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Tuesday, July 30, 2013

FDIC INSURANCE FUND WILL RUN A DEFICIT AS OF TOMORROW



September 30, 2009 by · Leave a Comment 

FDIC Proposes Banks Prepay Deposit Fees Through 2012

By Alison Vekshin

Sept. 29 (Bloomberg) — The Federal Deposit Insurance Corp.
proposed asking banks to prepay three years of premiums to
replenish reserves dented by a rash of bank failures that the
agency said will cost $100 billion through 2013.

The insurance fund will run a deficit as of tomorrow after
120 banks failed in the past two years, the agency said today.
Half the costs from seized banks have been incurred already and
prepaying the fees will raise $45 billion, the FDIC said. The
agency 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 raised its five-
year loss estimate by 43 percent.

The agency is required by law to rebuild the fund when the
reserve ratio, or the balance divided by insured deposits, falls
below 1.15 percent. It was 0.22 percent on June 30. The fund,
drained by 95 bank failures this year, had $10.4 billion at the
end of the second quarter. The fund will erase its deficit by
2012, the staff said.

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

John Dugan, the head of the U.S. Office of the Comptroller
of the Currency, said he was pleased the agency proposal didn’t
impose another special assessment this year and next year.

Assessment Opposition

“For banks that were already feeling the effects of a weak
economy, special assessments could only make them weaker,” said
Dugan, a member of the five-person FDIC board.

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 and then
make a decision on its approach.

The FDIC raised its projected fund losses, from $70 billion
in May, because the assets and number of failed and “problem”
banks have increased, said Arthur Murton, director of the FDIC’s
division of insurance and research. Bank failures will peak this
year and 2010, he said.

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.

‘Better Solution’

“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.

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, in addition to an
estimated $12 billion in annual premiums. 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.

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