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— Rules of the Road —
Bankers and federal regulators are grappling with that question as the Federal Deposit Insurance Corp. braces for an expected $40 billion hit to the federal deposit insurance fund from a spate of bank failures. The FDIC board Oct. 7 proposed higher assessments on banks and other depository institutions to rebuild the fund, which insures $4.5 billion in U.S. deposits. During the quarter beginning Jan. 1, all banks would face a one-time increase that would roughly double rates they pay now. Healthy banks with the most stable operations, however, would see rates decline a bit when new risk-based assessments take effect three months later. "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 says.
"The U.S. banking industry has the willingness and capacity to provide the necessary backing to the insurance fund," Bair has said. "The entire capital of the banking industry stands behind the fund, as does the full faith and credit of the United States government. The public can be sure that we will always have enough money to protect their insured deposits." The new system calls for imposing higher rates 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, a more expensive and less stable source of deposits than internally generated accounts. To provide an incentive for greater financial stability, banks can reduce assessment rates by holding long-term unsecured debt. Smaller institutions may also reduce assessments by holding high levels of capital. The deposit insurance system was designed to be replenished when the fund drops, so it's no surprise that higher assessments would be imposed while banks are struggling. But many in the industry argue it might be wiser to bulk up the fund when times are flush, rather than force banks to turn over precious dollars during an industry downturn. FDIC board member John Reich, also director of the Office of Thrift Supervision, acknowledges the dilemma the current system imposes. A better long-term approach, he says, would avoid imposing the highest assessments "when the industry can least afford it." The deposit fund now stands at roughly $45 billion, just more than 1% of insured deposits. The FDIC aims to restore it to at least 1.15% of insured deposits by the end of 2013. The American Bankers Association, the main trade group of the banking industry, questions whether it might be better for the industry to rebuild the fund more slowly, with less drastic increases. "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," the ABA said in a statement after the rates were proposed. The group urges the FDIC "to strike the right balance between keeping the fund strong and not taking money out of the system unnecessarily." The deposit fund's current level is the lowest for the entire banking industry since 1995, when it was still recovering from the savings and loan crisis of the late 1980s. But the five-year timetable gives banks little reason to complain, argues John Douglas, former general counsel of the FDIC during the S&L crisis and current chair of the banking and financial institutions group at law firm Paul, Hastings, Janofsky & Walker LLP. "The FDIC is taking a patient approach and will probably face some
criticism for not getting there quicker." It could be much worse, he
says. "It's a tax increase, sure, but for most of the industry it's an
increase of seven one-hundredths of 1%." Bill McConnell is The Deal's Washington bureau chief. |
Is it fair to hand banks a huge bill from the FDIC while the financial industry is mired in crisis?
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