FDIC To Banks: Speed Up Future Premium Payments To Buoy Insurance Fund

The federal agency that insures that bank depositors don't lose their money when a bank becomes insolvent needs some financial assistance itself because of all the failed banks it's had to move in to clean up.

So the Federal Deposit Insurance Corp. is planning on asking banks to prepay their insurance premiums to the fund earlier than scheduled.

By doing so, the FDIC believes it can take in about $45 billion which should allow the agency to maintain the level of cash it will require to do step in and protect insured deposits through 2010. The FDIC wants to receive early the premiums due for this year's fourth quarter all the way through 2012.

According to FDIC officials, bank failures are expected to peak this year and next, so it projects it will need the money more in the near-term than further out. It even suggests that it might be able to reimburse premiums in the out-years so long as its projections hold.

 

There are other potential ways to raise the money but FDIC officials believe they have landed on the best one.

They're not keen on imposing a special assessment on banks that would come on top of the premiums since that could hurt industry earnings and make weak banks even weaker. As might be expected, the banking industry absolutely hated this idea.

Likewise, the FDIC wasn't thrilled with the idea of going to the Treasury Department since the agency's philosophy, shared by the industry, is that banks should support the insurance fund with their premiums.

So that left the pre-payment idea, of which the industry group, the American Bankers Association, approves.

A snippet of a statement by James Chessen, ABA's chief economist:

"The pre-paid assessments represent money that the FDIC expects to receive from banks anyway over the next several years, but having the cash on hand sooner rather than later provides more flexibility for dealing with any contingencies over the foreseeable future. The bottom line is that customer deposits remain safe in banks and the FDIC has the resources needed to meet its responsibilities.

"This year banks will pay nearly $17 billion in premiums — including the large $5.6 billion special assessment paid in the second quarter. Another special assessment would likely do more harm than good as it would directly reduce bank income, hinder capital growth, and make lending much more difficult. At this critical time, when the economy is just beginning its recovery, looking to options that are less pro-cyclical and that spread the cost over time is the right policy."