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FDIC Prepayment May Be in Store for Banks

Source: Wall St. Journal

Posted on 29 Sep 2009

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Later today, the Federal Deposit Insurance Corp. is expected to propose that most of the banking industry prepay the next three years' worth of fees to restock the fund that insures trillions of dollars of customers' deposits, said sources.

Having banks pay up front for 2010, 2011 and 2012 could bring between $36 billion and $54 billion to the FDIC, which insures deposits at more than 8,000 banks, sources said. It couldn't be learned when the assessments would have to be prepaid.

An FDIC spokesman declined to comment. The agency's board, which will make the final proposal, could still decide to pursue a different strategy before it meets later this morning.

The move is expected to be met by complaints from the banking industry because of the amount of money that would have to be paid upfront. Still, some might see prepaid assessments as preferable to another option, a one-time charge that wouldn't offset any future obligations to pay into the fund.

The industry would have time to comment after the FDIC board votes on the proposal today. The FDIC, which backs several trillion dollars of U.S. deposits, had $10.4 billion in its deposit-insurance fund at the end of June, compared with $45.2 billion a year earlier. The fund is typically financed by assessments on the banking industry, but its reserves have been depleted recently as bank failures have outpaced fees coming into the agency.

The FDIC has to rebuild its fund when it dips below a certain level -- which happened months ago -- and it has been debating how best to do that. Options included hitting the industry with a special assessment, borrowing money from the industry, borrowing money from the Treasury Department, or having banks prepay their assessments.

Many in the industry, and some in Congress, have urged the FDIC to borrow the money from the Treasury because the banking industry is still reeling from the financial crisis and needs the money to rebuild reserves.

"There are plenty of other options that won't hit the industry as hard," said Scott Talbott, a senior vice president at the Financial Services Roundtable, a trade group of large financial companies. "Prepaying three years' worth of assessments is the exact wrong strategy at the exact wrong time."

But FDIC officials have been reluctant to borrow from the Treasury, both because of the potentially worrying message it would send to the public and because some believe such moves should be done only in an emergency.

It's possible not all banks would have to prepay assessments. A special exemption could be made for banks struggling financially, though a policy in this area hasn't been finalized.

In 2009, 95 banks have failed and more failures are expected in the next year. The FDIC's deposit-insurance fund helps resolve bank failures. FDIC officials have stressed that the agency is backed by the full faith and credit of the U.S. government and that no depositor has ever lost a penny of insured deposits. It has already reserved an additional $32 billion to cover bank failures in the next year.