By suggesting that banks could absorb a sizable increase in deposit insurance premiums, a new study undercuts the case for a taxpayer bailout of the Federal Deposit Insurance Corp.
Just when bank lobbyist are beginning to talk about the need for taxpayer help, Keefe, Bruyette & Woods determined that the effect of a 7-cent increase in deposit insurance per $100 of deposits would be negligible for some and only moderately difficult for most banks.
"It is sort of hard to imagine a bank whose viability would be determined by FDIC premiums," said Richard Stillinger, an analyst with Keefe, which ranked the 50 largest banks by impact of an insurance hike on share earnings.
Traders Less Affected
Prifitable, trading-oriented banks such as J.P. Morgan & Co. and Bankers Trust New York Corp. would give up only a fraction of a percent of earnings per share, for instance.
Two of the 50 largest banks, Bank of Boston and Shawmut National Corp., would suffer a decline in earnings per share of more than 12% and 19% respectively. They are the only ones that would suffer more than an 8% decline in earnings per share from the contemplated insurance increase.
But Mr. Stillinger said expected improvements in credit quality should outweigh the impact of premium increases.
Hits of 2% to 5% -- the amount most banks would lose in earnings -- would make life more difficult, and partially cancel expected earnings increases, Mr. Stillinger said. But "it's not a matter of life and death.
Healthy Subsidize Weak
"You can understand how smaller banks are, if not screaming, at least protesting," Mr. Stillinger added, noting indications from Washington that the premiums would not be distributed according to risk. "That means the healthy banks would be paying for the others," he said.
But he also said part of the loss in earnings could be made up in increased fees and reduced deposit rates.
The 7-cent solution to the the deposit insurance fund's shortfall would increase the bite on banks for insurance to 30 cents per $100 of deposits.
That is as much as 10 cents less than some observers believe is needed to keep the fund afloat. Some observers, on the other hand, hold no hike is needed.
When Congress first authorized deposit insurance, actuaries estimated a 33-cent premium would be needed to cover catastrophic losses of a depression.
Noting the weakened condition of the banking industry, and arguing that increased regulation would prevent the cataclysmic business cycles of the era before deposit insurance, however, Congress imposed a premium of only 8.3 cents, said James R. Barth, a professor at Auburn University.
Mr. Barth argued that congress never envisioned premiums covering the kinds of catastrophic losses the industry now faces and that taxpayers are indeed the last line of defense.
The estimates of per share impact don't take into account the loss of market share to non-banks who don't have to pay insurance on their money, he said, adding that higher premiums may in fact increase the risk to taxpayers. "It tends to weaken banks. We just don't know how much," he said.
Keefe chose the 30-cent benchmark because of remarks made by FDIC chairman William Taylor last fall, when he suggested that rate could take effect in the middle of next year.
Bank issues surged with the rest of the market in a shortened trading session the day before Christmas as investors continued to react to declines in interest rates.
BankAmerica Corp. was the biggest gainer among major banks. It rose $2.25, to $36.50. Security Pacific Corp., which plans a merger with BankAmerica, gained $2.125, to $30.25. One Bancorp gained 75 cents to reach a 52-week high of $50.375.
The Dow Jones industrial average climbed 28.40, to 3,050.98.