I spoke with David Barr, the FDIC's spokesperson, after I had written this post about the re-privatization of Indymac, the California bank that failed last summer and was managed by the government. Barr points out that even though the FDIC took a $10.7 billion loss on Indymac's failure, more often losses from failed banks are much lower in proportion to the size of the bank's assets -- losses on Indymac represented about one-third of its assets; typical loss rates on smaller banks are about 22 percent. Barr also said that, most important from his institution's point of view, all insured deposits were protected.
Barr also noted that in the case of Washington Mutual, the largest bank failure ($300 billion in assets) during the FDIC's 75-year history, estimated federal losses are zero -- that's right, zero -- dollars. (It's an estimation because some of WaMu's assets remain in government receivership, a process that takes three to five years to complete). Typically, banks under federal control are not directly managed but instead quickly dismantled and sold. Of the 75 banks that have failed in the last three years, Indymac is the only bank the federal government has actually managed; it is the first time the FDIC has used conservatorship since 2001.
"[Banks] are like snow flakes, each and every failure is unique," Barr said. "FDIC's preference is not to run banks. ... It's not something we do all that often; it's one of the tools we have at our disposal."
This may be instructive as policy-makers contemplate similar policies for the large investment banks at the center of the financial crisis, often referencing the FDIC's experience in that arena. Balancing the need to act broadly and to deal with individual banks' specific problems is a difficult task, and figuring out in advance what the costs are is apparently no easy one. That may explain the stress tests the Treasury is performing on the remaining large banks. It's the only way to figure out the costs and benefits of the different policy options for fixing the financial system.
-- Tim Fernholz
