"Banks to Pay Higher Fees to Build FDIC Insurance Fund (Update1)
By Margaret Chadbourn
May 22 (Bloomberg) -- U.S. banks will pay an emergency fee based on their assets to rebuild the Federal Deposit Insurance Corp.’s reserves, putting a greater burden on large banks to replenish the fund amid the fastest pace of failures since 1994.
The FDIC voted 4-1 today to impose a fee of 5 cents per $100 of assets, excluding Tier 1 capital, backing away from a proposal of 20 cents per $100 of insured deposits. Community banks said the fee on deposits could erase more than half their 2009 earnings. The FDIC estimates it will raise $5.6 billion, lifting the fund from its lowest level since early 1994.
“We have tried to strike the right balance between keeping the assessment low enough so that we do not unduly burden anyone in any capacity,” FDIC Chairman Sheila Bair said at a meeting in Washington. “We have struck upon a rule that is equitable.”
The deposit insurance fund, used to pay customers when banks fail, has been drained by more than $10 billion this year as regulators closed 34 lenders, including Florida’s BankUnited Financial Corp. yesterday and Silverton Bank of Atlanta on May 1. The two banks combined cost $6.2 billion. The tally of failed banks is approaching a 15-year high.
The fee, the first special assessment since 1996, will boost the insurance fund from $18.9 billion at the start of this year. Tier 1, or core, capital excluded from the calculation is about 7.19 percent of total industry assets, the American Bankers Association said. The FDIC estimates U.S. banks have $13.1 trillion in assets.
Comptroller of the Currency John Dugan, an FDIC board member, cast the lone dissent, citing concerns about “front loading” fees on banks in a recession. OCC-supervised banks would be responsible for 76 percent of the fee, or $4.3 billion of the FDIC estimate, he said.
“The asset-based approach results in most larger banks, that is, banks with more than $10 billion in assets, paying more,” he said. “That result is frankly perverse.”
The proposal to base the special fee on deposits, made by the agency on Feb. 27, drew fire from Independent Community Bankers of America that complained about paying a higher fee during the financial crisis. The agency got more than 14,000 letters, including from the group’s members.
Bair in March told a community bank conference in Arizona that the agency could reduce the fee, pending the outcome of congressional action to expand its borrowing authority. President Barack Obama signed a law May 20 giving the FDIC access to $100 billion from the Treasury, up from $30 billion, which helped the agency reduce the assessment.
“There is a good probability that we will have to do another special assessment in the fourth quarter,” Bair said. Larger banks have benefited from “massive government aid” that smaller banks were unable to access, creating a risk of failure and higher costs on the deposit fund, she said.
The FDIC will have flexibility to add a special assessment in the third or fourth quarters, if necessary, of 5 cents per $100 of assets, minus Tier 1 capital. The special assessments are capped based on a bank’s annual fees for insurance coverage.
Bair said the agency would only use the borrowing authority from the Treasury in “an emergency.”
The FDIC is required by law to replenish the fund when the reserve ratio, or fund balance divided by insured deposits, slips below 1.15 percent. It was 0.40 percent at the end of the fourth quarter, the lowest since the second quarter of 1993. Obama’s 2010 budget proposal projected the cash cushion will more than triple by 2016.
Deposits account for 89 percent of the liabilities of banks with assets under $1 billion, and 68 percent for lenders with assets exceeding $50 billion, the American Bankers Association said. About 92 percent of banks have assets under $1 billion, and 39 percent have assets under $100 million, according to the Independent Community Bankers of America, which lobbied to revise the assessment.
“Many small banks benefit from this, but there’s a lot of pain that others will suffer as a consequence,” said James Chessen, ABA’s chief economist. “It’s a zero-sum game and there’s unidentified consequences of changing this assessment base.”
The agency’s fund reimburses customers for deposits of as much as $250,000 when a bank fails.
The banking industry lost $32.1 billion from October through December, the first aggregate quarterly loss since 1990. The FDIC protects deposits at 8,305 institutions with $13.9 trillion in assets. The agency will announce first-quarter industry earnings next week. Bair said May 12 major U.S. banks “managed to turn” a profit in that period."