Smaller banks given federal extension to help preserve key accounts

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By Brady Dennis
Washington Post Staff Writer
Wednesday, April 14, 2010

Federal banking regulators voted Tuesday to extend a guarantee program aimed at helping smaller banks overcome the fallout from the financial crisis while also moving to explore a proposal that could result in higher fees on large, risky banks.

The five-member board of the Federal Deposit Insurance Corp. unanimously approved a six-month extension of the Transaction Account Guarantee Program, which offers unlimited deposit insurance for certain business bank accounts. The program, instituted in October 2008, was scheduled to expire at the end of June.

Board members and FDIC staff members said the extension was necessary to ensure that smaller banks could retain critical accounts -- such as payroll accounts from municipalities and small businesses -- rather than risk losing those to larger banks that might be perceived as more stable. They said allowing the program to expire could put additional pressure on community banks and subsequently place more strain on the FDIC's deposit insurance fund if they were to falter.

FDIC Chairman Sheila C. Bair said allowing the program to expire under the current economic environment "could cause a number of community banks -- already under stress -- to experience deposit withdrawals from their large transaction accounts and would risk needless liquidity failures."

Regulators had already extended the program's initial deadline last year, and Tuesday's vote highlighted the continued fragility of the nation's banking system. The program will remain in effect through the end of 2010, and the FDIC has the option of extending it through the end of 2011.

Nearly 6,400 institutions, about 80 percent of the nation's banks, participate in the guarantee program. The banks, mostly smaller institutions, hold an estimated $340 billion in accounts guaranteed by the program. Of that figure, $266 billion represents amounts above the traditional limits on insured deposits.

The board's decision won praise from the banking industry, particularly from groups representing small banks.

"The TAG program has provided stability and confidence for many bank depositors," James Chessen, chief economist for the American Bankers Association, said in a statement. "However, economic conditions remain very unsettled and it is as important as ever to assure depositors that their money is safe."

Jim MacPhee, chairman of the Independent Community Bankers of America, said the program "has been especially helpful in the communities that were hardest hit by the economic downturn."

Meanwhile, the FDIC board also moved Tuesday to further explore a proposal to overhaul how the agency assesses fees on banks with more than $10 billion in assets, with the aim of discouraging excessive risk-taking and shifting the burden to riskier institutions whose failure would inflict the largest potential losses on the deposit insurance fund.

Under the proposal, the agency would no longer rely on existing risk categories and long-term debt ratings, but would instead adopt a score-card system that measures a firm's risk concentrations, financial performance and credit quality. The plan also would give the FDIC discretion to consider factors such as stress testing, risk-management practices and underwriting standards. There would be a separate score-card category for the handful of "highly complex institutions" -- banks with $50 billion in assets and a holding company with $500 billion in assets.

Staff members said that the FDIC would collect roughly the same amount in fees under the new system, but more responsibility for funding the deposit insurance program would rest with larger, riskier institutions.

"Events during the past two years have made clear the need for improvement in how well and how quickly we recognize and charge for risk. This proposal, I think, is a significant improvement to how we do that," Bair said Tuesday. "If we had used the proposed system during the pre-crisis periods, I think it would have predicted the current rank ordering of large institutions much better than the system did."

She said the proposed system probably would prove "fairer and less pro-cyclical." If approved, the new fee system could be operational as early as next year.

John C. Dugan, the current comptroller of the currency and an FDIC board member, voted in favor of putting out the proposal for a 60-day comment period, but he expressed concerns that the fee system could be open to subjective judgments and impose uncertainty on the largest U.S. banks.

"It is important that any proposed changes to the assessment method be based on methods that are objective and transparent," Dugan said, adding, "I have not yet made up my mind about whether this will be an improvement."

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