The board of the Federal Deposit Insurance Corp. recently postponed until Sept. 15 a decision on whether to increase premiums for banks. The delay is intended to allow the board members to review new information and arrive at a consenus.
We believe there are ample reasons why the FDIC's board should decide not to increase premiums at this time.
In May, the FDIC proposed increasing the insurance premium to 28 cents per $100 of domestic deposits, from its current level of 23 cents. The premiums has already been increased three times during the past several years, up from 8.3 cents in 1989. The current level of 23 cents generates about $6 billion a year for the FDIC.
Some Rays of Sunshine
Significant changes over the past several months are cause for optimism. As of yearend 1991, the FDIC predicted that 375 banks -- with aggregate assets of between $168 billion and $236 billion -- would fail during 1992 and 1993.
A loss reserve of $16.3 billion for these projected failures took the FDIC's fund balance to a negative $7 billion from a positive $9.3 billion. The negative balance is due solely to the establishment of a reserve for future losses. Recent events have brought into question the need for a reserve this large and the proposed premium increase.
So far this year only 74 banks with total assets of $22 billion have failed, a rate far short of the pace projected by the FDIC.
We reviewed yearend 1992 financial data to get a sense of the institutions that the FDIC viewed as potential failure candidates.
We identified three or four relatively large regional banking organizations, collectively holding $60 billion to $80 billion in assets, that have shown considerable improvement over the past several months. Each has raised significant amounts of new capital. One has entered a merger agreement with a much larger and healthier bank holding company; the others either have had senior debt ratings upgraded or have been put under review for an upgrade.
While most would agree that the banking organizations in the Northeast and Middle-Atlantic regions have made considerable progress, concerns have surfaced about the California banking industry. The FDIC's exposure in California appears to be relatively limited, however.
Almost 80% of banking assets in California are held by BankAmerica, First Interstate, and Wells Fargo -- none of which poses a serious risk to the FDIC -- or by large out-of-state or foreign holding companies. We believe the FDIC's exposure in California currently is limited to approximately 65 banking institutions with aggregate assets of less than $10 billion. It seems indisputable that the FDIC's exposure has declined markedly relative to yearend 1991.
Ample Time for Reflection
We do not understand the sense of urgency that appears to have been attached to the premium increase proposal.
We recognize that the FDIC is under a legal mandate to increase its fund to 1.25% of insured deposits. But this target does not have to be reached until the year 2006. A six-month or a one-year delay in altering the premium structure will not affect materially the goal of hitting this target.
Some have argued that the FDIC should proceed with the proposed rate hike and pare it back later if the added revenues prove not to be needed. This approach ignores the political reality that it will be difficult to ratchet down a premium increase even if it is determined in the future that it was not necessary. Governments have a way of clinging to tax revenues once they are in place.
Unnecessarily draining funds from the banking industry at this point in the economic cycle is ill advised. The regions of the country that economically are the weakest also house the largest number of banks recovering from the most recent round of economic difficulties. Additional taxes on these institutions can only serve to retard the economic recovery. For every dollar transferred from banks to the FDIC, the ability of banks to lend is decreased by $10 or so.
We believe the most appropriate course the FDIC board can take is to delay action on the issue until it becomes clear whether the recent improvements in the industry are only temporary.
Mr. Isaac, a former chairman of the Federal Deposit Insurance Corp., is managing director and chief executive of the Secura Group, a Washington-based financial services consulting firm. Mr. Marino is a principal of the firm and was formerly assistant director of research at the FDIC.