WASHINGTON — The financial services industry is backing a bill to permanently raise the deposit insurance limit to $250,000 per account, though it would deplete the Deposit Insurance Fund reserves by about 10 basis points and trigger higher premiums.
The bill, written by House Financial Services Committee Chairman Barney Frank, is the subject of a hearing today, and a panel vote is scheduled Wednesday.
The legislation would significantly expand the power of the Federal Deposit Insurance Corp. by more than tripling its borrowing authority from the Treasury Department, to $100 billion, and giving it the power to decide which institutions would pay a special systemic risk assessment.
But much of the focus has remained on the deposit insurance limit, which was temporarily increased to $250,000 in a housing bill last year but is supposed to return to its previous $100,000 ceiling in 2010.
Under the housing bill, the FDIC was expressly banned from using the temporary coverage increase to charge higher premiums, and it has not included deposits above $100,000 in its calculation of the insurance fund's ratio of reserves to insured deposits.
But Rep. Frank's bill lacks such a provision, and the agency would be obliged to recalculate the reserve-fund ratio if the coverage level were permanently increased. Such a scenario would mean a roughly 10-basis-point reduction in the ratio, an FDIC spokesman said Monday. This would add pressure on the falling fortunes of the DIF, whose reserve ratio stood at 0.76% at the end of the third quarter — well below the statutory minimum of 1.15%.
Jim Chessen, the chief economist of the American Bankers Association, said a 10-basis-point decrease would require an additional $7.8 billion in premiums from the banking industry to make up.
Despite the decline, however, industry representatives said the higher coverage level is worth it, and they said other parts of the bill would mitigate the potential premium cost. (The higher coverage level would also apply to credit unions.)
The bill would give the FDIC an additional three years — for a total of eight — to return the DIF ratio to 1.15%, the statutory minimum. This provision is crucial, industry representatives said, and would let the agency gradually make up for the effect of a permanent coverage increase.
For example, Chris Cole, a regulatory counsel at the Independent Community Bankers of America, said the increased coverage would require an additional 2.4 basis points in premiums per year over a five-year term to return the fund to the 1.25% target level set by the FDIC but that only a 1.4-basis-point increase would be needed under an eight-year restoration plan. (Most banks now pay 12 to 14 cents annually per $100 of domestic deposits.)
"We think that would be manageable for community banks," Mr. Cole said.
The FDIC, though taking no position on whether to permanently increase coverage, is expected to say at today's hearing that it supports a more flexible timeframe for restoring the fund ratio.
"Because of the immediate dilutive effect on the DIF of permanently increasing coverage to $250,000, extending the … period for restoring the DIF reserve ratio to within the statutorily mandated range would be appropriate," said John Bovenzi, the FDIC's chief operating officer, in testimony obtained by American Banker.
The bill was already included in a bigger legislative package passed by the House on Jan. 21. But the package, which would set conditions for use of the remaining Troubled Asset Relief Program funds, was seen as a largely symbolic gesture and is not expected to be taken up by the Senate.
Whether the Senate will act on the narrower FDIC bill is unclear. Senate Banking Committee Chairman Chris Dodd has so far stayed silent on proposed changes for the FDIC.
Other aspects of the legislation may also prove important.
In his testimony Mr. Bovenzi says increased borrowing authority may be needed due to higher than expected losses from bank failures. The agency estimated last fall that failures would most likely cost $40 billion over the next five years. But Mr. Bovenzi said that fourth-quarter data indicates costs will be higher. "These data, combined with ample evidence of deteriorating economic and industry conditions, now suggest that the range of losses to the insurance fund (and the most likely outcomes) over the next few years will probably be higher," he said. "Thus, the uncertain and changing outlook for bank failures and the events of the past year have demonstrated the importance of contingency planning to cover unexpected developments in the financial services industry."
Mr. Bovenzi also recommended giving the FDIC and Treasury the power to raise the borrowing limit even higher in "exigent" circumstances, after consultation with Congress.
He also endorsed giving the FDIC the power to include bank holding companies — not just their subsidiaries — in a special assessment of systemic risk. Under current law, if the systemic risk exception were invoked and it resulted in losses to the FDIC, the agency would be required to assess all insured banks and thrifts to make up for the losses but could not charge holding companies. This is not always a fair outcome, Mr. Bovenzi said.
"The recent actions taken under the systemic risk authority have directly and indirectly benefited holding companies and nonbank affiliates of depository institutions, including shareholders and subordinated creditors of these organizations," he said.
The bill would give the agency significantly more flexibility to decide which institutions must pay the assessment — and which need not. In theory at least, this could benefit community banks, which have complained that the systemic risk exception is only used to bail out larger institutions. If the bill is enacted, the FDIC could force larger institutions to pay more in an assessment — or exempt community banks altogether.
"The question is: Who stands to benefit the most from that protection?" said Mr. Chessen. "Those who stand to benefit the most should pay the cost of any losses. … Logically, that makes sense. The devil will be in the details about which institutions benefited the most and what is a fair and equitable sharing of that cost."
Mr. Cole said the bill should go even further. "Community banks would like to see the largest systemic-risk institutions have to pay some sort of risk premium."
In addition to Mr. Bovenzi, several industry representatives are expected to testify in favor of the bill, including R. Michael Menzies, the chairman-elect of ICBA and the president and CEO of Easton Bank and Trust Co. in Easton, Md., and Edward Yingling, the president and chief executive of ABA.
The hearing will also include discussion of a separate bill to fix the Hope for Homeowners program, which is designed to encourage servicers to accept writedowns on underwater mortgages in exchange for insurance from the Federal Housing Administration. The bill would reduce required premiums and the minimum writedowns servicers must accept in order to participate to 93% of current market value.
