows money from large banks, ultimately the same banks that lent the money are going to be kicking in to pay the interest.

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