Tuesday, September 29, 2009

Another Sign of Mr. Bernanke's Recovery? Maybe He Should Look Again?

FDIC Proposes Banks Prepay Deposit Fees Through 2012

Sept. 29 (Bloomberg) -- The Federal Deposit Insurance Corp. is asking lenders to prepay three years of premiums, raising $45 billion, to replenish reserves drained by the fastest pace of bank failures in 17 years.

The insurance fund will have a negative balance as of tomorrow after 120 banks were shut in the past two years, and will be positive by 2012, the staff said. Banks failures may cost $100 billion through 2013 with half the cost already incurred, the FDIC said. The agency today 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 is required by law to rebuild the insurance fund when the reserve measured against insured deposits falls below a certain level. The fund, drained by 95 bank failures this year, had $10.4 billion as of June 30 and will return to a positive balance in 2012.

The proposal adopted unanimously 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 Department, charging the banking industry a special fee in addition to levies they already pay and borrowing directly from the banks.

Dec. 30 Payment

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.

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.

“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 after the meeting.

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. 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.