FDR prescient on FDIC

The Federal Deposit Insurance Corp. is being put to the test as a growing number of financial institutions are struggling to stay afloat.

As of June, there were 416 banks on the FDIC watch list, the highest number in 15 years. Some experts expect the number to climb in coming months due to the flagging economy, the collapse of the housing market and not enough cash on hand to cover losses from bad loans.

Some experts fear that the FDIC may not have enough money to insure everyone if the number of bank failures continues to escalate. Eighty-two banks have failed this year, The Associated Press reports. Some experts warn that the FDIC could itself need a government bailout should these trends continue.

The FDIC has the option of tapping a line of credit at the Treasury Department, which should be of comfort to financial institution customers. However, the line of credit, which Congress extended to $100 billion in May, with temporary borrowing authority of $500 billion through 2010, is taxpayer money. Like other government bailout programs, the day of reckoning will come.

Yet, it is difficult to comprehend how the nation's banking industry — and depositors — could have withstood the unprecedented and ongoing loan-loss problems if not for the FDIC.

The FDIC was created in 1933 under President Franklin D. Roosevelt in response to the thousands of bank failures that occurred in the 1920s and early 1930s. The purpose of the institution was to help stabilize the failing bank system and, as a result, shore up the economy.

The vast majority of the nation's banks and depositors should not be affected by a bank failure. Yet, the backing of the FDIC helps to ensure that bank customers do not make rash decisions, such as withdrawing deposits and placing them under their mattresses at home, because they're worried about the health of the banking industry. The FDIC track record speaks for itself: No depositor has lost a penny of insured funds as a result of a failure since the institution's inception in 1933.

As banks continue to rectify their loan-loss problems, the limits of the FDIC will be profoundly tested. But credit Roosevelt's vision and the sound philosophy behind the 1933 Banking Act, which created a venerable institution that has enabled the nation to weather many an economic storm.