WASHINGTON — Facing losses from accelerating bank failures, Federal Deposit Insurance Corp. staff are expected to recommend charging a special assessment on the banking industry in order to bolster federal reserves, sources said.
The agency's board is scheduled to meet Friday to set deposit insurance premium rates for the second quarter.
While the board could still opt to simply raise premium rates well above the current level, agency staff is expected to push for a more aggressive solution, sources said.
The special assessment rate has not been determined, but FDIC officials are considering a rate between 14 to 16 cents for every $100 in domestic deposits, sources said. The special assessment would be charged in the second quarter on top of current premiums; most banks currently pay 12 to 14 basis points.
A special assessment is necessary because the Deposit Insurance Fund may be nearly exhausted by yearend under worst case scenarios, sources said.
The FDIC is concerned that — even though it has an additional $30 billion line of credit with the Treasury Department — a diminished fund could undermine consumer confidence in deposit insurance. Such an outcome would be catastrophic for the banking industry if consumers began running on banks.
But industry representatives said they are worried that higher premiums also would hurt banks.
"We are very concerned that the FDIC will sharply raise premiums, which will be detrimental especially to the community banking industry, which will bear a disproportionate burden of that increase," said Camden Fine, the president and chief executive officer of the Independent Community Bankers of America.
Two months into 2009, failures are occurring at a heightened pace. Fourteen banks have collapsed so far — more than half as many failures as in all of last year, when 25 banks were seized — costing an estimated $1.6 billion.
At the current pace more than 80 institutions could fail this year, putting added pressure on the DIF. The agency's ratio of reserves to insured deposits had already fallen 25 basis points, to 0.76%, in the third quarter, well below the statutory minimum of 1.15% that triggers a mandatory premium increase. (The FDIC will report the fourth-quarter ratio today in its Quarterly Banking Profile.)
Sources said fourth-quarter data is likely to show a rise in troubled banks, and a steep decline in the DIF ratio.
They cautioned that the situation is still in flux, and agency staff ultimately do not make the final call. The five-member FDIC board — which includes the heads of the Office of the Comptroller of the Currency and the Office of Thrift Supervision — must approve any special assessment or change to the premium schedule.
Premiums this year are already roughly double the 5- to 7-basis-point rates that most institutions paid in 2008. Last year the FDIC proposed a 10- to 14- basis-point rate for the second quarter, based on an institution's riskiness. But the situation has changed.
"The FDIC has seen losses greater than they anticipated when they proposed those rates" last year, said James Chessen, the chief economist for the American Bankers Association. "They want be sure there is no question that the FDIC has adequate resources to protect depositors."
Last fall, the agency estimated failure costs for the next five years at $40 billion. But FDIC officials since then have said fourth-quarter data had made the estimate higher. More information is expected today in the QBP.
If a special premium is assessed, it could anger many smaller banks, who argue the current crisis was caused by the largest institutions. "The very largest banks in this country have destabilized the economy," Mr. Fine said. "The FDIC should just cut out the middle man and go directly to the Treasury to recapitalize the DIF and not assess thousands of banks that had nothing to do with this mess."
