WASHINGTON — The Deposit Insurance Fund, on the verge of gaining access to an extra $70 billion, is facing mounting costs from the handful of multibillion-dollar institutions on the edge of collapse.
Those losses are likely to influence how much the Federal Deposit Insurance Corp. charges banks when it meets Friday to set a special assessment on the industry.
Thirty-three institutions with $20 billion of assets have failed so far this year, at a cost of $5.4 billion for the fund. Larger institutions in danger of failing soon include the $15 billion-asset Guaranty Bank in Dallas, the $14 billion-asset BankUnited in Coral Gables, Fla., and the $8 billion-asset Corus Bank in Chicago.
The insurance fund had just $19 billion at the end of the fourth quarter, leaving some observers to question whether several large failures could strain the agency's resources.
"If you have several multibillion failures in the next three to six months, in my experience, the FDIC doesn't have the people on staff today to handle something like that," said Sanford Brown, the managing partner in Bracewell & Giuliani LLP's Dallas office.
Though small banks typically are expensive relative to their size, their overall impact on the fund when they fail can be negligible. But the coming failures would be more reminiscent of the $30 billion-asset IndyMac Bancorp. failure last year, which is expected to cost the fund nearly $11 billion.
BankUnited has been on the radar as a potential failure for six months, and despite its continued efforts to find an open-bank buyer, many observers agree that its days are numbered.
An April 14 prompt corrective action notice giving the thrift 20 days to complete a deal has expired. In a securities filing last month,
BankUnited said its Tier 1 capital ratio at the end of the fourth quarter had dropped to negative-0.2%. Several sources have said the FDIC is already engaged in its bidding process for the thrift.
Corus, citing its noncompliance with regulatory orders, raised the notion of its failure in a filing this month. It has been hit with big losses from loans to condominium developers in several states, and it has been accused of improperly inflating the value of its own assets by buying properties it helped to finance.
The warnings are less dire for Guaranty, but the thrift reported last month that it is under a cease-and-desist order from the Office of the Thrift Supervision. Guaranty said that it had until May 21 to raise capital, or it would have to start looking for a buyer.
Though historically a bank's failure costs roughly 10% to 20% of its assets, that ratio has been significantly higher in recent collapses.
For example, Westsound Bank in Bremerton, Wash., the most recent one to collapse, had $334 million of assets, but that failure is expected to cost the fund $108million.
If larger institutions have that kind of loss rate, it could deplete what's left of the insurance fund relatively quickly.
"If you had that with some of these midregional firms, that's a staggering percentage," Brown said.
This string of potentially expensive failures could not come at a more sensitive time for the industry.
The FDIC is scheduled Friday to finalize its rule that would charge banks a special assessment based on their second-quarter deposits.
The special premium was originally supposed to be 20 basis points, but the agency has signaled it would cut that price by more than half if legislation passed that would increase the agency's borrowing authority to $100 billion.
Both the House and the Senate have passed bills that would raise the agency's borrowing authority, but differences between the measures must still be worked out. Lawmakers are expected to take up and pass a final bill this week. (See related story.)
Though the agency is almost certain to reduce the special assessment, agency officials may be wary of slicing it too far with expensive failures looming. Even with extra borrowing authority, top FDIC officials have appeared reluctant to tap into it, and they have warned that doing so could threaten borrowers' confidence in the system.
As a result, many observers still see the FDIC charging a relatively high premium.
"This assessment will be expensive," Jaret Seiberg, a policy analyst with Concept Capital's Washington Research Group, wrote in a note to clients.
The FDIC appears to be continuing to prepare for more failures.
It recently announced the opening of a satellite office in Jacksonville, Fla., with capacity for up to 500 nonpermanent staff members and contractors.
The agency currently has budget authority for almost 6,300 employees. (It currently has over 5,500.)
"The FDIC has always met its mission objectives, and I am confident that the agency will continue to do so," said James Wigand, deputy director in the Division of Resolutions and Receiverships.
Observers said they were confident the agency could address the rise in failures.
"The FDIC has been preparing itself to deal with some bigger potential failures," James Barth, a Lowder Eminent Scholar in Finance at Auburn University and a senior fellow at the Milken Institute.
Yet he also said it was important for regulators not to waver on closing institutions that were insolvent. He said that during the savings and loan crisis, institutions were kept open too long, exacerbating the government's losses.
Some have raised questions about whether BankUnited has been kept open too long, given that speculation about its imminent collapse has been going on for months.
"The issue is to move in a timely manner to prevent the losses from escalating," Barth said.
"What happened then — before RTC was set up — is institutions more or less were left open, even though everybody knew they were deeply troubled if not actually insolvent. That raises potential problems for the FDIC, because then the losses can escalate. Hopefully, that won't be allowed in this current crisis."
However, many observers said they expect regulators to continue to space out major failures to ensure they do not stretch the staff too thinly.
"These institutions go under when the FDIC and the primary supervisor decide that it's time for them to go," said Gil Schwartz, a partner at Schwartz & Ballen LLP.
"It's not like there will be an unforeseen collapse, where the FDIC all of a sudden is going to have 20 institutions that they have to deal with on one weekend. These things are highly managed."
Not all large failures, of course, result in big tabs for the FDIC.
Take the $307 billion-asset Washington Mutual Inc. Its banking operations were acquired by JPMorgan Chase & Co. at no cost to the government.