FDIC the Federal Deposit Insurance Thesis

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The second key impact is that it protects unemployed homeowners in the event that their bank becomes insolvent. Without this additional protection, such homeowners could find their mortgage with a collection agency. By reducing the negative consequences to consumers of bank failure, the FDIC encourages faith in the system.

There are critics of the FDIC loss-share plan, however. The plan essentially limits the downside for purchasers of failed banks, while allowing them to retain the upside. The critics point to this as bearing too high a risk for the taxpayer (Paletta, 2009). This risk must also be taken into account when assessing the FDIC's performance in the financial crisis. While it has maintained the stability of the banking system in the face of over 100 bank failures, the FDIC has also deferred much of the risk associated with this failures in exchange of expediency in redistributing these assets.

From the early signs of the subprime crisis to the current state of rapid bank failures, the FDIC has worked consistently if not always successfully to fulfill its mandate. The promotion of sound policies failed, a reflection of the lack of true power the FDIC has in this regard. It has, however, successfully maintained stability and public confidence in the financial system. Despite the high rates of bank failures, there has not been a bank run and very stories have emerged of consumers suffering because of the failure of their bank.

The one caveat to a glowing assessment of FDIC performance is that the spate of bank failures has put tremendous strain on the organization. While it has accomplished its mandate thus far, it has done so at tremendous risk to the American taxpayer for the coming years.

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If banks pay fees through 2012 now, the FDIC will need new sources of funding should the recession and bank failures continue into next year. The loan-loss program has risk of roughly six times the FDIC's capacity. This means that the likelihood of a taxpayer-funded bailout of the FDIC is strong. The institution's successful handling of the economic crisis thus far could be undone if it is forced to absorb too much of the bad debt it has taken on in the name of expediency.

I would recommend for the FDIC to find ways to reduce this risk. At this point, the agency appears to be scrambling to salvage its own solvency. The federal government is responsible for backing the FDIC and will need to be called upon for support in the coming years. Most of the damage is done for the agency, however it needs to create better methods for disposing of bank assets than the loss-share contract that burdens it with 80% of the downside risk. Given that the FDIC is struggling to retain its own solvency, it is in no position to take on this risk. It is understood that the agency's mandate includes spending money where necessary, but in this case programs such as TAG and the loss-sharing program go beyond the call of duty to what will ultimately be the taxpayer's expense. I would recommend that given the agency's own solvency issues it should curtail such excessive risk-taking and spending.

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