September 22, 2009 2:02PM

FDIC Plan to Borrow from Banks Just Back‐​door Way of Putting the Taxpayer on the Hook

With the declining balance of the Federal Deposit Insurance Fund, and more bank failures likely in the days ahead, the FDIC is looking for novel ways to avoid borrowing from Treasury to cover its expected shortfalls. One proposal being floated is to have the FDIC borrow from healthy banks to cover the costs of bank failures. Without borrowing from either the Treasury or the banks, FDIC would likely have to raise insurance premiums on all insured banks.

While the scheme is imaginative, it is in reality no different than borrowing from the Treasury. Banks, in exchange for a loan, would receive a government bond. Does anyone doubt that these bonds would not simply be backed by the FDIC, but also backed by the Treasury? In effect the plan is no different than FDIC borrowing from the Treasury and the Treasury selling bonds to the banks to cover the FDIC’s borrowing. Why the FDIC and Treasury would prefer a direct FDIC borrowing from banks is that it hides the real cost of the borrowing from the American taxpayer.

If we are going to continue to put the taxpayer on the hook for the behavior of the banks, let’s at least be honest about it.