According to the Associated Press:

The US government is warning banks that its deposit insurance fund could go broke this year as bank failures mount.

The head of the Federal Deposit Insurance Corporation, Sheila Bair, in a letter to bank chief executives dated March 2, defended the FDIC’s plan to raise fees on banks and assess an emergency fee to shore up the fund and maintain investor confidence.

According to Bloomberg:

The FDIC last week approved a one-time “emergency” fee and other assessment increases on the industry to rebuild a fund to repay customers for deposits of as much as $250,000 when a bank fails. The fees, opposed by the industry, may generate $27 billion this year after the fund fell to $18.9 billion in the fourth quarter from $34.6 billion in the previous period, the FDIC said.

The fund, which lost $33.5 billion in 2008, was drained by 25 bank failures last year. Sixteen banks have failed so far this year, further straining the fund.

So, banks are dropping like flies and reeling in credit lines…but are also expected to offer payday loan alternatives at a loss when payday lenders are eliminated?  Yup, makes perfect sense.

From Thomas Brown at Bankstocks.com:

So Sheila Bair will hang around as head of the FDIC in the Obama administration. Ugh. I know, I know, Bair is hugely popular in certain circles in Washington, and never fails to get adoring press (most recently, as it happens, in the New Republic). But her let’s-stick-up-for-the-little-guy schtick doesn’t figure to do much to bolster the banking system she’s supposed to be protecting. Nor will it likely speed the healing of the financial system. More broadly, Bair isn’t exactly the profile in courage she’s often made out to be.

Click here to see highlights of a recent FDIC study on bank overdraft protection programs.

Overdraft Protection and Payday Advance Loans

Short-term credit providers play a critical role in the U.S. financial services market by extending capital to a population in need of small-dollar loans. The demand to meet the need for immediate, unsecured, short-term credit has grown in the past decade with the market now exceeding $115 billion, including bounced check fees, late bill payment fees and payday loans. Bank overdraft protection and salary or payday advances are among a number of options available to consumers facing unexpected and unbudgeted expenses.

Confronting a budget shortfall, a consumer may overdraw their checking account, triggering a “bounced loan” through overdraft protection or choose an advance through a payday lender.While both options provide consumers with short-term access to funds, there are important differences between the two.

See a detailed comparison of the two products.

From Bankstocks.com:

Sheila Bair is the media’s favorite financial regulator. In fact, she is a disgrace. She didn’t do consumers any good when she took a powder on Wal-Mart’s banking application, or offered her small-dollar-loan plan. And she’s certainly not doing them any good when she pushes for uneconomic loan mods, which will only delay the inevitable. Worse, she’s not doing the banking system any good, either.

According to the AP:

The Federal Deposit Insurance Corp. said Tuesday the list of banks it considers to be in trouble shot up nearly 50 percent to 171 during the third quarter—yet another sign of escalating problems among the institutions controlling Americans’ deposits.

We’ve had profound problems in our financial markets that are taking a rising toll on the real economy,” said FDIC Chairman Sheila Bair in a statement, adding that Tuesday’s report “reflects these challenges.”

Recently, community banks—defined as those with assets under $1 billion—have started to show similar stresses as their larger counterparts, the FDIC said.

First of all, only 30 banks, generally small local ones at that, have signed up for the program.  Second, when customers find out all the strings attached to getting a short-term loan from one of these banks–application fees, minimum balances in a savings accounts, complicated fee structures–they will decide that a payday loan is a better deal.  In any case, the market will decide.

This Kansas City Star story has more.

The American Banker is working on a story about the “success” of the FDIC small loan program.  About 30 small community bankers signed up for the program, but all the big boys passed on it.   CFSA spokespeople will be quoted in the story supporting a free market.   Story should run next week.

The Center for Consumer Freedom has a great letter to the editor in today’s USA Today responding to a recent editorial on payday lending.

“USA TODAY’s editorial on payday loans invoked the Federal Deposit Insurance Corp.’s (FDIC) stance in support of putting caps on these loans…But the FDIC’s own chairwoman authored a study in 2005 that painted a very different picture. Her report shows that payday loans can be a lower-cost option than bounced check or overdraft fees and that credit unions are sometimes not available as a reasonable alternative.”

Well said.

http://blogs.usatoday.com/oped/2008/02/keep-payday-loa.html