The cash reserves needed for the FDIC to keep paying depositors at failed banks has all been used up. Don’t panic (yet anyways), the FDIC has an open credit line to the Treasury Department (uh, that means us tax payers) that will keep the FDIC floating in cash to keep paying out money to Grandma and Grandpa at the failed banks.

You see, the FDIC is supposed to be self maintaining, it charges banks a fee to have their deposits insured. Think of it as the banks paying an insurance premium. That money goes into the FDIC kitty and is used to pay depositors when a bank fails. That is all well and good except when the financial system blows up like it has over the past 2 years.

As of today’s quarterly report issued by the FDIC they are now broke, and I mean that in the literal sense.

FDIC deposit insurance fund now -$8.2B v $10.4B last quarter

Yep, they are broke, no money left in the cash drawer. So what now? As long as the FDIC has an open credit line with the Treasury then any bank that fails it will be the taxpayers who reimburse Grandma and Grandpa.

Think of it this way: you have a checking account at (let’s pick a name out of the air) ShittyBank and they get closed by the FDIC. Your very own money will be reimbursed to you via the FDIC insurance fund, but you will actually be paying yourself back in part because taxpayers will be on the hook to keep the FDIC floating in funds. So in the end you still lose some money.

The FDIC has recently asked member banks to pre-pay insurance premiums for the next 3 years in an attempt to fund the reserve pool as quickly as possible. But many smaller banks are objecting to this as it will further cut into their balance sheets. Besides, will prepayment of 3 years of insurance premiums be enough to cover the increase in bank failures that still lie ahead? I think not. In which case it will eventually end up in the tax payers lap.

Not only has the FDIC announced that their cash drawer is empty, but the number of banks on their hit list has grown yet again. That number now stands at 552 compared to 416 just in the previous quarter.

Recall that just a couple months ago the FDIC opened a satellite office in Florida with a staff of roughly 500 to deal with the bank issues (aka future bank failure) in the Southeast region. Expect more bank failures from Florida and surrounding states in the future.