US bank fails to stretch deposit insurance fund

The turmoil among US banks has depleted the government-backed fund that protects depositors, giving it the least firepower in nearly a decade to cover losses from future lender failures.

The Federal Deposit Insurance Fund held $116 billion in assets at the end of the first quarter, up from $128 billion at the end of 2022, according to data released Wednesday. The asset ratio of insured deposits fell to 1.1, the lowest since 2015.

The agency said the number of banks on the Federal Deposit Insurance Corporation’s so-called “problem list” was 43 at the end of the first quarter, up from 39 at the end of the year. The FDIC discloses the number of banks on its problem list, but not the names.

The deposit fund’s deteriorating financial condition follows a period of turmoil for US regional lenders. The fund lost $20 billion in March due to the failures of Silicon Valley Bank and Signature Bank. The first quarter figures do not reflect First Republic’s subsequent failure, which cost the fund another $13bn, and will further worsen the fund’s financial position.

The FDIC reports updated fund data as part of its quarterly Banking Profile. The agency also confirmed that net profits of US banks neared $80 billion, the highest ever for the quarter, as reported by the Financial Times earlier this month. Deposits in US banks fell by almost $500bn in the quarter. It was the biggest decline in nearly two decades, on an absolute basis, but represented just 2 percent of the roughly $17 trillion in US deposits.

“Despite recent periods of stress, the banking industry has proven to be quite resilient,” FDIC Chairman Martin Gruenberg said in a statement. “However, these results, especially for earnings, include the effects of only a few weeks of industry stress in early March, rather than the full quarter. The more lasting effects of the industry’s response to that stress will not be fully realized until second quarter results.” may not be as clear.

The data also showed a marginal improvement in the bond portfolio of banks, which have been hit by rising interest rates. US banks would collectively face losses of $515bn if they were forced to liquidate those portfolios by the end of March, down from an unrealized loss of $617bn at the end of 2022.

However, unrealized losses are still higher than a year ago, when they stood at around $300bn, or at the end of 2021 when they were close to zero.

The FDIC said the correction is the result of a decline in long-term bond interest rates, which occurred mostly in the month of March.