WASHINGTON — With losses expected to top $40 billion over the next five years, the Federal Deposit Insurance Corp. on Tuesday proposed doubling the fees it charges banks and thrifts for the government's protection.
On average, financial institutions would pay 13.5 cents per $100 in domestic deposits under the plan. Most banks would pay in a range of 8 to 21 basis points, depending on their chances of failure and potential cost to the Deposit Insurance Fund.
Currently, banks pay 5 to 7 basis points, with an average assessment of 6.5.
Though the added premiums come at a time when banks are already hurting for liquidity and business, FDIC board members made it clear they had no choice. Officials estimated losses over the next five years to total more than $40 billion — a staggering sum that would virtually wipe out the current $45 billion balance of federal reserves.
"The situation is what it is," FDIC Chairman Sheila Bair said at a board meeting.
"We are acutely aware of the challenges the industry is facing right now. … But the industry understands from a public confidence perspective that the public needs to know the industry stands behind the fund. That is their moral obligation as well as their statutory obligation."
Industry representatives — while raising some concerns about the plan — appear to have resigned themselves to higher premiums. Several said it is in the industry's interest to maintain a healthy fund.
"The first obligation is to say the industry knows the importance of the FDIC fund and is prepared to make sure it will always be strong," said James Chessen, the chief economist at the American Bankers Association. "Anything else is just details."
Recent failures — 13 so far this year, with another 117 banks on the FDIC's problem bank list — depleted the fund's ratio of reserves to insured deposits to 1.01%, 14 basis points below the statutory minimum.
Federal law requires the agency to bulk up the reserve ratio to 1.15%. The agency said the additional premiums should help restore the fund to 1.26% by 2013.
In addition to going up, deposit insurance rates will also become more complicated under the new plan, though some of the changes may work to the industry's benefit.
Currently, depending on a host of factors, healthy banks — or 91% of the industry — pay in a 2-basis-point range.
Starting in April, the agency would expand it to a 4-point range and add additional incentives and penalties that would broaden it even further.
Initially, banks will pay 12 to 14 basis points under the current system when rates are raised on Jan. 1. After the end of the first quarter, the FDIC will institute its plan to add more risk-based elements to the premium calculation, which is expected to reduce the lowest assessment rate to 10 basis points.
Even that range will be subject to additional factors. Under the current system, the FDIC has focused only on the likelihood of failure.
Under the proposed changes, the agency would also charge according to the cost of a failure were it to occur.
The FDIC proposal would let institutions receive credit for efforts to minimize their potential cost, while those engaging in activities that would make a failure more expensive would be penalized.
Under the plan, large banks could shave 2 basis points from their assessment if they have significant holdings of unsecured debt — such as subordinated debt. Smaller institutions could receive a rate reduction for holding high amounts of Tier 1 capital.
But the agency is also proposing to raise assessment rates by up to 7 basis points if more than 15% of an institution's domestic deposits are tied up in secured liabilities, such as brokered deposits and Federal Home Loan Bank advances.
Weaker institutions would also be penalized for holding large amounts of brokered deposits. The agency said it would add a surcharge of up to 10 basis points for weaker institutions if their brokered deposits exceed 10% of their domestic deposits.
High levels of brokered deposits and Home Loan bank advances helped make the failure of IndyMac Bancorp. on July 11 one of the most expensive collapses to date. The thrift's failure is expected to cost the Deposit Insurance Fund $8.9 billion.
The proposal marked the first time the agency has sought to charge higher premiums for high levels of Home Loan bank advances — and industry representatives said that would make advances less attractive. That could be particularly challenging since the industry has increasingly relied on advances as a source of quick, cheap liquidity during the credit crisis.
"The simple economics is if you charge more for something, people will use it less," Mr. Chessen said.
John von Seggern, the president of the Council of Federal Home Loan Banks, said that, though he respected the FDIC's need to rebuild the insurance fund, the secured-liabilities measure could "increase the cost of retail deposits" for Home Loan bank members.
Some FDIC board members also questioned the fairness of giving banks a 2-basis-point credit for unsecured debt while charging 7 basis points for secured liabilities.
"While I support both thoughts, I don't know that calibration is right," said Comptroller of the Currency John Dugan. "I do think we should get comment on that."
The FDIC is accepting input from the public for 30 days.
