WASHINGTON-It isn't just stockholders and the federal government that are on the hook in the plan to shore up Citigroup: other banks are, as well.
Under terms of the deal the Federal Deposit Insurance Corp. used its systemic risk authority to guarantee $10 billion of Citi's losses on a portfolio of troubled assets, according to American Banker, an affiliate of CU Journal. If the FDIC were forced to kick in money, the banking industry would be assessed a special premium for the amount, agency officials.
That prospect has some community bankers and their representatives steamed. "We've been told ... that the alternative" to saving Citi "is going to be even worse. We have to hope that they're right," said Preston Kennedy, the president of the $150-million Bank of Zachary in Louisiana. "It doesn't make it any easier for us to stomach, particularly since this problem was not one to which we contributed." FDIC officials said the odds of a special assessment are remote, arguing that the Citi agreement protects the Deposit Insurance Fund. Under the deal, Citi would absorb the first $29 billion of losses on a $306 billion asset pool, while the Treasury Department would cover the next $5 billion.
The FDIC would kick in $10 billion after that point, and it also received $3 billion in preferred Citi stock to compensate it for the risk of the deal. Agency officials acknowledged the concern of community banks, but said they had taken steps to protect the DIF. They also said any special premium would favor community banks because it is charged on non-deposit liabilities - which larger banks hold more of - in addition to domestic deposits.
"We did get compensated for" the deal "in the form of the preferred stock," said Arthur Murton, the head of the agency's division of insurance and research. "Having said that, we have to acknowledge that there is a chance that there could be a special assessment on the industry, and...that assessment tilts more towards the larger banks than the community banks." He added that a stable Citi has far-reaching benefits. "The entire banking system and financial system benefits from having a stabilized system," he said.
