The Bank Insurance Fund is on track to earn $1.72 billion in revenue this year but is expected to report only $1.27 billion in profits.

What's up with the $450 million difference?

Critics blame soaring expenses. The Federal Deposit Insurance Corp. released a midyear earnings report for the bank fund last week that shows first-half operating expenses surged 23%, to $332 million; they are up 52% from the first six months of 1996.

"The operating expenses of the FDIC charged against the BIF continue to increase," said Bert Ely, an industry consultant and deposit insurance expert. "FDIC has not been able to cut its costs."

In years past the FDIC charged much of its personnel costs to a huge stockpile of failed banks in receivership. But now with just 248 receiverships holding $1.3 billion of assets, more overhead is charged directly to the bank fund.

But FDIC officials argue that this is just a shifting of costs, not an increase. When operating costs were lower, the fund was still hit indirectly because those receiverships-after covering FDIC staff expenses- had less money left to pay creditors, including the bank fund.

FDIC officials also contend that operating expenses show only part of the picture.

Total expenses, at $221 million, were actually lower than operating expenses in the first half. That occurs because the FDIC subtracts from total expenses any reserves for losses it no longer expects to incur. For example, in the first half the FDIC estimated losses would be $127 million less than previously expected.

"A greater proportion of expenses are being charged to the fund, but overall expenses are lower," explained Fred Selby, a deputy director in the FDIC's finance division. "It's a bigger bite of a smaller pie."

Mr. Ely, president of Ely & Associates in Alexandria, Va., is not convinced.

"They are constructing an elaborate rationalization to excuse the fact that they have not cut their operating expenses as much as they should have," he said. "Presumably, as the level of liquidation activity went down, the expenses associated with liquidation activities should have been cut accordingly."

Mr. Ely said the FDIC needs to cut its staff to reflect its smaller work load.

In the 18 months ended June 30, the FDIC shed 1,500 employees, or 17% of its work force. The agency expects to shave another 300 people from its staff of 7,600 in the second half, according to an agency spokesman. (Some of those reductions will be offset as the agency hires examiners for the first time since 1992, he added.)

Mr. Ely said the FDIC ought to reduce its staff to between 4,000 and 4,500.


Through June 30 the bank fund earned $637 million. Total revenues grew 12.7% in the first half, to $858 million. If the second half mirrors the first, as expected, net income would be $126 million-or 9%-shy of the $1.4 billion earned in 1997.

Because so few banks are paying deposit insurance premiums, most of the fund's revenues come from interest earned on U.S. Treasury investments. At June 30 interest income totaled $827 million, 16% more than in the first six months of 1997.

FDIC officials said forecasting the fund's full-year earnings is difficult because no one knows how much reserves will be drawn down in the second half. For all of 1997 the FDIC pulled $504 million from the fund's reserves.

The bank fund's reserves hit a record $28.9 billion June 30. Since 1995, when the FDIC eliminated premiums for most banks, BIF has grown $3.4 billion, or 13%.

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