WASHINGTON — The growing number of failures this year — now more than three times their total for all of 2008 — has pushed the chances of a second special deposit insurance premium to a near certainty.
The Federal Deposit Insurance Corp. warned in May that a second special assessment could be in the offing when it charged banks 5 cents for every $100 of assets minus Tier 1 capital. In the three months since, 43 banks, with $41 billion of assets, have collapsed, costing the Deposit Insurance Fund an estimated $8 billion. The collapses have taken a toll on federal reserves, which stood at $13 billion on March 31, their lowest point since 1993.
Observers said another special assessment will be needed to keep the fund from exhaustion.
"The size of the insurance fund is diminishing significantly, so I suspect that the good players are now going to be paying for the sins of the failures," said James Rockett, a co-chairman of the financial institutions group at Bingham McCutchen LLP, a lawfirm in San Francisco.
How much the FDIC would charge is debatable, but it would be partly based on the ratio of reserves to insured deposits. In late May, the last time the FDIC updated the figure, the reserve ratio stood at 0.27% — 88 basis points below its statutory minimum. An even clearer picture will come Aug. 27, when the FDIC is scheduled to give its second-quarter report on the banking industry's health.
With the reserve ratio in decline, FDIC Chairman Sheila Bair has warned that the industry would probably face a second special assessment by yearend. "We think there is a good probability that we will have to do another special assessment in the fourth quarter," she said in May.
Though some industry representatives had held out hope that a second charge might not be needed, most observers now agree another assessment is inevitable.
"The fear in the industry is that the special assessment is not that special, and is going to be repeated," said Kip Weissman, a partner in Luse Gorman Pomerenk & Schick PC.
Weissman said the FDIC has moved expeditiously to resolve the glut of failures but that the result may be more expensive collapses.
"The good news is, the receiverships have moved quickly, which helps the FDIC address their manpower issues and enhances confidence in the banking industry," he said. "The bad news is that it's a fairly expensive way to go."
Under the special assessment rule adopted in May, the FDIC board has the power to charge additional special assessments based on third- and fourth-quarter call report data. The rule came just after the May 21 failure of $13 billion-asset BankUnited in Florida, which at the time was the year's largest failure. But Friday's collapse of $25 billion-asset Colonial Bancshares eclipsed the earlier closure. If failures continue at this pace, they will top 100 for the first time since the savings and loan crisis.
Still unclear is exactly how much the FDIC would charge, and on what basis. The special assessment was the first premium based on assets, not domestic deposits — a calculation that imposed bigger premiums on larger institutions. At the time, Comptroller of the Currency John Dugan objected, calling it unprecedented. But most observers said the agency is likely to continue basing any new special assessment on assets.
Observers were split on whether the agency would charge more or less than 5 basis points in any subsequent assessment.
Some said the FDIC could not afford to burden the industry more than it had in the second quarter, but others said a higher special rate is possible.
"I have a strong suspicion that the FDIC will levy another special assessment on the industry, probably sooner rather than later," said Camden Fine, the chief executive of the Independent Community Bankers of America. "Another special assessment is a probability … , and I think that it will probably be more than 5 cents — that's my fear. It could be as much as 8 cents."
But James Chessen, the American Bankers Association's chief economist, said the agency may charge less than 5 basis points.
He, like others, said a key factor for the FDIC in determining whether more special assessments are necessary is gauging what its future losses are likely to be from failures that have not yet occurred.
"My sense is, they're on the pace of failure cost that they expected this year. I don't think there's been much change," he said. "The unknown is: Are the costs increasing for next year, which they have to reserve for? With the possibility of commercial real estate losses and higher consumer losses — particularly on credit cards — I think that increases the potential for greater losses."
Rockett agreed. "A lot is going to turn on the pace of bank failures in the future, and that's going to turn really on whether we're going to see continuing weakness in commercial real estate loans and" commercial and industrial "loans," he said. "Right now, there's some reason for optimism in that area. But if they continue to deteriorate, they're probably going to need additional funding."