Banks to prepay FDIC for failures

By Binyamin Appelbaum
Washington Post Staff Writer
Friday, November 13, 2009

The Federal Deposit Insurance Corp. will collect $45 billion from the banking industry to cover the rising cost of bank failures, an unprecedented assessment that reflects the agency's projections that the current round of failures will not peak until next year.

The FDIC's board voted Thursday to require banks to pay at the end of this year the amount they would owe the FDIC over the next three years. The agency collects insurance premiums from all banks, which it uses to reimburse depositors in failed banks.

In the past two years, the FDIC has seized 145 banks, compared with only three in 2007. The casualties include four of the 10 largest failed banks in U.S. history. The agency projects that the cost of all failures resulting from the current crisis will reach $100 billion.

The FDIC has already spent or set aside the money to cover more than half of those costs, but for the first time since the early 1990s, the agency said the regular premium payments wouldn't be enough to cover the costs looming on the horizon.

Depositors don't run any risk, as the FDIC can always turn to the federal government for emergency funding. But FDIC officials have said that they prefer for the industry to pay the costs of the failures upfront to avoid the perception that taxpayers are funding another bailout.

FDIC Chairman Sheila C. Bair thanked the industry for its support of that approach on Thursday.

"I'm pleased but not surprised by the industry's willingness to step up to the task," Bair said.

The money that the FDIC is collecting from banks legally is considered a prepayment of future premiums. That technicality is intended to avoid a hit to the industry's lending capacity.

Payments to the FDIC generally are deducted from banks' capital, the reserves they are required to hold against unexpected losses. Because banks make loans in proportion to their capital, the FDIC premiums reduce lending capacity. But in this case, banks are not required to report a reduction in capital until the quarter in which the premiums were originally due.

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