After run on IndyMac, others could face 'walk'

by Robin Sidel, David Enrich and Jonathan Karp - Jul. 15, 2008 12:00 AM
Wall Street Journal

The federal government's seizure of IndyMac Bank is deepening worries among executives, regulators and consumers about the U.S. banking industry.

Banks and thrifts are struggling against a rising tide of bad loans, and it is becoming clear that some lenders won't be able to escape.

While fewer banks are expected to fail than the 834 that went under from 1990 to 1992, it may take several years for battered financial institutions to work through bad loans and replenish depleted capital.

Those gloomy scenarios could be avoided, however, if the U.S. economy and housing market rebound soon.

But for now, as the turmoil worsens, signs are emerging that consumers, who generally thought little about the safety of their deposits when times were good, are having some second thoughts.

More likely than the kind of exodus of depositors that quickly sank IndyMac is what some bankers are describing as a slow-motion "walk on the bank," which could cripple financial institutions already weakened by credit problems.

The Federal Deposit Insurance Corp. insures deposits of up to $100,000 per depositor per bank, or $250,000 for most retirement accounts, including any accrued interest. But a surprising proportion of deposits exceeds those limits.

The percentage of uninsured deposits has doubled since 1992, climbing to about 37 percent of the nation's $7.07 trillion in deposits, according to an analysis of data reported to the FDIC; the figures also include large corporate and institutional deposits, such as payroll accounts.

The FDIC will bear the bulk of the financial burden of IndyMac's failure, predicting that its collapse will cost the deposit-insurance fund between $4 billion and $8 billion, possibly making it the costliest bank failure ever.

If an expected surge in bank failures materializes, other financial institutions, which pay assessments to the FDIC to capitalize the fund, may be forced to provide more money.

"There will be increased failures, but it still will be within the (realm) of what we can handle, will handle," FDIC Chairman Sheila Bairsaid. "No insured depositor has ever lost a penny of insured deposits."