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WASHINGTON — Rumors that the Federal Deposit Insurance Corp. is close to broke — which have increasingly gained traction as the level of federal reserves has declined — appear greatly exaggerated.
September 11 -
Despite widespread optimism about the broader economy, a regulatory report out Thursday showed that the banking industry remains deep in crisis.
August 27 -
The growing number of failures this year — now more than three times their total for all of 2008 — has pushed the chances of a second special deposit insurance premium to a near certainty.
August 18
WASHINGTON — Under pressure from lawmakers not to charge banks another special assessment, Federal Deposit Insurance Corp. Chairman Sheila Bair said the agency would consider other alternatives — including some obscure ones — before it decides to act.
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The remarks appeared to be a shift for Bair, who has said another special assessment was likely by yearend and has shied away from seeking to tap her agency's $100 billion line of credit with the Treasury. While the FDIC chair made it clear that another assessment was still very much on the table, it was evident no final call had been made.
The agency is considering "all options, including borrowing from Treasury," she said in a response to a question at a speech at Georgetown University. "There are other tools that we have that are less known."
Her comments come after two powerful Democrats — House Financial Services Committee Chairman Barney Frank and Sen. Carl Levin, D-Mich., — urged the agency to consider borrowing from the Treasury rather than increasing bank fees.
"They should use the borrowing authority and not raise the assessments," Frank said in an interview Friday. "That's what we gave them the borrowing authority for."
Bair has been clearly reluctant to do so, in part because of the impact that could have on the public's view of deposit insurance. Many media outlets have been warning that the DIF is nearly broke (it held $10 billion as of the end of the second quarter, though it has an additional $32 billion set aside for expected losses), and emphasizing that if the FDIC borrowed from the Treasury, it would be using taxpayer money. Bair is concerned that if the DIF is exhausted, consumers might lose faith in deposit insurance and the media could portray any borrowing from the Treasury as a another bailout for the industry.
But circumstances may force her hand. Even though the industry has anticipated another special assessment this year, many bankers oppose it, arguing it comes at the worst possible time. The agency already charged a special fee in March of 5 cents per $100 of second-quarter assets, minus Tier 1 capital, on top of normal premiums. The agency has the authority to charge extra assessments in the third and fourth quarters, and Bair has repeatedly warned the agency is likely to use that option given the health of the DIF.
Lawmakers cite fears that another assessment could stop banks from lending or push troubled banks to failure.
"Adding yet another major financial obligation during this crisis could further deplete the capital of these small financial institutions, making it difficult for them to extend the credit needed to turn our economy around," Levin wrote.
Frank said borrowing from the Treasury does not mean the banks will not pay eventually — they just do not have to pay while in the middle of a crisis.
"Banks will ultimately have to pay it back but I think this is a case where it would be I think procyclical," he said. "We are still in a tough situation. It's not that the banks are off the hook but I would defer any increase in premiums and I have communicated that to the FDIC."
Some observers said the FDIC may also be concerned about harming troubled banks.
"I'm sure the FDIC is doing its calculation about how many banks would be tipped over the edge if they did another special assessment," said William Longbrake, an executive in residence at the University of Maryland, and a former chief financial officer at the FDIC.
Observers were still waiting for more details on some of the alternative approaches, including borrowing money from banks or asking institutions to prepay next year's premiums. Under one scenario, the FDIC could issue debt to the industry, allowing banks to buy agency bonds. Such a scenario provides the FDIC with more cash, but would give banks an asset on which they earn interest.
Allowing banks to prepay premiums would not force institutions to pay more than they would when regular annual assessments are due next year, but would give the agency added funds earlier. Such a scenario might help the FDIC get through a rough period without asking for additional money.
Unlike borrowing from the Treasury, both options would keep the FDIC industry-funded, and could not be viewed as taxpayer assistance.
"The FDIC is realizing that an additional special assessment may create more harm than good. Options are extremely important and that may include looking to borrow from the industry or looking for the prepayments on premiums in the future," said James Chessen, the chief economist for the American Bankers Association. "Borrowing from the industry or the prepayments could be a very important option instead of borrowing from the Treasury's line of credit."
Some industry representatives are also suggesting other potential solutions, including diverting fees to the DIF that the agency has raised from its temporary programs to guarantee bank debt and give unlimited deposit insurance to certain business checking accounts. While the FDIC diverts some percentage of those fees to the DIF, some estimate it could raise as much as $5 billion for the fund if diverted more fees.
Ultimately, industry observers said adopting alternative approaches makes some sense, allowing the industry to spread out payments to the fund.
"At the end of the day we all know that the industry is going to have to recapitalize the deposit insurance fund. The challenge to the industry is a matter of timing," said Camden Fine, the president and chief executive of the Independent Community Bankers of America.
Some predicted that the FDIC may adopt a hybrid approach. "There is some history of the FDIC during Sheila Bair's tenure of looking at different ideas and different proposals," said Brian Gardner, an analyst at KBW Inc. "They have been open to different solutions on whole host of areas, from loan modifications, to liquidity programs to this. It's pretty consistent with at least the general approach of the FDIC which is to be creative and think outside the box a bit."
Still, Gardner said, a movement away from a special assessment would be a surprise. He said the agency may propose a multimethod approach that combines another assessment with other alternatives.
"It's very possible that they float some kind of hybrid, or ask for comment on a hybrid approach," he said. "They're going to be floating a number of trial balloons."
