WASHINGTON — The Federal Deposit Insurance Corp. is expected to propose extending its blanket deposit insurance coverage tomorrow for noninterest-bearing deposits, sources said.
Such coverage is set to expire at yearend, but observers said FDIC officials want to avoid spooking business customers, who keep large checking account deposit balances for payroll processing and other purposes.
It is just one of several actions the agency is considering. At an open board meeting, the FDIC is expected to adopt a rule bringing regulatory auditing requirements more in line with the Sarbanes-Oxley Act and to issue a proposal to amend the Community Reinvestment Act.
But many bankers are focused on unlimited deposit insurance coverage for certain accounts, a guarantee the FDIC granted last year as the financial crisis worsened. Though it was unclear how long the FDIC would extend this coverage, predictions ranged from an additional six months to a year.
Bankers are "worried that if their depositors know the program will expire at the end of this year, they'll start pulling money out now," said Christopher Cole, a regulatory counsel at the Independent Community Bankers of America.
But just as the FDIC charged a higher fee for an extension of its debt guarantee program, it is liable to propose a higher charge for banks that continue to use its unlimited coverage, sources said. Banks that use the program already pay a 10-basis-point fee on all deposits guaranteed above the general $250,000 limit. A higher fee could encourage institutions to wean themselves from the program, while still providing the service to those that need it.
Added fees could also ultimately benefit other institutions. After the FDIC proposed raising fees for government-backed debt, it said the increase would supplement the Deposit Insurance Fund, which has shrunk dramatically during a wave of bank failures.
Kip Weissman, a partner in Luse Gorman Pomerenk & Schick, said some institutions may choose to remain in the program not because they need the extra protection but because they want to stay on par with competitors who offer the extra coverage.
"A lot of our clients are losing enthusiasm for it fast but feel they have to keep it for competitive reasons," he said. "A lot of the industry would like it" to end, "but they can't opt out or discontinue it because the guys across the street have it."
The Temporary Liquidity Guarantee Program was begun in October as fears about banks spread to depositors and debt holders and policymakers worried that institutions would lack the liquidity to extend credit. Along the same line, Congress has extended a temporary increase in the standard deposit insurance coverage to $250,000 per account through 2013.
As of early May, most institutions were part of the transaction guarantee program — 1,100 banks have opted out. At the end of March, about $700 billion in deposits was guaranteed through the program.
But with the financial crisis appearing to ebb, at least temporarily, some said the time has come to phase out the program. "A lot of the concern that money wasn't safe — that has passed somewhat," said Christina Gattuso, a lawyer at Kilpatrick Stockton LLP.
But "there's still some instability," she added. The FDIC "just took over three small banks … . It doesn't take a lot to extend it. Businesses then will have the comfort that if they put their money in the bank, there is this protection."
The FDIC is also expected to complete a rule it proposed in October 2007 that would clarify auditing requirements for both public and privately held institutions. The rule would reinforce earlier policies on the need for bank auditors to be independent, including that banks' auditing firms not be those that do tax work for senior employees.
Publicly held banks are already subject to the more explicit auditing requirements through the Sarbanes-Oxley Act, which created a tougher accounting regime for public companies. The FDIC rule was designed to be more consistent with the 2002 law and also apply to privately held institutions.
But the agency proposal provoked disapproval from some smaller banks in rural areas, where it is difficult to find multiple accounting firms for audits and individual tax services.
