average premium of 4.4 cents back in August, it justified the rate as a reflection of the Bank Insurance Fund's historical losses. While ecstatic over the 83% cut in premiums, bankers urged the FDIC to go even lower. FDIC Chairman Ricki Helfer resisted, insisting the agency must manage the fund for the long term. All that changed last week. On Tuesday, the FDIC cut the average premiums to less than half a cent per $100 of insured deposits - with 92% of banks paying only the legal minimum of $2,000 a year. At the FDIC's board meeting to vote on the reduction, there was less talk of history and much more about the need to stick to the 1.25% reserve ratio set by law. "It appears that with the emphasis on keeping the ratio at 1.25%, we're turning the process into pay-as-you-go," complained Jonathan Fiechter, who as acting director of the Office of Thrift Supervision sits on the FDIC board. What happened? Has the FDIC shifted gears on how it sets insurance premiums? Well, yes, it has. But not because it wanted to. FDIC staff members still prefer the idea of setting rates on the basis of loss experience - as insurance companies do - and avoiding the sharp changes in rates inherent in sticking to a strict reserve ratio and making banks pay for fund losses as they occur. But the bank fund's reserves had simply grown too far beyond the 1.25% reserve target set by Congress in 1991 to stick to that approach. "If it weren't for the law, probably we'd be trying to emulate what an insurance company does," said Roger Watson, the FDIC's director of research and statistics and Ms. Helfer's point man on insurance premiums. "But we have statutory provisions that prohibit us from doing that in good times." Even in August, it was clear that an average premium at the low end of the FDIC's historical scale of 4.5 to 13 basis points would probably put the bank fund's reserves at well above 1.25% of insured deposits by Dec. 31. But current law is vague about just what the FDIC is to do when fund reserves are above 1.25%, and under the agency's short-term worst-case scenario - a $4 billion bank failure and 6% growth in insured deposits - the reserve ratio would have dropped to 1.24% at the end of the year. FDIC staffers in August felt this gave them enough legal wiggle room to recommend premiums ranging from 4 basis points for the best-rated banks to 31 basis points for the worst. In fact, it is the best-case scenario that is coming to pass. Yearend reserves will fall between 1.31% and 1.34% of insured deposits, the FDIC estimates. This, Mr. Watson said, made it impossible to justify keeping premiums higher than zero for most banks. "This time we tried to look at the same factors" as in August, he said. "The main difference is that now the worst-case scenario brings the fund above 1.25%." If the FDIC had left premiums at 4.4 cents, the agency's worst-case scenario would have put bank fund reserves at 1.28% of insured deposits by June 30. With the new premiums, which range from near zero for the best- rated banks to 27 basis points for the worst, the reserve ratio is expected to end up somewhere between 1.25% and 1.37%. Another difference between August and November is that Congress is on the verge of enacting legislation that orders the FDIC to set healthy banks' premiums at zero - as the agency did Tuesday - whenever fund reserves are at 1.25% or higher. Was the FDIC reacting to actions on Capitol Hill, or perhaps trying to steal Congress' thunder? "I'm sure that whole business crossed people's minds when they were looking at this, but I don't think it was a driving factor," Mr. Watson said. "We would have done it anyway." The argument that even existing law left the FDIC little choice but to cut banks' premiums finally overcame Mr. Fiechter's reluctance. "It's unfortunate, but I know it's a statutory constraint," he said before casting his vote in favor of the rate cut.

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