FDIC Wants Banks to Pay Billions Early for Insurance Fund

The Federal Deposit Insurance Corp. today proposed that banks prepay tens of billions of dollars in fees to bolster its insurance fund that has been depleted by a rash of bank failures during the recession.

As of the end of June, the FDIC's insurance fund for depositors had dwindled to $10.4 billion, its lowest level in 15 years. The agency now expects bank failures to cost the fund $100 billion over the next four years, with the bulk of the costs coming this year and next, and the fund balance to turn negative this month.

To replenish the fund, the FDIC wants banks to pay three years worth of fees, a move that could rake in $45 billion. If the proposal is enacted, the agency's 8,195 insured institutions would prepay by Dec. 31 their fees for the fourth quarter of this year and all of 2010, 2011, and 2012.

"This proposal is really about how and when the industry fulfills its obligations to the insurance fund," FDIC chief Sheila Bair said at a board meeting in Washington.

Bair explained why the agency selected the prepayment proposal over other options, such as tapping its $500 billion credit line with the Treasury Department.

"I do think that the American people would prefer to see an end to policies that look to the federal balance sheet as a remedy to every problem," she stated. "This is especially true in the case of this industry that has the resources to deal with these problems. It is important for the industry to maintain public confidence by demonstrating that it will not reflexively fall back on the public safety net in a period of distress."

"I never say never and there's much we cannot control for, particularly the speed and strength of the economic recovery," she added. "While we are optimistic on the economy, if conditions unexpectedly worsen, we could reach a point where we would have to tap our Treasury line, but today is not that day. Our analysis suggests that the industry can step up, so we are asking them to do so."

As of the end of the second quarter, the agency had 416 institutions on its "problem list." Already this year, federal regulators have shut down 95 banks, with more sure to come.

As the proposal moves into a 30-day period of public comment, Bair maintained that whatever happens next, depositors' funds are safe.

The banks seem to prefer the advance approach rather than hitting them for money over and above what they would be expected to pay.

"The prepaid assessments represent money that the FDIC expects to receive from banks anyway over the next several years, but having the cash on hand sooner ... provides more flexibility for dealing with any contingencies over the foreseeable future," James Chessen, chief economist of the American Bankers Association, said in a statement. "Another special assessment would likely do more harm than good as it would directly reduce bank income, hinder capital growth, and make lending much more difficult."

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