FDIC Seeks Buffer for Deposit Insurance

The Federal Deposit Insurance Corp. will require banks to prepay premiums that support insurance on depositors’ funds, due to staff projections that bank failure provisions have forced the insurance fund’s reserve ratio into a deficit as of today.

FDIC Chairman Sheila Bair is pictured at right.

But consumer deposits are still protected by cash and marketable securities that can be sold off and those assets "remain positive," FDIC staff reported Tuesday in a Board of Directors meeting.

No banks have failed in Connecticut at this point in the calendar year, according to FDIC records, but slightly under half of the 95 failures that have occurred were spread across California, Illinois and Georgia.

The FDIC insures up to $250,000 per account, but Tuesday was the first time in the organization’s 75-year history that it decided to collect fees early from banks. As of December 30, institutions would have to pay the assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012.

That is the time banks normally would pay insurance premiums only for the third quarter of 2009.

The FDIC projected that the fund will need $100 billion through 2013, an increase from the staff’s May 2009 estimate of $70 billion over the same period. "Projected failures have increased due to further deterioration in the condition of insured institutions, as reflected in the increasing number of problem institutions. Asset quality problems among insured institutions are not expected to abate in the near-term," Arthur Murton, director of the FDIC’s Division of Insurance and Research reported, to the board.

Approximately $25 billion of the $100 billion in projected failure costs already has been incurred this year and the FDIC anticipates that the majority of costs are likely to occur in 2009 and 2010.

The prepaid assessments are expected to bring in about $45 billion from affected institutions.

"We haven’t analyzed it fully yet, and at this point, it is still a proposal. But we understand it is in our interest and the industry’s interest to support the FDIC, and this looks like the best option," said Ed Steadham, vice president of public affairs for Webster Bank in Waterbury.

The FDIC imposed an emergency insurance fee on banks earlier this year which brought in about $5.6 billion. The industry opposed any additional assessments, saying that would likely do more harm than good. Such a move would directly reduce bank income, hinder capital growth, and make lending much more difficult, the American Bankers Association said in a statement.

"The pre-paid assessments represent money that the FDIC expects to receive from banks anyway over the next several years, but having the cash on hand sooner rather than later provides more flexibility for dealing with any contingencies over the foreseeable future. The bottom line is that customer deposits remain safe in banks and the FDIC has the resources needed to meet its responsibilities," ABA Chief Economist James Chessen said.

Matthew Breese, a research associate with the firm Sterne, Agee & Leach, Inc., said that from a liquidity standpoint, institutions will lose a lot of cash and cash equivalents, but on the upside, they will know what to expect, rather than the uncertainty of repeated special assessments going forward.

"We believe it was the FDIC’s best option," Breese said. "During a time when profitability is important to banks and to the economy, you can’t have this big question mark hanging over the industry."

John Carusone, president of the Bank Analysis Center, said banks will have to set up prepaid asset accounts and put capital against them for the next three years. A pay-as-you-go system would be more prudent, he said.

"There’s no assurance for the banks that paying the money upfront is going to relieve them a later burden," Carusone said. "There’s no consensus from Congress on what the new regulatory landscape will look like and we still don’t know the magnitude of future bank losses."

FDIC Chairman Sheila Bair did not rule out another option of tapping into the agency’s $500 billion line of credit with the Treasury Department, if circumstances worsen. "But today is not that day," Bair said.

There will be a 30-day comment period before the policy goes into effect.