As Bank Fund's Balance Grows, It Becomes a Topic of Interest

Corp.'s money is about to get interesting. To be sure, the agency can't put the insurance premiums paid by banks and thrifts into anything but short-term and medium-term U.S. Treasury securities. "This is not rocket science," said William A. Longbrake, the FDIC's chief financial officer. But Treasury securities are in the news these days - thanks to a budget standoff between Congress and President Clinton that may result in a government default. Mr. Longbrake has already had to work out a special deal with the Treasury to guarantee a source of funds for the FDIC in the unlikely event of a big bank failure. Also, for the first time in years, the FDIC has some serious money to manage. The Bank Insurance Fund, which had a negative balance as recently as 1992, is now at a record $25.1 billion. Interest on the bank fund is expected to top $1 billion this year. By boosting interest earnings just one-tenth of a percent, the FDIC saves banks $25 million in annual premiums. So far, bankers have been too busy clamoring for premium cuts to pay much attention to the FDIC's investments. "We haven't really focused on it," said American Bankers Association chief economist James Chessen, who added that Mr. Longbrake, the former CFO of the nation's sixth-largest thrift, Washington Mutual, "is a great guy to be in that position." But Alexandria, Va., banking consultant Bert Ely, who has been following the FDIC's investments for years, said he thinks Mr. Longbrake is being too conservative - and thus missing out on higher yields on longer-term securities. "The banks ought to push him hard on it, because it's going to cost them down the road," Mr. Ely said. Until recently, both the bank fund and the Savings Association Insurance Fund were managed with liquidity uppermost in mind. Fresh memories of bank and thrift failures, together with the fact that neither fund had reached the 1.25% reserve level mandated by law, rendered long-term investments out of the question, Mr. Longbrake said. The undercapitalized savings fund is still being run for the short term - the average maturity of its investments is four months, and as of Sept. 30, 36% of the fund was in overnight Treasury certificates. In the bank fund, where reserves now equal 1.30% of insured deposits and few bank failures are imminent, the FDIC is shifting gears, but slowly. As of Sept. 30, the average maturity of BIF investments was 1.2 years - with none maturing later than December 1998. Both funds were earning about 5.7% interest as of Sept. 30. Mr. Longbrake said he wants to buy longer-term securities for the bank fund. But at the moment, 10-year Treasury notes earn about 6%, overnight certificates 5.75%. "The rewards are simply not there right now for taking maturity risk," he said. There's another twist, one Mr. Longbrake said he does his best to ignore. Premiums paid by banks count as government income that reduces the federal deficit; earnings from Treasury securities do not. "The better a job he (Mr. Longbrake) does, the worse the budget deficit," Mr. Ely said. The FDIC is required by law to invest only in nonmarketable Treasury notes. The Treasury pays market rates, but the investments exist only as bookkeeping entries in the overall federal budget. These "imaginary investments," as Mr. Ely calls them, can't have maturities of more than 10 years. That limit was reaffirmed by the FDIC board Oct. 30 with an investment policy that also bans the agency from holding more than 50% of any of its portfolios in instruments maturing six or more years into the future. The fact that the FDIC's investments are all on paper may come in handy if the Treasury can't make interest payments on time. Unlike holders of real bonds, who would get their interest late, the FDIC would eventually get its "imaginary" interest credited to it on day it was supposed to be paid in the first place, Mr. Longbrake said. The FDIC has enough cash to keep up normal operations even if there's a government shutdown, Mr. Longbrake said.

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