WASHINGTON - The Federal Deposit Insurance Corp. maneuvered around a trigger that would have forced all banks to pay premiums last year, according to a report released Tuesday by the agency's inspector general.
The IG report concluded that the move avoided adding $96 billion of insured deposits to the Bank Insurance Fund - an influx that would have pushed the ratio of reserves to insured deposits below its statutory minimum by the first quarter of 2005, triggering premiums for the first time since 1996.
The inspector general's office questioned whether FDIC staff acted appropriately, including whether they adequately discussed the potential implications of the accounting switch with members of the agency's board.
"The nature, timing, and application of the new method could have had a significant impact on the reserve ratios, and we concluded that the FDIC should have more fully … involved the board in the decision," the report said.
At issue are so-called Oakar deposits, which banks bought from failing savings and loans but that in 1989 Congress said must remain in the Savings Association Insurance Fund. The FDIC then calculated what portion of a BIF-insured member's deposits, including the growth of such deposits during each quarter, should technically be allocated to the SAIF. FDIC officials concede that from its inception the calculation was arbitrary and confusing.
In 2002 the FDIC decided to reassess its methods of calculation, and it studied the issue for three years.
FDIC staff discovered that applying the new method retroactively to the beginning of 1997 would have significant consequences, including adding $96 billion in insured deposits to the BIF, according to the IG report.
In February 2005 a new method was adopted, but after consultation with Don Powell,the agency's chairman at the time, its staff decided against applying it retroactively.
The IG report does not directly state that the staff should have done otherwise. Instead, the report suggests that the agency's four other board members were not given sufficient information on the implications of the accounting change, and that the FDIC did not discuss the issue publicly.
For example, the report questioned a February 2005 meeting where FDIC staff briefed deputies to the other board members. A copy of the briefing did not discuss the impact on the BIF ratio if the method were applied retroactively, and the inspector general said that "other meeting attendees had differing recollections regarding … whether the dollar value" was mentioned.
And at the board's May 2005 briefing on the state of the BIF and SAIF, its staff made no mention of the issue, though the implications of other such changes had previously been noted, the report said.
Aside from a brief mention in the FDIC's Quarterly Banking Profile, the FDIC did not emphasize the importance of the change to the public, the report said.
"The announcement did not clearly describe the reasons for the change, disparity between the old and new allocation methods, or the corporation's rationale for not addressing the cumulative effort of the prior allocation method," it said. "As a result, the FDIC's actions lacked transparency."
Some critics said the FDIC might have wanted to keep the change quiet. At the time the decision was made, a drop in the BIF ratio could have affected debate on the deposit insurance bill, which was still pending before Congress. (It passed this year.) They suggested that the agency may have wanted to minimize any disruption.
"It is my opinion that the FDIC staff desperately wanted to avoid levying a premium on … banks so as to not stir up opposition to the deposit insurance bill," said Bert Ely, an analyst in Alexandria, Va., and a frequent FDIC critic.
But some industry representatives said bankers would have been furious to be charged a premium over a change in the way deposits were divvied up among the funds.
"I can just imagine my reaction if you called me a year ago and said they" were charging premiums due to this issue, said Jim Chessen, the chief economist for the American Bankers Association. The FDIC "would have gotten more criticism for looking like they were making an accounting change to influence the Hill debate."
In its response to the IG report, FDIC officials agreed with a recommendation that they should improve communication with board members. But they disputed any suggestion that the agency should have made the change retroactively.
Officials said it would have been hard to pinpoint when to start applying the change, arguing that the original method was appropriate in the early 1990s and that it is unclear when that changed.
"There is no single correct method to estimate and allocate insured deposits, and there is no scientific way to determine at what precise point in time an existing method becomes insufficiently representative so as to require a change," Art Murton, the director of the FDIC's division of insurance and research, wrote in an April 10 letter to the inspector general.
