In early December, bankers will be getting another bill for their federal deposit insurance.
For about 75% of the 12,000 commercial banks and savings banks, the premium rate will be the same as the previous one - 23 cents per $100 of domestic deposits.
But under the risk-based system adopted Sept. 15 by the board of the Federal Deposit Insurance Corp., some banks that pose higher risk to the Bank Insurance Fund will for the first time be paying a higher premium rate than others pay.
Starting Jan. 1, 25% of the industry will pay anywhere from 26 cents to 31 cents per $100 of domestic deposits.
Hot Topic
The issue was a source of much discussion before the September vote and remains one still.
For example, consultant Bert Ely wrote in a commentary published Aug. 31 in this newspaper that a decision to increase rates would "be driven solely by politics" and would have "absolutely no economic justification."
Even now, when the decision is history, there still may be doubts about the economic justification, even among bankers not subject to a higher fee.
As a staff member who helped wade through the arguments for and against a change in rates - including the points of Mr. Ely and other knowledgeable critics - I wish to correct certain false information and misunderstandings about the basis for the changes.
These are the facts:
* The FDIC's primary objective is to achieve a sound underwriting basis for the deposit insurance funds. Each year for about the last eight years, the expenses of the Bank Insurance Fund have exceeded premium revenue.
From January 1984 through June 1992, the fund's costs exceeded assessment income by more than $18 billion.
Industry trends and financial results are heavily influenced by two factors - interest rate spreads and restructured risk profiles. These currently provide good reasons to be optimistic, but do not yet provide good reasons to declare victory.
Critics are shortsighted if they fail to recognize the need for sustained positive industry performance and economic improvements, along with definitive evidence that the deposit insurance fund is being replenished.
Analysis that ignores the risks from the existing list of problem banks, the volatility of interest rates, and the historical likelihood of new shocks over a 15-year time frame would appear shallow.
* The FDIC staff believes that a majority of bankers would agree that a viable deposit insurance program is best run independently from taxpayer assistance and the world of politics.
That being the case, a majority of the banking industry should support a restoration of the financial integrity of the fund, which the FDIC's new premium would promote.
* The FDIC projects that banks, on average, will pay a rate of 25.4 cents per $100 of domestic deposits under the new rule. That works out to about a 10% rise for the industry as a whole.
Minimal Harm
As [acting] FDIC Chairman Andrew C. Hove Jr. told bankers in a September speech, "a 10% increase in premiums is material and meaningful by any measure." However, we believe the rate increase was reasonable, and our projections show there will be very little negative impact on bank profitability.
An FDIC staff analysis estimates that about 85% of the fund-insured banks (with 65% of the industry's assets) will find their return on equity either unaffected or reduced by 1/20th or less. The median decline is expected to be less than 1/80th.
These and other findings indicate minimal impact on the number of bank failures.
Some of the key premises put forward by the critics are simply incorrect.
For example, contrary to Mr. Ely's calculations, losses in failed savings banks since 1989 have not exceeded losses from failed commercial banks. Failed savings banks in 1989-91 have cost the Bank Insurance Fund $5 billion; failed commercial banks ran up a $12.1 billion tab.
Also - again contrary to Mr. Ely's assumptions - it is entirely plausible that the fund will suffer significant losses in states that already have had high failure activity.
To underestimate the potential for losses in such states as California and such areas as the Southwest and Northeast is dangerously optimistic.
Further, Mr. Ely and others must recognize that recent and foreseeable fund losses are running at or above what the current premium rate can cover.
The FDIC's best estimate is that the new premium structure will increase the fund's income next year to $6.35 billion, about $600 million more than 1992 income.
The new structure also rewards well-run institutions and gives weak ones a clear incentive to improve.
The FDIC staff believes that the board's decision on a premium increase will prove to have been wise not only for 1993, but for many years to come.
