US bank failures stretch deposit insurance fund

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

The federal Deposit Insurance Fund contained $116bn in assets at the end of the first quarter, down from $128bn at the end of 2022, according to data released on Wednesday. The ratio of assets to insured deposits fell to 1.1, the lowest since 2015.

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

The deposit fund’s depleted finances follow a period of turmoil for US regional lenders. The failures of Silicon Valley Bank and Signature Bank in March cost the fund $20bn. The first-quarter figures do not reflect the subsequent failure of First Republic, which cost the fund another $13bn, and would make the fund’s financials look even worse.

The FDIC reported the updated fund data as part of its quarterly banking profile. The agency also confirmed that total profits of US banks neared $80bn, an all-time high, in the quarter as the Financial Times reported earlier this month. Deposits at US banks dropped by nearly $500bn in the quarter. That was the largest decline in almost four decades, on an absolute basis, but represented just 2 per cent of the nearly $17tn in US deposits.

“Despite the recent period of stress, the banking industry has proven to be quite resilient,” said the FDIC chair Martin Gruenberg in a statement. “However, these results, especially for earnings, include the effects of only a few weeks of the industry’s stress than began in early March, rather than the course of the entire quarter. The more lasting effects of the industry’s response to that stress may not become fully apparent until second-quarter results.”

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

However, unrealised losses were still higher than a year ago, when they amounted to about $300bn, or at the end of 2021 when they were close to zero.

The FDIC said the improvement was the result of a drop in the interest rates of longer-term bonds mostly in the month of March.

This article has been updated to correctly describe the scale of the decline in deposits at US banks in the first quarter.