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 The Federal Deposit Insurance Corp.'s board approved Tuesday higher assessment on banks and other depository institutions to replenish the federal deposit insurance fund, which is threatened with substantial depletion by recent bank failures and additional failures that are expected. The restoration plan would increase the rates all banks pay beginning in January. New risk-based assessments would go into affect April 1.
"Like any insurance company, we've identified activities that have increased or reduced the cost of insurance, and as a result, want to factor them into our determination of assessment rates," FDIC Chairman Sheila Bair said Tuesday. Currently, banks pay anywhere from five basis points to 43 basis points for deposit insurance, depending on bank examiners' grading of their financial condition. Under the proposal, the assessment rate schedule would be raised uniformly by seven basis points (annualized) beginning on Jan. 1. Beginning with the second quarter of 2009, riskier institutions will begin paying a larger share. Under the new system, higher rates would be imposed on institutions with a "significant reliance" on secured liabilities, which generally raise the FDIC's losses when a bank fails. Higher rates would also be imposed on institutions that have achieved rapid growth by relying on brokered deposits, which are a more expensive and less stable source of deposits than internally generated accounts. According to FDIC statement, "Brokered deposits combined with rapid asset growth have played a role in a number of costly failures," including the failure of IndyMac Bancorp in July. To provide an incentive for greater financial stability, banks will be able to reduce assessment rates by holding long-term unsecured debt and, for smaller institutions, high levels of Tier 1 capital. The aim of the new assessment rates is to replenish the deposit insurance fund, which now stands at roughly $45 billion, to at least 1.15% of insured deposits by the end of 2013. Prior to the current banking crisis, the fund hovered around 1.18%, and the FDIC historically has aimed to maintain a reserve ratio of 1.25%. The FDIC will wait a month before finalizing the rules in order to give time for public comment. The American Bankers Association, the main trade group of the banking industry, offered some reaction right away. The ABA said "the industry is quite capable of meeting this obligation" but questioned whether the higher assessments should be delayed. "The premium increases announced today by the FDIC are significant and ... pose an extra burden on every bank," the ABA continued. "While we understand the need to rebuild the fund, timing can make a big difference when the economy is in turmoil and our communities can least afford a credit crunch. We want to be sure the FDIC monitors the pace of rebuilding in order to strike the right balance between keeping the fund strong and not taking money out of the system unnecessarily." ABA also predicted with the new assessments the deposit insurance fund will reach the FDIC's target level before 2013 and urged the FDIC to lower assessments accordingly if the fund is restored ahead of schedule. "We are optimistic that FDIC's cost projections over the next five years may be too high. Should its projections prove to be too conservative, we hope the FDIC would immediately move to adjust premiums downward so as not to further restrict bank resources that could be used to meet the credit needs of our customers and communities." - Bill McConnell See FDIC staff analysis of the fund today and the impact of proposed changes Bill McConnell is The Deal's Washington bureau chief. CategoriesComments Deal Video
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We must realize that in some ways there is still a chance to get over with these expenses despite that this credit repair it wasn’t enough.
Apparently, it wasn’t enough to cover the mortgage crisis up with a TARP. No, Treasury Secretary Paulson’s Troubled Asset Relief Program wasn’t the kind of credit repair scores the endangered homeowners needed. Now that Federal Deposit Insurance Corp Chairman Sheila Bair has pushed a new mortgage modification program forward, 1.5 million homeowners will have someone new on their side when they’re facing foreclosure. This $24.4 billion program will be drawn from the $700 billion pool that TARP set up, and it’s a very straightforward system. Lenders will be given a stipend of $1,000 per loan they renegotiate with financially stuck homeowners, and in the event of default on a loan, the FDIC has promised to take on up to 50 percent of the loss. Paulson has condemned this, as mere spending that will only bankrupt the FDIC; others view this action on Bair’s part as a needed investment to maintain liquidity in the mortgage industry. While this won’t solve all of the problems at once, it’s certainly a valiant effort to help repair credit, isn’t it? Click to read more on Credit Repair