Can the banking industry affort the legislation just passed by Congress?
New accounting requirements, disclosure rules, and heightened supervision will take a heavy toll, warns James McDermott, president of Keefe, Bruyette & Woods Inc.
Noting that as many as 250,000 bankers could be fired this decade, Mr. McDermott says: "All of those savings could be offset by the increased cost of regulation in this bill."
And that's without taking into account the issue that has the industry most worried: The multibillion-dollar cost of restoring the deposit insurance fund to health.
Not only must banks repay up to $30 billion in government loans to cover losses from failed banks, but they must also rebuild fund reserves to $1.25 for each $100 of insured deposits within 15 years.
The two requirements carry a potential $80 billion price tag - turning a projected $30 billion deficit in the insurance fund into a $50 billion surplus by the year 2006.
Some analysts, including those in the American Bankers Association's economics department and industry consultant Bert Ely, argue that the fund can be rebuilt without an increase in the current premium, 23 cents for each $100 of insured deposits.
But others worry that the Herculean task will require huge premium increases that could cripple the industry well into the next century.
A Citicorp analyst concludes that it would take a premium of 28 cents to 40 cents over 15 years for the banking industry to bear the cost of rebuilding the fund.
Karen Shaw, president of the Institute for Strategy Development, puts the cost at the high end of that range. Using General Accounting Office estimates of the size of embedded losses in the industry, she says a premium of 35 to 40 cents would be required.
The potential costs are so great that some bank representatives are beginning to question a key element of industry orthodoxy - that the Bank Insurance Fund should be recapitalized with no help from the taxpayer.
"Anybody who says that now is irresponsible," says Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America.
The industry cannot afford "an open-ended commitment" to the insurance fund, he adds, particularly at a time when a key competitor - the savings and loan industry - has an open-ended draw on the U.S. Treasury to pay for its losses.
Mr. Guenther says that while an economic turnaround could spare huge losses, the industry should not close its eyes to the possibility that losses will snowball.
Still, it is precisely the example of the savings and loan bailout - and the anger it aroused among taxpayers and their legislative representatives - that leads others to reject any thought of government aid.
"The banking industry can pay for the recapitalization without taxpayer help," maintains Edward L. Yingling, executive vice president of the American Bankers Association.
Near Term Looks Bleak
Whatever happens over the long haul, bankers are focusing their attention now on the near-term prospects for insurance premiums, and they don't like what they see.
Since 1989, deposit insurance premiums have nearly tripled, to 23 cents from 8.3 cents. With passage of the new legislation, the Federal Deposit Insurance Corp. Improvement Act of 1991, bankers have begun to assume that the FDIC is ready for another major hike - to at least 30 cents.
"They are talking about raising premiums now [at the FDIC], and if the analysis continues on the same basis, they may well go to 30 basis points next year," says Robert Dugger, the ABA's chief economist.
Already bankers are beginning to warn that raising the premium above 30 cents may prove counterproductive; that is, it may cost the insurance fund more money from additional bank failures than it adds in revenue.
FDIC Chairman William Taylor says there is no hard evidence to back up that claim. "Above 30 cents, and it may well get above 30 cents, then you approach the point where it may well be counterproductive," he said during a brief interview last week. "But there's no data to support that."
Bankers say increased premiums are already taking a stiff toll. At Smith County State Bank and Trust Co., a highly profitable $60 million-asset bank in Smith Center, Kan., president Murray D. Lull says premiums are steadily eating away at the bottom line.
"We paid $62,000 in premiums a year ago and $116,000 this year," he says. "Next year, we expect to pay $130,000."
Smith County State Bank earns about 1% on assets, or about $600,000. As a result, the $68,000 increase in premiums from 1990 to 1992 amounts to more than 10% of total earnings.
While bankers have accepted a series of increases since 1989 with barely a whimper of protest, there is some indication that those same bankers are ready to put put up more of a fight this time.
While the GAO and key lawmakers are pressuring the FDIC to raise premiums sharply, some key bank industry representatives are making the contrarian point that the fund can be rebuilt with a premium equal or very close to the current 23 cents.
Leading the defense is Mr. Ely, the Alexandria, Va.-based consultant who made his reputation by predicting the magnitude of the thrift bailout earlier and more accurately than almost anyone else.
Today Mr. Ely, who now works for bank trade groups, among other clients, is arguing that too many analysts - including those at the General Accounting Office and the FDIC - are overestimating the size of the industry's problem.
As of June 30, he says, the industry's embedded losses, which must eventually be paid for by the insurance fund, amount to no more than $11 billion - about a third of the $30 billion the FDIC is authorized to borrow.
"Not only are the embedded losses in the banking industry not that bad, but even if the entire $30 billion is borrowed, it can be paid back with the 23-cent premium," Mr. Ely says.
Even assuming that embedded losses are five times greater than he expects, and that the loss rate after 1995 will be well above historical experience, Mr. Ely believes the 23-cent premium is adequate to bring the fund up to the required reserve level of $1.25 per $100 by 2006.
Mr. Dugger of the ABA believes Mr. Ely's numbers are essentially accurate and says his own estimates indicate a premium of 23 to 26 cents would be needed. But Mr. Dugger says he is concerned that the FDIC is looking at a higher premium because it is overly pessimistic about the future course of the economy.
'Ignorance About the Future'
"They are going to charge a premium now on the basis of ignorance about the future," he says.
All of the estimates being offered are based on a number of factors that simply can't be predicted with any precision, including the likely failure rate over the next 15 years and the impact of higher prmeiums on deposit growth.
As premiums rise, larger banks have an incentive to shift out of insured deposits and into other sources of funding, such as foreign branch deposits or non-deposit liabilities.
As a result, smaller institutions are worried that an increasingly large share of the burden is shifting to them.
Squeezing Loan Capacity
The ABA is also warning that increased premiums will take a toll on the economy by removing still more lending capacity from the banking industry at a time when the Bush administration is trying to reverse the two-year-old "credit crunch."
"Each $1 you take in higher premiums has a $12 to $16 effect on credit availability," says Mr. Dugger. "If you are concerned about credit availability and you think the 23-cent premium is already causing problems, then it would be a major policy error to raise them further."
But Mr. Taylor of the FDIC readily confirms what almost everyone in the industry believes: Premiums are going up, probably on July 1.
"If your question is will it go up," he says, "the answer is yes, it probably is going up."