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Dead Constitution See other Dead Constitution Articles Title: FDIC Proposes Banks Prepay Deposit Fees Through 2012 Sept. 29 (Bloomberg) -- The Federal Deposit Insurance Corp. proposed asking banks to prepay three years of premiums to replenish reserves dented by a rash of bank failures that the agency said will cost $100 billion through 2013. The insurance fund will run a deficit as of tomorrow after 120 banks failed in the past two years, the agency said today. Half the costs from seized banks have been incurred already and prepaying the fees will raise $45 billion, the FDIC said. The agency rejected options for a second special fee or borrowing from the Treasury Department. “What we are proposing to do is to tap the ample liquidity of the banking industry to improve our own liquidity position without borrowing from the Treasury,” FDIC Chairman Sheila Bair said at a Washington board meeting. The agency raised its five- year loss estimate by 43 percent. The agency is required by law to rebuild the fund when the reserve ratio, or the balance divided by insured deposits, falls below 1.15 percent. It was 0.22 percent on June 30. The fund, drained by 95 bank failures this year, had $10.4 billion at the end of the second quarter. The fund will erase its deficit by 2012, the staff said. The proposal approved by the board requires banks to pay premiums for the fourth quarter and next three years on Dec. 30. The board backed prepayments over alternatives such as borrowing taxpayer dollars from the Treasury, charging the banking industry a special fee in addition to levies they already pay and borrowing directly from the banks. John Dugan, the head of the U.S. Office of the Comptroller of the Currency, said he was pleased the agency proposal didn’t impose another special assessment this year and next year. Assessment Opposition “For banks that were already feeling the effects of a weak economy, special assessments could only make them weaker,” said Dugan, a member of the five-person FDIC board. Under the proposal, the FDIC wouldn’t impose another special assessment this year. The agency would raise assessments by 3 basis points in 2011. The FDIC will seek public comment until Oct. 28 and then make a decision on its approach. The FDIC raised its projected fund losses, from $70 billion in May, because the assets and number of failed and “problem” banks have increased, said Arthur Murton, director of the FDIC’s division of insurance and research. Bank failures will peak this year and 2010, he said. The banking industry lobbied against a special fee that would be added to the regular annual premium, telling the FDIC and Congress such a levy would hurt their ability to raise capital. The industry welcomed the FDIC’s proposed approach. ‘Better Solution’ “It’s certainly a better solution than taking a large chunk of money out of banks’ income and capital,” James Chessen, chief economist at the American Bankers Association, said. The prepayment approach gives “the FDIC the cash that they need, it will be paid for by the industry and it will not have the severe impact that other options would have had on banking,” Chessen said. Banks paid a special assessment in the second quarter that raised $5.6 billion for the insurance fund, in addition to an estimated $12 billion in annual premiums. The agency also has authority to impose fees in the third and fourth quarters. Banks backed prepayment because the premiums are classified as an asset when the payment is made, becoming an expense during the quarter in which the obligation is due. The agency has authority to borrow against a Treasury line of credit that Congress in May increased to $100 billion. This option would have put the FDIC in the position of borrowing from taxpayers in the wake of public anger over the bank bailout.
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The prepaid premiums are expected to total $45 billion. Without them, the Washington-based FDIC said that the agency's Deposit Insurance Fund -- which repays customers with deposits of as much as $250,000 when a bank fails -- would face a liquidity crunch early next year, and it will be operating in the red by the end of this month. * * * Fifty institutions were closed in the third quarter for a total estimated cost to the FDIC of $14.9 billion, according to researchers at Keefe Bruyette & Woods. "This compares to the declining Deposit Insurance Fund balance of $10.4 billion as of the second quarter of 2009," Keefe's Washington analyst Brian Gardner said in a report published Monday. A trillion here, a trillion there, soon you're not talking real money
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