LITTLE ROCK — Regulators expect the cost of bank failures to grow to about $100 billion during the next four years - up from an earlier estimate of $70 billion. Faced with that sobering news, they voted Tuesday to require banks to prepay $45 billion in premiums to replenish an insurance fund that will start running dry today.
The proposal by the board of the Federal Deposit Insurance Corp. to require early payments of premiums for 2010-2012 could take effect after a 30-day public comment period.
The FDIC is fully backed by the government, which means depositors' money is guaranteed up to $250,000 per account.
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, D.C., board meeting.
Most of the $100 billion in costs is expected to come from failures this year andnext, the agency said. Some analysts expect hundreds more banks to fail in coming years.
The agency is required 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.
Tim Yeager, associate professor of finance at the University of Arkansas at Fayetteville, said the three-year prepayment "really shows howmuch stress that the deposit insurance fund is under."
Healthy banks normally pay between about 0.12 percent of their deposits annually to the FDIC. For a bank with about $10 billion in deposits, that would be a total of $36 million for the three years. For a bank with only $500 million in deposits, that would be $1.8 million for three years.
Many larger banks are "sitting on piles of cash," while for smaller banks "there will be a cash-flow issue," Yeager said.
Garland Binns, a Little Rock banking attorney, saidthat if the FDIC needs $100 billion by 2013, and the prepayment would raise $45 billion, banks still could get hit with special assessments in the next three years, he said.
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 ofthe 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.
"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.
Information for this article was provided by Alison Vekshin of Bloomberg News, David Smith of the Arkansas Democrat-Gazette and by Marcy Gordon of The Associated Press.
Business, Pages 25, 26 on 09/30/2009