By Zachary A. Goldfarb
Washington Post Staff Writer
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."
The FDIC was created in 1933 to prevent runs on banks like those during the Great Depression. Ninety-five banks have failed this year.
The agency, which has the explicit backing of the U.S. government, collects fees from banks that go into a deposit insurance fund that covers deposits at failed banks. The fund insures $4.8 trillion in deposits.
FDIC officials said that on Wednesday, the end of the third quarter, the fund is expected to go into the red, down from a $50 billion balance last year. Agency officials said it would be several weeks before they know exactly how low the fund would go.
The agency still has plenty of assets that it has taken from failed banks. But many of these assets cannot easily be sold, which is creating a cash crunch for the agency. The prepayment of fees is supposed to ease that crunch.
Some doubt whether it will be enough.
"The real question is, is this prepay merely deferring a special assessment until the banking industry is healthier and can better absorb a special assessment or are there not going to be as many bank failures as people are projecting?" said V. Gerard Comizio, a banking lawyer in Washington and former regulator.
In addition to the prepayment, the agency is also planning to increase its fees in 2011. Currently, banks pay 12 to 16 cents for every $100 they have on deposits. That would rise to 15 to 19 cents per $100.
The FDIC's plan is that the moves would restore the deposit fund to a healthy level within eight years. Some very weak banks will be eligible for exemptions from the prepayment, officials said.
The proposal is open for 30 days of public comment before being finalized.