More Bank Failures May Follow IndyMac Federal regulators seized IndyMac Bank Friday, one of the nation's largest lenders, because of questions about its viability. The bank is now being run by the Federal Deposit Insurance Corporation (FDIC). Karen Shaw Petrou, managing partner at Federal Financial Analytics, about what that means for the financial sector, speaks with NPR's Liane Hansen.
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More Bank Failures May Follow IndyMac

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More Bank Failures May Follow IndyMac

More Bank Failures May Follow IndyMac

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LIANE HANSEN, host:

This is Weekend Edition from NPR News. I'm Liane Hansen. This week, an already bad housing market got even worse. Markets tumbled on rumors that the Bush administration would bail out mortgage lenders Freddie Mac and Fannie Mae. Then on Friday, federal regulators seized IndyMac Bank, one of the nation's largest lenders, because of questions about its viability.

The failure of IndyMac is one of the biggest in U.S. history. The bank is now being run by the Federal Deposit Insurance Corporation, or FDIC. Joining us in the studio is Karen Shaw Petrou. She's a managing partner at Federal Financial Analytics, a Washington-based firm that assesses risk in the financial sector. Welcome to the program.

Ms. KAREN SHAW PETROU (Managing Partner, Federal Financial Analytics): Thank you.

HANSEN: Briefly, remind us what exactly is the FDIC, and what does it do. What's its role?

Ms. PETROU: The FDIC was set up in the early 1930s by the Roosevelt administration so that the nation would never have to go through the kind of bank runs that were a critical and awful part of the Great Depression. It's that sticker you see at every teller window on every bank in the United States, and it means that your insured deposit is covered by an agency of the federal government.

HANSEN: Insured deposit up to a certain point?

Ms. PETROU: Up to 100,000 dollars.

HANSEN: What does it mean then that the FDIC has taken over this bank?

Ms. PETROU: It means that it will now work through the bank, paying off the insured depositors, figuring out who are the uninsured depositors and the other creditors of the bank. And after it's paid off all the insured deposits, what's left and, you know, what's called the resolution, it will then parcel out the pieces of the bank, trying to make that as the least-cost-possible resolution to preserve the integrity of the FDIC and minimize potential cost to tax payers.

HANSEN: Are the uninsured depositors out of luck?

Ms. PETROU: That depends. In some bank failures, there was one in early 2000, 2001 where the FDIC was able to sell off a failed bank for enough money to pay all the uninsured depositors and the creditors and still make a couple of dollars for the FDIC. But that's unusual. Usually, an uninsured depositor and other creditors will take a hit.

HANSEN: As of March, IndyMac bank had 32 billion dollars in assets. How deep are the FDIC's pockets? I mean, can it get into trouble if banks keep faulting like this?

Ms. PETROU: The FDIC can. The amount of insured deposits at IndyMac is considerably less than the total amount of the assets at the bank. And the fund is ample, and if it, for any reason, encountered short-term funding problems, the federal government would stand behind it.

Banks fund the FDIC. All insured banks pay a premium into the FDIC for the coverage. And if at any point the coverage runs short, the treasury writes a check, and then the banks pay it back.

HANSEN: IndyMac is the fifth bank to close this year. Do you think the American public should be worried that this might be a trend?

Ms. PETROU: We'll have more bank failures, and there's no question in my mind that this is going to be a tough year. We've all been lulled into complacency. We've had a lot of good years. And boom brings that out in the banking system, and it makes us all lazy.

It means that uninsured depositors get too relaxed, then they don't take care. It means that regulators get lazy. We've been through a period of time in which we all sort of thought that, gee, regulation is always wrong, and the market is always right. And I think we got a little too careless.

HANSEN: Karen Shaw Petrou is a managing partner at Federal Financial Analytics, based here in Washington D.C. Thank you so much for coming in.

Ms. PETROU: Thank you.

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