FDIC wants banks to prepay fees to meet failure bill

October 1, 2009

www.reuters.com/article/newsOne/idUSTRE58R58020090929

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UPDATE 2-FDIC to meet Sept. 29 on rebuilding insurance fund Wednesday, 23 Sep 2009 12:59pm EDT

SCENARIOS-US weighs how to rebuild depleted insurance fund Tuesday, 22 Sep 2009 01:28pm EDT

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By Karey Wutkowski

WASHINGTON (Reuters) - U.S. banking regulators proposed on Tuesday that banks prepay three years of fees to help cover the rising cost of bank failures, now put at $100 billion through 2013.

Banks would prepay $45 billion of regular quarterly assessments under the plan, but would not have to recognize the hit to their earnings until the fees are normally due.

The five-member board of the Federal Deposit Insurance Corp voted unanimously to put the proposal out for 30 days of public comment.

Regulators have been exploring ways to replenish the fund that safeguards bank deposits without putting a huge burden on healthy banks or taxpayers.

Tuesday's proposal avoids levying another hefty "special assessment" that would crimp banks' earnings or tapping the FDIC's $500 billion line of credit with the U.S. Treasury.

"Everybody has bailout fatigue," FDIC Chairman Sheila Bair said of avoiding drawing on the Treasury.

FDIC staff raised their expectations for bank failure costs from 2009 through 2013 to $100 billion, up from a previous estimate of $70 billion.

If finalized, the proposal would require banks to prepay on December 30, 2009 their regular assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012.

The FDIC said the insurance fund's balance is expected to become negative this quarter and will remain negative through 2012, but said the agency will still have plenty of cash to operate and handle bank failures.

"We have tons of money to protect insured depositors," Bair said before the vote. "This is really about the mechanics of funding."

It would be the first time the agency has asked banks to prepay regular fees. It needs the money now because the FDIC's cash needs will outstrip liquid assets early next year.

Because of accounting requirements, the agency must set aside money for failures expected over the next 12 months.

NEGATIVE FUND BALANCE

The FDIC last had a negative fund balance in 1991, during the savings and loan crisis, when the agency chose to borrow from Treasury. FDIC officials insist bank deposits, up to $250,000 per account owner, are safe, even with a negative insurance fund balance.

"Western civilization did not come to an end" when the fund balance last went negative, agreed banking industry consultant Bert Ely. "But there is a public perception issue." Continued...