FDIC Seeks Fees to Shore Up Reserve
Wednesday, September 30, 2009
With banks failing faster than the government expected a few months ago, the federal agency that insures deposits on Tuesday called for a $45 billion cash infusion from the banking industry, seeking to raise additional funds needed to continue protecting deposits.
The Federal Deposit Insurance Corp. proposed that banks pay three-years worth of government fees by year's end. Banks pay fees into the FDIC's fund, which is used to protect depositors in case a bank fails.
Agency officials said that the fees would supply ample cash to the FDIC and allow the agency to begin to rebuild its deposit insurance fund, which has been battered by more than 100 bank failures in 18 months.
The plan reflected the dire state of the banking industry even as the economy recovers. The FDIC increased its estimate on expected losses on bank failures over the next five years to $100 billion -- $30 billion more than it projected just four months ago. Banks are still losing billions of dollars on troubled loans for homes and commercial real estate.
The FDIC's proposal strikes a middleground between two other widely discussed options, which included charging the banking industry a special new fee or tapping a line of credit from the Treasury Department.
"I think that the American people would prefer to see an end to policies that look to the federal balance sheet as the remedy to every problem," FDIC Chairman Sheila C. Bair said Tuesday.
Bair stressed that going to the Treasury remained an option, adding that the announcement is a "nonevent" for depositors, who are protected for up to the federal limit of $250,000 per bank.
"We have tons of money to protect insured depositors under any scenario," Bair said.
By and large, banks supported the plan. They'll have to fork over more money sooner to the agency, but they'll receive a credit on their books for the prepayment. As a result, the move should have only a minimal effect on their business.
"Banks are committed as ever to assuring the health of the FDIC because we understand the importance of deposit insurance to bank customers everywhere," said James Chessen, chief economist of the American Bankers Association. "At this critical time, when the economy is just beginning its recovery, looking to options that are less pro-cyclical and that spread the cost over time is the right policy."
Some experts, however, said tapping the Treasury line of credit would have been a smart alternative because it would have avoided putting any new pressure on the struggling banking industry.
"I'm a little concerned that in their zeal to rebuild the insurance fund and fix the system, they do it so quickly, they kill the patient," said Rick Weiss, director of banks and thrift research at Janney Montgomery Scott. "You do need to accept that you're living with bad decisions of the past four or five years."