If bank failures multiply, as some knowledgeable observers have forecast, the Federal Deposit Insurance Corporation (FDIC) which insures depositors funds could go broke.
This was the dire prediction of FDIC Chairman Sheila Bair, writing in a letter to banking industry executives.
Due to "rapidly deteriorating economic conditions" a large number of bank failures are possible, wrote Bair.
If that happens, according to Bair, "...current projections indicate that the fund balance will approach zero or even become negative.”
As a hedge against that potential, the FDIC recently imposed one-time "emergency" assessment fees on banks. The infusion of new money will replenish the shrinking cash reserve used to reimburse depositors for losses up to $250,000 in the event of a bank failure.
Twenty-five banks failed in 2008, reducing FDIC funds by $33.5 billion. Another 16 banks have failed since Jan. 1, 2009.
Understandably, the banking community is not pleased with the assessment. The FDIC later reduced the fee but asked the Federal Reserve for a $100 billion line of credit from taxpayers.
Camden Fine, president of the Independent Community Bankers of America, told Bloomberg.com in a telephone interview that small banks expressed their anger over the assessments in more than one thousand e-mails and phone messages received at his office.
"I've never seen emotions like this," Fine told Bloomberg.
More messages of protest from small banks are expected, according to an industry trade organization, in an effort to switch their assessment burden to bigger banks.
If the assessments remain in place at their current levels, some 50 to 100 percent of some small bank earnings could disappear, according to Fine.
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