WASHINGTON — An emergency 20-basis-point deposit insurance premium sparked outrage Friday from community bankers, who accused the Federal Deposit Insurance Corp. of squeezing their earnings to stem losses they did not cause.
"Apparently, history has taught us nothing. The federal Deposit Insurance Fund bailed out the S&Ls in the '80s, and now we are pouring the risk of large, systemically important institutions on to the back of the community banks," said Noah Wilcox, the president and chief executive officer of the $244 million-asset Grand Rapids State Bank, a unit of Wilcox Bancshares Inc. in Grand Rapids, Minn.
The FDIC announced the steep premium, assessed on institutions' second-quarter domestic deposits, a day after reporting that the fund's reserve ratio had slipped to 0.4% — a level not seen since the savings and loan crisis.
Community banks argued that the special assessment — added to their regular premiums, which were also raised to between 12 and 16 basis points — would take a large chunk out of their earnings at a time when the government is pressuring them to increase lending.
FDIC officials acknowledged the cost of the new assessment but said there are no other options; the Deposit Insurance Fund's reserves have fallen to $18.9 billion, their lowest level sine 1993, and letting the fund continue to decline could undermine public confidence in deposit insurance.
Once the reserves are exhausted, the FDIC can also draw on a $30 billion line of credit with the Treasury Department, but agency officials said they want to avoid that.
"If we were to turn to taxpayers to cover fund losses, this could open up a whole new debate about the degree of government involvement in the affairs of insured banks," FDIC Chairman Sheila Bair said at a board meeting.
In a subsequent interview, she said, "I don't think we had any other choice."
Community bankers have begun clamoring for the FDIC to charge large banks more in premiums, but Ms. Bair said that the agency is barred by law from discriminating against institutions on the basis of size, and that it is seeking more flexibility in legislation.
In the end, the industry would not be able to afford the public's reaction if the Deposit Insurance Fund's strength were put in serious doubt, Ms. Bair said.
"There are just no good options here. I don't think it's in anybody's interest for that fund to go to zero," she said. "The press watches the level of the reserve ratio very closely. The fact that the industry would not want to stand behind its Deposit Insurance Fund is highly problematic... Without that 20-basis-point assessment, we would be flirting far too close with zero."
The FDIC voted 4 to 1 to approve the interim rule establishing the emergency assessment, with Office of Thrift Supervision Director John Reich opposing the measure. The rule, which includes a 30-day comment period, also would give the FDIC the authority to set further emergency assessments of up to 10 basis points.
The 20-basis-point assessment would immediately raise $15 billion for the fund, officials said. Including standard premiums, the agency expects to raise roughly $27 billion this year, compared with only $3 billion last year, when institutions could still offset costs with credits for past assessments.
The agency's actions provided some silver lining. Its plan to restore the fund's reserves to 1.15% of insured deposits was stretched from five to seven years, and the agency decided to ease new premium pricing factors that would penalize institutions that rely too heavily on noncore funding.
But the estimates of future failure costs has gone sky-high. Just four months ago the FDIC estimated that they would be $40 billion for 2008 to 2013. By Friday that estimate had grown to $80 billion.
Comptroller of the Currency John Dugan said it was clear the special assessment is necessary. "We do have to be very careful about potential issues about public confidence," Mr. Dugan said. He did not rule out an eventual tapping of the Treasury credit line. "There may be circumstances where we may wish to do that. I would not foreclose the notion that we could go to such a point."
David Skiles, the president and CEO of the $240 million-asset First Peoples Bancorp Inc. in Port St. Lucie, Fla., said the FDIC should have pursued other avenues for replenishing the fund, such as tapping the line of credit.
"This is certainly not the time to assess new fees on banks. … Banks are burning through capital right now and doing the best they can to survive," Mr. Skiles said. "We are already strained to the limit."
Many observers, including Mr. Wilcox, noted that the special assessment was announced the same day the Treasury Department increased its stake in Citigroup Inc. "Why do I pay under the same formula as Citibank, who got its third scoop off of the taxpayer's pie today, while the community bankers got kicked in the teeth?" he asked.
The Independent Community Bankers of America said it is seeking legislation that would let the FDIC charge a special assessment on all systemically important institutions to rebuild the fund.
"Those are the institutions that pushed the economy into this turmoil," said Camden Fine, the trade group's president. "Every bank that they are doing a stress test on should have to pay a systemic risk premium."
In the meantime, the ICBA is also asking the FDIC to base premiums on total liabilities, not domestic deposits.
The FDIC's interim rule asked for comment on things like whether special assessments should be based on assets "or some other measure" besides domestic deposits. It also asked whether all FDIC assessments "should take into account the assistance being provided to systemically important institutions."
Community bankers argue that they are paying more than their share, since their institutions are funded largely by deposits, while large banks have alternative funding mechanisms.
"I believe FDIC insurance is important, but I would prefer they find another way to fund it because I believe disproportionately the burden will fall on community banks," said Bill Loving, the CEO of $205 million-asset Pendleton Community Bank Inc., a unit of Allegheny Bancshares Inc. in Franklin, W.Va. "I'm truly disappointed in the timing and the amount" of the assessment.
He was seconded by many others. "I think it's wrong in no uncertain terms," said Jeffrey Gerhart, the president and CEO of Bank of Newman Grove in Nebraska.
He estimated that his $30 million-asset bank would have to pay a premium equal to more than half its earnings last year.
Steven Trager, the CEO of the $3.3 billion-asset Republic Bancorp Inc. in Louisville, said he is angry Republic must pay for the mistakes of big-bank competitors.
"I am frustrated that they continue to protect and aid those that made bad decisions," he said.