WASHINGTON -- The cost of deposit insurance is coming down.
The exact date of the decrease is still being debated - mid-1995 is the earliest estimate - but there is no doubt that banks will be paying the Federal Deposit Insurance Corp. less.
This week, bankers across the country are mailing in their premium payments for the six-month assessment period ending July 31. They are paying at the current average rate of just under 24 cents for each $100 of domestic deposits.
Drop Could Be Gradual
But that rate is expected to plummet, to less than 10 cents for each $100 - an d perhaps to as little as a nickel.
If rates come down sooner
Rather than later, bankers can expect a more gradual decline than if the reduction is put off for a while, W. Roger Watson, the FDIC's research director, said in an interview Tuesday.
"If it's reduced in mid-year 1995 it would not be a huge amount," he said of the premium reduction. "If it's the first assessment in 1996, I think it will come down significantly."
Describing the rate in pennies makes it easy to forget that deposit insurance is one of the industry's most important competitive issues.
But every one-cent change in the premium rate translates into $240 million in savings for the industry. That means the industry could gain $3.1 billion to $4.3 billion annually once deposit insurance costs subside.
Almost Tripled Since '89
The industry has already watched its costs go the other way.
In less than five years, the price of insurance jumped to 24 cents per $100 of domestic deposits from just 8.3 cents. The industry's insurance tab this year will be $5.6 billion, or nearly triple the $1.9 billion banks paid in 1989.
These higher rates have helped the Bank Insurance Fund stage a $20 billion comeback. In two years, the fund climbed from $7 billion in the red to $13 billion in the black.
By law, the FDIC cannot start lowering premiums until the insurance fund has $1.25 for every $100 of domestic deposits. That comes out to about $25 billion.
Nearing $20 Billion
The fund ended 1993 with $13.5 billion, according to a draft audit by the General Accounting Office. Premiums paid by bankers this year will boost that total to $19.1 billion. Add in interest on the fund's investment portfolio and revenue from the sale of failed bank assets, and the fund will close 1994 near $20 billion.
Premiums paid through the third quarter of 1995 will add another $4 billion. The FDIC expects to collect premiums each quarter next year rather than semiannually.
That income will bring the fund within striking range of $25 billion. But the fund has one other source that could put it over the top: converting reserves to income.
$8B Converted in '93 When reality turns out better than the FDIC expected, the fund adds back money that was put aside to cover losses. In 1993, for example, the fund gained about $8 billion by converting loss reserves to income.
At the start of this year, the Bank Insurance Fund still had $2.6 billion in reserves, according to GAO figures. If the FDIC does not need this money to cover bank failures, then it, too, could be used to boost the fund''s balance.
Even the GAO, often the FDICs biggest critic, predicted in its draft audit that the fund's reserves may be overstated.
"If the interest rate environment remains relatively stable and levels of problem assets continue to decline, the estimated liability for troubled institutions could be reduced further during 1994," according to the GAO report.
Fewer Failures Foreseen
The FDICs costs have been falling since 1992 as the rate of bank failures has slowed. In fact, the agency is about to lower its failure estimate for this year, cutting it to something less than 50 banks with less than $5 billion in assets.
Falling premium rates are great for banks but could be disastrous for thrifts.
Once the bank rate falls, competing thrifts will be stuck paying the higher rate because the Savings Association Insurance Fund is far from meeting that 1.25% goal.
The thrift industry is lobbying for a merger of the funds, arguing that the rate disparity will drive the industry and its insurance fund into the tank.
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