WASHINGTON — The White House is projecting a massive increase in costs to the Federal Deposit Insurance Corp. from bank failures over the next two years, but experts disagree over the reliability of the administration's numbers.
The Office of Management and Budget released details on the proposed 2010 budget last week that estimated failure-related expenses would total a whopping $91 billion through the 2010 fiscal year.
The estimate contrasts sharply with that of the FDIC, which has projected net losses of $65 billion through 2013. Industry representatives wasted little time in arguing the figures were exaggerated.
"These numbers are crazy," said James Chessen, the chief economist of the American Bankers Association. "There's no relationship between these numbers and the reality of the health of the banking industry."
Differences between FDIC and OMB projections are not new, and previous administrations have had a poor track record when predicting failures. Several Bush administration budgets predicted failures — and a corresponding increase in premiums — that did not materialize. For example, in the 2004 fiscal-year budget, OMB projected $1.1 billion in losses. Actual failure costs were less than $200 million. "They've always been on the pessimistic side of the world," Chessen said.
Observers attributed the discrepancy this year to the administration's more conservative view of the industry's recovery, the OMB's focus on a fiscal-year cycle (the FDIC uses calendar years) and the White House's use of factors preferred by private insurers in their estimates.
George Pennacchi, a University of Illinois at Urbana-Champaign finance professor and a former consultant to the OMB, said the administration weights more heavily than the FDIC a certain risk calculation — known as "systematic" risk — that deems large banks more likely to fail in a recession. Private insurance companies typically use such a factor in charging premiums, he said.
"Because banks tend to fail during economic downturns, if you looked at what would be the cost of that insurance, it would be greater than the expected losses," said Pennacchi, who called the FDIC's approach "wrongheaded."
"An insurer whose losses are greater during economic downturns … is going to require an additional charge above expected losses. That's why if you look at the value of covering those losses, the OMB is going to be greater than the FDIC."
The OMB, whose fiscal year ends Sept. 30, estimates expenses from resolutions will total $53.7 billion in fiscal 2009 and $37.4 billion in fiscal 2010. (That is compared with just $11 billion in expenses that the OMB said hit the FDIC in 2008, and the $5 billion in total losses that the FDIC has estimated for failures that have already occurred in 2009.)
The OMB has also projected hefty revenue into the FDIC through next year that will offset some of the large costs. For example, asset recoveries — which include sales of failed-bank assets — are estimated to total $81 billion in 2009, and $104 billion in 2010.
The OMB said the FDIC is expected to raise $21 billion in 2009 through assessments, and $24 billion in 2010. Though the FDIC is still in the process of finalizing its premium plan, it has previously said it could raise as much as $27 billion this year from both regular premiums and a 20-basis point special assessment on the industry to make up for significant losses to the Deposit Insurance Fund.
Yet the final special assessment is expected to be much lower than 20 basis points, and would likely not exist next year, meaning a softer premium hit than indicated by OMB.