Financial Regulatory Forum

U.S. banks give nod to prepaying fees, seek tweaks

By Reuters Staff
November 3, 2009

By Karey Wutkowski
WASHINGTON, Nov 3 (Reuters) – U.S. banks are lauding regulators for avoiding another emergency fee to replenish the deposit insurance fund, but are suggesting tweaks to a plan for them to prepay three years of regular assessments.


The Federal Deposit Insurance Corp is expected to meet shortly to finalize a proposal that banks pay cash upfront to replenish the depleted fund safeguarding bank deposits.

The proposal would give the agency about $45 billion in cash to deal with the rising cost of bank failures, but banks would not have to book the expense until the fees are regularly due over the three years.

Some of the largest banks are hoping the FDIC might break up the prepayments into chunks and assume that deposits will not grow, meaning the assessment base would be lower, according to comment letters posted on the FDIC’s website.

Smaller banks have suggested just prepaying one or two years of assessments, and suggest switching the assessment base to assets from deposits — a move that would push the burden of the fees onto larger institutions.

The FDIC board is expected to consider the rule in coming weeks, spokesman Andrew Gray said on Tuesday.

“We are in the process of digesting the letters from the comment period, taking into careful consideration the thoughts and issues that have been raised as we prepare the final board case,” he said.

The agency proposed in September that banks prepay three years of fees as an alternative to imposing another $5.6 billion emergency fee that could crimp the industry’s earnings and lending abilities, or tapping the FDIC’s $500 billion line of credit with the Treasury Department.

The $45 billion prepayment, if approved, would give the FDIC more resources to deal with bank failures, which are expected to cost the agency $100 billion through 2013.

Some Republicans have questioned whether the prepayment is an accounting gimmick, but the industry has generally supported the move in letters it has sent to the agency.

State Street Corp said the prepayment approach “represents the least disruptive alternative for both the U.S. banking industry and the economy as a whole.”

It also characterized the cost as “substantial,” however, and said its own initial cost estimate is $115 million.

Bank of America Corp also said it prefers prepaying assessments to more emergency fees, but said it has concerns that the prepayment will reduce existing liquidity at banks.

“For some banks, that will either necessitate a reduction in business activities (such as lending) or it will require banks to take measures to replace that liquidity,” Bank of America said in its letter to the FDIC.

The bank said the FDIC could mitigate this effect through multiple prepayments spread over time, or by assuming no growth in deposits, which would lower the assessment base.

The Independent Community Bankers of America, which represents many of the smaller banks, also supports prepaying assessments, but said banks should prepay fees for two years, with an optional third year at the FDIC’s discretion. Further, it said the fee should be a ratio of assets, not deposits.

The FDIC switched to using assets as its assessment base when it levied the emergency fee earlier this year, much to the dismay of larger banks who had to pay more proportionately. The agency did not formally propose such a switch for the prepaid assessments.

If finalized, the proposal would require banks to prepay on Dec. 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, based on expected failures, went negative as of the end of the third quarter and will remain negative through 2012, but said the agency will still have plenty of cash to operate.

Bank failures have reached 115 so far this year, the highest annual level since 1992, as the industry continues to grapple with deteriorating loans.
(Reporting by Karey Wutkowski; Editing by Tim Dobbyn)
((E-mail:karey.wutkowski@thomsonreuters.com +1 202 898 8374)) Keywords: BANKS/FEES

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