SCENARIOS-US weighs how to rebuild depleted bank insurance fund

By Reuters Staff
September 22, 2009

Federal Deposit and Insurance Corporation (FDIC) Chairman Sheila Bair,  June 17, 2009. By Karey Wutkowski
WASHINGTON, Sept 22 (Reuters) – U.S. bank regulators plan to meet next week to propose options for replenishing the insurance fund used to safeguard bank deposits, including tapping a line of credit with the Treasury Department.

The Federal Deposit Insurance Corp plans to put the options out for public comment, soliciting feedback from the banking industry on how to pay for the cost of bank failures, before the FDIC makes any final decision.

FDIC Chairman Sheila Bair has said bank failures will remain elevated into 2010, continuing to eat into the agency’s deposit insurance fund.

She said on Friday that the agency is carefully considering all options to replenish the fund, including some lesser known ones, such as issuing a note that would allow the FDIC to borrow from healthier banks.

So far this year, 94 U.S. banks have failed, compared with 25 during all of last year and only three in 2007.

Those failures have whittled the balance of the insurance fund down to $10.4 billion at the end of the second quarter, from $45 billion a year ago. The FDIC is careful to mention that it has an additional $32 billion in reserves to handle failures over the next year.

There could be division among the FDIC board, which includes the heads of the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Recently the OCC has opposed assessments that focus on larger banks, while the FDIC has favored shifting some of the burden to larger institutions.

Here are the options the FDIC will likely put out for public comment:

ADDITIONAL ‘EMERGENCY’ ASSESSMENTS
The FDIC voted in May to impose a one-time “emergency” fee on the banking industry of $5.6 billion to prevent the insurance fund dropping to zero. At that time, it also authorized two more fees in the following quarters. The FDIC has said it is likely to take advantage of that authority, making this a leading option.

The banking industry warns, however, that additional fees could cause many banks to report a loss during those quarters.

LINE OF CREDIT WITH TREASURY
The FDIC has a $500 billion line of credit with Treasury that the agency can tap if the fund balance drops dangerously low. FDIC’s Bair has been reluctant to take advantage of that option because she said it is preferable for the industry to pay to clean up its own mess instead of temporarily borrowing from taxpayers. John Dugan, head of the OCC, has been warmer to the idea, saying it is a strong possibility.

Key lawmakers have joined the debate. Barney Frank, chairman of the House Financial Services Committee, said recently the FDIC should consider borrowing from Treasury.

The industry has to weigh the negative public
perception of borrowing from Treasury against their desire to avoid another hit to their earnings. In the second quarter, the emergency assessment caused the industry to swing to a loss.

BORROWING FROM HEALTHY BANKS
The FDIC also has the authority to borrow from depository banks by issuing them a note. If it exercises this option, the FDIC would likely target healthier banks, and the Treasury Department would set the interest rate.

An FDIC spokesman said on Tuesday that borrowing from the industry is not an option being given serious consideration. Bair said last week that it is just one of many options the FDIC has to rebuild the fund.

PREPAYMENT OF ASSESSMENTS
The banking industry could also provide some needed relief to the insurance fund by prepaying the regular assessments it is charged every quarter.

The prepayments would provide the FDIC with operating liquidity in the short term, allowing it to deal with the crush of bank failures that will likely slow in the coming months.

The banks would benefit because they would not actually have to mark the assessment as an expense until the assessment would regularly be due. Bair last week also mentioned this as a little-known option the FDIC has, but did not indicate if it is something being seriously considered by regulators.

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