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Obama's proposed budget would increase FDIC insurance fund

By Binyamin Appelbaum
Monday, February 1, 2010; 5:18 PM

The Obama administration wants to increase the size of the insurance fund that repays depositors in failed banks, a step that would require all banks to pay larger fees to the Federal Deposit Insurance Corp.

The change, which would require legislation, is part of a broader effort by the administration to raise taxes and fees on banks to discourage risk-taking and to create better shock absorbers for future crises.

The FDIC fund is designed to gather money in good times and spend it in bad times. But the fund drained quickly as banks failed over the last two years, forcing the FDIC to increase fees and impose special assessments at the very moment that banks could ill afford the additional expense. The insurance fund also ran out of money during the last banking crisis, in the late 1980s and early 1990s.

The administration's budget proposal, released Monday, suggests that the FDIC needs a larger insurance fund.

"It may be appropriate to consider raising the target to a level above 1.5 percent in order to maintain positive fund balances during future downturns," the budget states.

An FDIC spokesman said the agency favors the idea.

But banks are unlikely to applaud. Existing law requires the FDIC to keep the fund balance between 1.15 percent and 1.5 percent of all insured deposits. The FDIC uses an internal target of 1.25 percent, or about $95 billion at present. Raising the target by half a percentage point, to 1.75 percent, would require the FDIC to collect an additional $38 billion.

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