FDIC Asks Banks to Prepay $45 BillionBoard Seeks Advance Payments to Bolster Tapped Insurance Fund
Meeting on Tuesday morning, the board adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012.
The FDIC's Deposit Insurance Fund is strapped for funds, spending billion on scores of bank failures that began in mid-2008. Regulators say that U.S. bank failures are expected to cost the insurance fund about $100 billion over the next four years.
The FDIC currently has about $21 billion in cash available in reserve to cover losses at failed banks, down from $25 billion at the end of the first quarter. So far in 2009, 95 banks and 12 credit unions have been closed, acquired or placed into conservatorship.
The FDIC's proposal to impose the prepaid assessments will take effect after a 30-day public comment period. The decision to impose this plan versus a special assessment or borrowing money from Treasury represents a balanced approach, says member Thomas Curry. "The challenge here is to address short-term and long-term needs of the fund, and avoid the impact on credit availability, and avoid imposing an unneeded burden on banks," Curry says.
FDIC Chairman Sheila Bair says, "I do think this is a good balance." The plan requires the banking industry "to step up" while spreading the financial hit to banks over a number of years. It is the first time the FDIC has imposed prepaid insurance fees on its institutions.
The FDIC Board also voted to adopt a uniform three-basis point increase in assessment rates effective on January 1, 2011, and extend the restoration period from seven to eight years.
Bair assures bank customers that their deposits are safe, backed with the full support of the U.S. government. "First and foremost, bank customers should know that their insured deposits have and always will be 100 percent safe, no matter what," she says. "This commitment to depositors is absolute. The decision today is really about how and when the industry fulfills its obligation to the insurance fund. It's clear that the American people would prefer to see an end to policies that look to the federal balance sheet as a remedy for every problem."
This is not the first time that the FDIC has faced such a shortage. In the banking crisis of the late 1980s and early 1990s, the fund was depleted, and the FDIC worked its way out of the shortfall.
"This is clearly a difficult time for the industry, but this is not the first recession we have faced, nor is it the first time banks have stepped up to meet the financial needs of the FDIC," says James Chessen, chief economist at the American Bankers Association. Over the last 75 years, banks have paid all the agency's costs, and not a single penny of customer deposits has ever been lost, Chessen notes.
The pre-paid assessments represent money that the FDIC expects to receive from banks anyway over the next several years, ABA's Chessen observes. "But having the cash on hand sooner rather than later provides more flexibility for dealing with any contingencies over the foreseeable future," he says. "The bottom line is that customer deposits remain safe in banks, and the FDIC has the resources needed to meet its responsibilities."