Troubled FDIC Seeks Industry Solution

123jump.com Staff
29 Sep, 2009
New York City

The Federal Deposit Insurance Corp is seeking prepayment of next three years of premiums and raise the cost of insurance by three basis points as lawmakers resist yet another bailout of the banking industry. The $22 billion fund is insuring $4 trillion of bank deposits.

[R]6:30 PM New York – The Federal Deposit Insurance Corp is seeking prepayment of next three years of premiums and raise the cost of insurance by three basis points as lawmakers resist yet another bailout of the banking industry. The $22 billion fund is insuring $4 trillion of bank deposits.[/R]

The Federal Deposit Insurance Corp, the U.S. government agency that insures roughly $4 trillion of consumer bank deposits is expected to run out of money by tomorrow. The insurer that is supposed to provide the deposit guarantee is running empty.

With less than $22 billion, the FDIC is insuring deposits that are almost 200 times the size its core funds at 5,160 banks.

The agency is reluctant to borrow money from U.S. Treasury as more people and lawmakers question the need for additional bank bailout. But the banking industry conditions have deteriorated in the last two months as losses mount.

The agency has relied on collecting special premium to solve the problems of the banking industry so far is left with three distinct choices.

Borrow more money from the U.S. government, raise premium rate for its coverage or assess one-time fee to cover future costs of bailout. The agency is proposing to do the two of the three choices.

The FDIC is proposing to collect three year premium in advance when banks pay fourth quarter premium for the year 2010 through 2012. Banks will be asked to pay three basis points more in premium beginning 2011. The fee prepayment will raise $45 billion that will raise its reserve ratio to the lever required by the Congress.

Premiums could increase again 2011 if losses continue in the industry but it is too early to predict it at this time.

The FDIC has raised its estimate of bank failure between 2009 and 2013 to $100 billion from $70 billion as 95 banks have failed so far in the year and 120 in the last two calendar years, according FDIC staff.

There were 416 problem banks at the end of June and the number is likely to grow as commercial loans and credit card defaults mount.

FDIC is required to increase its reserve ratio, the balance divided by all insured deposits, when it drops below 1.15. As of June 30 the ratio had dropped to 0.22. In May, Congress authorized the FDIC to bring the reserve ratio back to 1.15 in eight years. That requires the insurance agency to hold $46 billion in eight years.

The FDIC is expected to run out of money by tomorrow and the planned fees prepayment and increase in premium will help it collect the needed funds. The proposal relies on the collection from the industry and does not seek bailout from taxpayers.

Congress also approved $100 billion of credit line with Treasury but FDIC is not planning to use it. The FDIC is also not planning to assess special fee as it has already done so one time this year.

The banking industry appears to like the proposal but lobbied against one-time fee and prefers the prepayment. The prepayments will be classified as assets on the banks balance sheet and will not hurt their abilities to raise capital and will be expensed every quarter.

James Cheesen, chief economist at the American Bankers Association said in an interview that the prepayment will help FDIC and also preserve capital with banks.

The FDIC will leave the proposal open for public comment till the end of October and hopes that it will be approved before the end of the year.