WASHINGTON — Apparently all the years of anxiety over the Deposit Insurance Fund's reserve ratio were a waste of time.

The Federal Deposit Insurance Corp. on Tuesday said the DIF is headed to insolvency and will stay there for at least three years. Rather than rebuild it immediately to the statutory 1.15% reserve level, the FDIC plans to meet its liquidity needs by raising $45 billion from banks' prepaying the next few years' worth of premiums.

"The DIF balance going negative doesn't mean we've run out of money," FDIC Chairman Sheila Bair told reporters Tuesday.

Though the FDIC can use the prepaid premiums it receives to help pay insured depositors and cover other resolution costs, the agency cannot count it toward DIF reserves right away. This is a benefit to banks, which can count the money as a depreciating asset, while the FDIC has more cash in its pocket.

But observers said the proposal marks a sea change. Instead of focusing on the reserve ratio, which has been closely tracked for more than a decade by analysts, the industry and lawmakers, the FDIC is now concentrating instead just on its critical funding needs.

"I argue you shouldn't be concerned at all with the present value of what is in the fund because the confidence of depositors in the FDIC should not be focused on the fund," said George Pennacchi, a finance professor at the University of Illinois at Urbana-Champaign.

At issue is how the FDIC measures the amount of money it needs from the industry. For years, it has used accounting methods established by Congress, which requires the FDIC to charge enough so that it holds at least $1.15 in reserves for every $100 of insured deposits.

But failures have pushed both the ratio and the level of federal reserves to their lowest points in more than a decade. As of June 30, the agency had $10.4 billion of reserves and a reserve ratio of 0.22%.

Though some of the decline is due to failures that have already occurred, most of it is because of anticipated collapses. Accounting standards require the FDIC to set aside money to cover its expected losses during the next four quarters — cash that can't be counted in the DIF. In the second quarter, the FDIC had $32 billion set aside to deal with collapses.

But the agency said Tuesday it needs to set even more aside. Over the next four years, it anticipates $100 billion worth of resolution costs — up from a May estimate of $70 billion for the same period. The result is that the fund will be insolvent as of Sept. 30, according to FDIC calculations.

Under the plan announced Tuesday, the DIF will not be solvent again until 2012, and not reach its statutory minimum balance until 2017. Under the proposal, the FDIC gave itself eight years to return the fund to 1.15%.

Observers said the proposal, on which the industry will have 30 days to comment, reinforces the idea that the DIF's balance can slip as long as there is enough cash on hand to pay insured depositors and to fund resolutions.

The focus of the agency "at this point … is meeting the needs of insured depositors as each failure comes upon it and not looking toward meeting the always academic and highly constructed" reserve ratio, said Karen Shaw Petrou, managing partner of Federal Financial Analytics Inc. "It's an artificial number that was the result of a complicated political compromise."

Bert Ely, an independent consultant in Alexandria, Va., said Tuesday's proposal addresses the FDIC's "short-term working capital needs."

"In economic matters, cash flow is the ultimate truth," he said. "The FDIC's action today reflects that truth. It is not so much that the fund balance is an academic concept as it is a misrepresentation."

The proposal avoided other, more extreme funding options — namely, another special assessment on banks or the agency's tapping its credit line with the Treasury Department — but the FDIC asked for comment on these alternatives, too. Though a special assessment would bolster the fund, it would not be enough to make it solvent, FDIC officials said. Borrowing from Treasury, meanwhile, could taint the FDIC as having received a government "bailout" and also would not have counted toward the DIF. (Since it would be a loan, technically, any funds it realized would be liabilities for the agency.)

But the prepayment option lets the FDIC essentially borrow from the industry without incurring interest charges. All banks must pay by Dec. 30 their projected premiums for 2010 through 2012. Current premium rates would stay the same for this year and next — 12 to 16 basis points — but rise by 3 basis points in 2011.

Banks that view the initial payment as too great a liquidity hardship could apply to the FDIC for an exemption, which would be considered case-by-case.

FDIC officials said that the prepayment option makes sense because failures are expected to peak this year and next. By 2011, Bair said, industry earnings would be strong.

"We would not be proposing this option unless we had reason to believe that the financial performance of the industry will improve during the three-year prepayment period," she said.

Though the FDIC board's vote was contentious when it imposed the special fee in May, it was unanimous in issuing Tuesday's proposal.

Comptroller of the Currency John Dugan, who had strongly opposed the special assessment, said the agency "cannot meet its needs on a 'pay-as-you-go' basis with special assessments.

"We have to borrow and, therefore, spread out the assessment costs to repay the amounts we borrowed. Given that stubborn fact, it makes good sense not to increase assessments now, at the worst possible time," he said.

Yet he added that borrowing from the Treasury "does create more of a perception that the fund is somehow paid for by the taxpayer, even though that is not an appropriate perception."

Industry representatives generally praised the proposal, calling it preferable to a new special assessment. The agency opted not to charge additional fees on the industry to improve the DIF balance after having charged 5 basis points per $100 of assets minus Tier 1 capital in the second quarter.

"It's a lot of cash up-front, but it's a much better alternative than taking a huge chunk of money out of income and out of capital, which would have severely affected lending at a time when this economy needs credit to keep it moving," said James Chessen, the American Bankers Association's chief economist.

Chris Cole, a senior regulatory counsel at the Independent Community Bankers of America, agreed, "When you consider all the alternatives, what else can you do? Banks should seriously consider this proposal." Yet he added that some institutions will certainly view the cash obligation unfavorably.

"The three-year prepayment will be considered a hardship for some banks and particularly in this economic downturn that we're experiencing," he said.

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