The cost of bank failures is growing even faster than expected and will be at least $1 billion higher this year than federal regulators had projected only last month, Federal Deposit Insurance Corp. Chairman L. William Seidman disclosed yesterday.
Souring real estate markets were blamed for the sudden increase in the cost of protecting depositors in failed banks.
The number of bank failures is predicted to be about the same as last year -- around 200 -- but the costs will be substantially higher because bad real estate loans are dragging down bigger banks and causing much larger losses than expected, said Alvin Kitchen, a top FDIC accountant.
The FDIC now estimates it will cost $6.8 billion to clean up failed banks this year. That is $1 billion more than the agency projected in August and $3 billion more than Seidman estimated earlier this year.
As a result of the estimated cost increases disclosed yesterday, the FDIC fund that protects bank depositors is expected to shrink to its lowest level in history, less than 60 cents for each $100 in insured deposits.
The latest projected losses will effectively offset any benefit to the bank insurance fund from the $1 billion increase in deposit insurance premiums ratified yesterday by the FDIC's board of directors.
The failure of National Bank of Washington apparently is responsible for a large chunk of the unexpected increase in bank cleanup costs. The bank was not on the FDIC's "problem bank list" when it collapsed last month, leaving the FDIC to cover losses estimated by some to be as much as $500 million.
Seidman's disclosure of another $1 billion loss in the FDIC fund is expected to add to the political pressure for changes in the insurance program that was created to protect depositors after the massive bank failures of the Great Depression in the 1930s.
Congress will not take up broad deposit insurance reform until next session, but in the next few days the lawmakers are now virtually certain to pass a measure giving the FDIC unlimited power to raise the premiums banks pay for deposit insurance.
The White House also wants to give the FDIC additional authority to borrow money from the Treasury in case unexpected bank failures deplete the FDIC insurance fund. The General Accounting Office recently warned that the insurance fund could be wiped out if the nation falls into a recession or if one of the biggest banks fails without warning.
Anxiety about the health of the banking system was heightened further yesterday when Bank of Boston Corp. disclosed that it expects to report a $250 million quarterly loss and plans to lay off one out of every eight employees.
Citing "the deepening uncertainty of today's economic environment," Chairman Ira Stephanian said most of the loss was due to bad real estate loans, the ailment that devastated banks in the Southwest two years ago and now endangers financial institutions up and down the East Coast.
Bank of Boston is the largest bank north of New York. Boston's second-largest financial institution, Bank of New England, has been on the brink of failure for almost a year and is selling off many of its operations in an effort to rebuild its finances.
Starting in January banks will pay the FDIC 19.5 cents for every $100 of insured deposits, 7.5 cents more than the present premium. The new rate is the highest in history and the increase is the biggest ever.