WASHINGTON — As it began operating IndyMac Bancorp Inc. Monday, the government estimated the failure's cost could shave 18 basis points off the Deposit Insurance Fund's reserve ratio, lowering it to 1.01%.
That would trigger a big premium increase as early as September, because the Federal Deposit Insurance Corp. is required by law to rebuild the fund once it tips below $1.15 for every $100 of insured deposits.
"People have been accustomed to no reduction in the insurance fund, … and we're in a different stage of the cycle now, where it appears the fund will experience losses, and that's going to be an additional cost factor for banks," said Joseph T. Lynyak, a partner at Venable LLP.
IndyMac's failure — the second biggest, by assets — is expected to cost the Deposit Insurance Fund $4 billion to $8 billion, making it one of the costliest ever. The institution, which the agency now runs in conservatorship, holds low-value exotic mortgages and over $10 billion in Federal Home Loan bank advances, impeding FDIC efforts to sell its remaining assets.
Jaret Seiberg, an analyst with Stanford Group Co., said in a report Monday that premiums could rise to 10 to 15 cents per $100 of domestic deposits.
"We expect the agency will want" its reserves "to be high to support its argument that the insurance fund is big enough to handle the fallout from the credit crisis and a taxpayer rescue is not in the making," Mr. Seiberg wrote. "A dwindling fund is not consistent with this message."
The $32 billion-asset Pasadena, Calif., thrift company — which was not even on the FDIC's "problem bank" list — went down faster than expected after depositors began pulling funds in the days after a June 26 letter from Sen. Charles Schumer, D-N.Y., warning that IndyMac could fail.
"The question is: Would a more orderly liquidation have been a less costly resolution. … If they could have kept it afloat a little while longer, could they have done a little more orderly job? That's something none of us will ever know," said Ralph F. MacDonald 3rd, a partner in the law firm Jones Day.
After a decade of premium-free insurance, all banks and thrifts began paying premiums in June 2007. That was when the agency implemented a pricing plan mandated by a 2006 law aimed at maintaining the fund's ratio at its traditional target of 1.25%.
The current premium — 5 to 7 basis points for most institutions — pales in comparison to the 23 basis points all institutions had to pay in the wake of the savings and loan crisis.
The fund totaled $53 billion on March 31, up a hair in the first quarter as the FDIC increased its reserves for expected losses by 1,000%, to $525 million.
FDIC Chairman Sheila Bair said Friday that the resolution would likely drive the ratio of reserves to insured deposits — now 1.19% — below 1.15%, which is a statutory trigger requiring the agency to develop a plan to rebuild the fund.
The FDIC declined a request for an interview Monday but issued a statement saying IndyMac's failure could push the reserve ratio down by 9 to 18 basis points.
"Insured deposit growth, investment income, assessment revenue and other changes in loss provisions could cause the actual decline in the reserve ratio to be above or below this range," the statement said.
The FDIC board of directors will meet in September to set premiums for next year. The law gives the agency five years to get the fund back to 1.15%, and that's what industry representatives were pointing to Monday.
"FDIC doesn't immediately have to make back up those losses," said James Chessen, the chief economist for the American Bankers Association. "The beauty of the deposit insurance reform law was it gives the FDIC flexibility to rebuild the fund and not put an onerous burden on the existing healthy banks."
Camden Fine, the chief executive of the Independent Community Bankers of America, was more adamant.
"There is no threat to the FDIC fund whatsoever. I don't even see one on the horizon," he said. "The FDIC board certainly has some latitude under the law, and it would be our advice that they not try to do one great big fell swoop of getting the fund at some ratio that they're trying to achieve, but rather try to bring the fund back more slowly."