WASHINGTON — Preparing for more bank failures, the Federal Deposit Insurance Corp. on Tuesday approved an 84% increase in its 2009 budget, to $2.24 billion, almost entirely due to a massive funding increase for receivership operations.
The agency took three other, related steps: deposit insurance premiums will be significantly higher in the first quarter; capital requirements will be eased on merger-related goodwill; and before a failure, institutions will be required to provide data on counterparty agreements.
"We've … assumed that there will be a continued high level of failure activity" next year "that will look more like the last quarter of 2008 than like the first quarter of 2008," Thomas E. Peddicord 3rd, a deputy director in the agency's division of finance, said in the board meeting.
Regulators have closed 12 banks in the fourth quarter — roughly one per week, and nearly half of the total this year. FDIC officials conceded they are feeling some strain.
"Obviously, this has been overwhelming us a little bit in this last half of the year, and particularly in the last quarter, and we have provided contingent resources in this budget for us to get a handle on a continuation of that level of failures," Mr. Peddicord said.
The agency's receivership budget will rise 567%, to $1 billion, nearly half of its 2009 operating budget. The agency's budget includes the addition of 1,450 new, mostly temporary, positions since the beginning of 2008.
The 30% increase in staffing includes 832 new failure-related positions. The agency is bulking up in Dallas, where the main office of the Division of Resolutions and Receiverships is located, and in a new satellite office in Southern California.
Officials noted that the receivership budget is based on a worst-case scenario, and that actual spending next year is likely to be less. Still, board members took note of the dramatic rise in projected spending.
Having contingency funding "makes sense to me, but I must say, it's a big jump," said Comptroller of the Currency John Dugan.
"I think it is quite important that we track this so that if the" need "does not arise, we don't spend the money."
FDIC Chairman Sheila Bair said the agency's accounting procedures restrict expenditures "if the receivership activity doesn't warrant it."
Yet she said that the funding supports operations related to current receiverships, including the marketing and sale of failed banks' assets.
"You don't want to be penny-pinching in that endeavor," she said.
Despite some opposition, the FDIC also finalized a rule forcing troubled institutions to give the agency records on credit default swaps and other agreements — known as "qualified financial contracts" — that a bank holds with counterparties.
The requirements are meant to assist the FDIC in resolving those agreements, a process that must be completed on the first business day after a failure.
The final rule provided some leniency to the industry compared with a July proposal, including a doubling of the compliance time to 60 days after an institution learns it must provide records, and an easing of record-keeping requirements for institutions with less than 20 qualified financial contracts.
But the regulation still sparked some disagreement between the federal agencies over the authority exercised by the FDIC.
Under the rule, the agency can designate an institution as "troubled" — and therefore required to turn over information — even if its primary banking regulator has given it a composite Camels rating of 3. (Typically an institution is labeled "troubled" only with a 4 or 5 rating.)
The FDIC can make such a decision if the institution is experiencing significant capital or liquidity stress. The authority, which the FDIC says is mandated in federal law allowing the FDIC to regulate the record-keeping requirements, is meant to prepare for a failure that can occur rapidly.
Both Mr. Dugan and Office of Thrift Supervision Director John Reich raised concerns about the authority, and Mr. Reich ultimately voted against the rule.
"It seems to me that there is a ceding of authority that represents an expansion of the authority that's not contemplated in the FDIC statute," Mr. Reich said. "I'm troubled by that."
Mr. Dugan said he understood "why, as a policy matter" the move "is appropriate." But, he said: "I would like more … legal analysis to support that. We have a bit of an ongoing concern about that."
FDIC officials sounded open to further legal analysis.
"I would anticipate that this would be a very collaborative situation," Ms. Bair said.
Martin Gruenberg, the FDIC's vice chairman, said that while "we want to be careful about the legal authority, … it's particularly important, I think, for us to have the information on a real-time basis."
The year's failures have taken a severe bite out of the Deposit Insurance Fund — the agency's ratio of reserves to insured deposits is now 0.76% — and the agency finalized its first step toward a five-year plan to restore the ratio to 1.15%.
The board kept unchanged an October proposal to raise deposit insurance rates for most institutions in the first quarter to between 12 and 14 cents per $100 of domestic deposits.
The agency plans to finalize assessments for subsequent quarters, and revisit proposed changes to the agency's insurance pricing system, at a meeting in early 2009. The agency has proposed premium rates of between 10 to 14 basis points starting in the second quarter.
Despite the premium increase, the restoration plan is clearly in the early stages and higher assessments could be in the offing over the long term.
According to agency projections, even with the new premiums the reserve ratio could fall to 0.63% by March 31. By law, the agency has five years to return the ratio to 1.15%.
"My own view is this is a prudent earlier step" in the restoration plan "for a modest type of increase," Mr. Dugan said. "It may not seem modest to the industry, but what I would really worry about is if we did not do this, how sharply we would have to do it later."
The FDIC, along with the other federal banking agencies, also kept unchanged a proposed rule that could prevent certain failures from happening in the first place.
The rule, proposed in September, aims to ease the market for bank mergers and acquisitions. Before the regulation, acquirers had to deduct goodwill or other intangible assets tied to bank deals from their regulatory capital.
The new policy allows banks to hold off on deducting a portion of that goodwill.
