FDIC expects bank failures to cost more, hikes bank fees

WASHINGTON -- Facing a cascade of bank failures depleting the deposit insurance fund, federal regulators on Friday raised the fees paid by U.S. financial institutions and levied an additional premium in a bid to collect $27 billion this year.

The Federal Deposit Insurance Corp. now expects that bank failures will cost the insurance fund around $65 billion through 2013, up from an earlier estimate of $40 billion. The bank failures, 14 already this year following 25 last year, reflect the rising unemployment and falling home prices that have sent loan defaults soaring.

The FDIC said the economic crisis, which has caused the insurance fund to drop to its lowest level in nearly a quarter-century, also warranted extending the plan to rebuild the insurance fund from five years to seven.

"We're taking steps today to ensure that the deposit insurance system remains sound," FDIC Chairman Sheila Bair said at a board meeting to vote on the changes. "These steps are necessary because banks — and not taxpayers — are expected to fund the system."

But the head of the Office of Thrift Supervision, who is one of the board members, voted against the fee increases. John Reich said the fees would unfairly burden smaller banks that didn't contribute to the financial crisis with reckless lending.

Bair said the plan protects bank depositors — by safeguarding the fund that insures regular accounts up to $250,000. Taxpayers also are protected because it likely means the FDIC will not have to go to the Treasury Department and tap public money to replenish the insurance fund, she added.

Bair has not ruled out that possibility for a short-term loan, but said she doesn't expect to take the more drastic action of using its $30 billion long-term credit line with Treasury — something that has ever been done.

"Treasury exists for contingencies and should not be relied upon for planning purposes," Bair said Friday. "If we were to turn to taxpayers to cover fund losses, this could open up a whole new debate about the degree of government involvement in the affairs of insured banks."

The FDIC plan puts new charges on a battered industry while the Obama administration is seeking to pump as much as $750 billion in additional federal aid into ailing banks under its financial rescue plan.

The FDIC, as a regulatory agency charged with protecting the insurance fund, acts independently from the administration.

The FDIC raised the regular insurance premiums for banks to between 12 and 16 cents for every $100 in deposits starting in April, up from a range of 12 to 14 cents.

They also approved an additional premium, to be levied on the roughly 8,500 federally insured institutions on June 30. The premium will be 20 cents for every $100 of their insured deposits and will bring in an additional $15 billion.

The law requires the insurance fund to be maintained at a certain minimum level but it fell below that minimum — 1.15% of total insured deposits — in mid-2008.

But 25 U.S. banks failed last year — including two of the biggest thrifts — more than in the previous five years combined and up from only three failures in 2007.

The failures sliced the amount in the deposit insurance fund to $18.9 billion as of Dec. 31, the lowest level since 1987. That compares with $52.4 billion a year earlier.

The FDIC reported Thursday that U.S. banks and thrifts lost $26.2 billion in the last three months of 2008, the first quarterly loss in 18 years, as the housing and credit crises escalated. Banks also more than doubled the amount they set aside to cover potential loan losses, to $69.3 billion in the fourth quarter from $32.1 billion a year earlier.

The agency said there were 252 banks and thrifts in trouble at the end of 2008, up from 171 in the third quarter.

Two of the biggest bank failures in the nation's history occurred last year and involved thrifts.

Pasadena, Calif.-based IndyMac Bank collapsed in July and cost the federal deposit insurance fund $10.7 billion and Seattle-based Washington Mutual was the largest U.S. bank failure ever. WaMu fell in September, with around $307 billion in assets, and was acquired by JPMorgan Chase for $1.9 billion in a deal brokered by the FDIC.

Thrifts are important to consumer lending because they must have at least 65% of their lending in mortgages and other consumer loans, but that also has made them especially vulnerable to the housing downturn.