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Low Fees Hurt FDIC

Earlier this month, the FDIC put in place new fees for the banking industry in order to shore up the fund it uses to protect bank deposits. While small bankers were outraged at the new increases, FDIC Chairman Shelia Bair argued that they were necessary to keep the deposit insurance fund from becoming "insolvent this year."

The number of bank closures has skyrocketed this year, already 17 banks have failed in the first months of 2009, compared to just 25 total failures last year. But before the recent crisis, the FDIC was dealing with relatively few collapses. There were no bank failures in 2005 and 2006 and just three in 2007. So where is all the money? Wasn't the FDIC just socking away fees in the last five years in preparation for such a downturn?

According to the Boston Globe, apparently not.

The fund ran short of money during the savings and loan crisis of the 1980s, prompting the agency to increase fees to make up for the shortfall.

Then, a booming economy left banks flush with cash, and by 1996 the insurance fund was considered so large that it could grow through interest payments and fees charged only to banks with high credit risk. Congress agreed that premiums didn't need to be collected if the fund was sustained at a level that was considered safe. Thus, about 95 percent of banks paid no premiums from 1996 to 2006, including some new ones that did not have to pay a premium, the FDIC said.

Congress requires the insurance fund to stay over 1 percent of all insured deposits. As of December 31, the fund was at just 0.40 percent.