WASHINGTON — Although banks are not celebrating a proposed prepayment of their deposit insurance premiums, they are still embracing the plan over other alternatives.

In comment letters, most institutions and trade groups told the Federal Deposit Insurance Corp. that the up-front payment was better than another special assessment. Some small banks complained that the plan would deplete their liquidity, while others suggested ways to make the prepayment more manageable.

"Prepaying of assessments appears to be the least painful and most relevant of all the options offered," John Lund, the chief financial officer at $1.5 billion-asset Rockville Bank in Vernon-Rockville, Conn., wrote on Oct. 7.

The proposal, which was issued Sept. 29 and gave institutions until Wednesday to comment, would provide the FDIC with $45 billion in cash as an advance for all premiums that come due over the next three years. (By Wednesday afternoon, the agency had received 85 comment letters.)

But the plan would not immediately hit bank income, nor immediately rebuild the Deposit Insurance Fund. Instead, institutions would expense their prepaid amount over time, taking a charge each quarter for their normal premium. While the DIF would grow back gradually, the FDIC would get the cash instantly to help pay for failures now.

The FDIC said the DIF's balance was negative at the end of the third quarter. Even though it still has significant resources in its loss reserves ($32 billion in the second quarter), the agency has said its liquidity could be exhausted in 2010 if it does not take action.

After the FDIC charged a special assessment in the second quarter of 20 cents per assets minus capital, on top of banks' normal premiums, institutions of all sizes said the prepayment idea was worlds better than another special assessment.

Chris Scribner, a vice president at Regions Financial Corp., said the company "agrees that the prepayment of these assessments, with the accounting mechanism proposed, is the right step at this time."

"The prepaid assessment allows the industry to maintain primary responsibility for restoring the DIF balance … while minimizing the impact on insured depository institution lending, deposit base, capital and earnings," Scribner wrote in Regions' Oct. 28 letter.

Still, numerous small banks opposed the plan, saying they would have trouble meeting the new liquidity demand. The FDIC's proposal would allow certain distressed institutions to apply for waivers — meaning they would pay premiums under the old system — but details about how an exemption process would work remain unclear.

"Not all banks have the luxury of having excess cash reserves to meet this new up-front expenditure," Richard A. Eichner, the director of retail lending for the $419 million-asset West View Savings Bank in Pittsburgh, wrote in an Oct. 9 letter.

"To fund this unexpected expense, banks would be required to either divert deposits from lending, borrow funds (at a market rate of interest), sell investments (perhaps at penalty) or sell capital stock."

Others suggested a shorter prepayment period. The Independent Community Bankers of America said it generally supported the plan, but proposed a two-year prepayment with the FDIC reserving the option for a third year.

"If, by the end of 2010, the economy and industry has improved sufficiently, then there may be no need for another prepayment," Chris Cole, a senior regulatory counsel for the ICBA, wrote in an Oct. 27 letter.

David Gaddie, the president and chief executive of the $285 million-asset Republic Bank in Duluth, Minn., suggested a "one-year-prepay-at-a-time" program in an Oct. 5 letter. "It allows the banks to maximize our earning assets and provides the agency with significant cash payments each year through 2012."

The American Bankers Association also expressed support for the proposal. However, James Chessen, the ABA's chief economist, wrote in an Oct. 28 letter that the prepayment would come with a cost.

"Most banks, but not all, have the liquidity on hand to meet the prepayment request," Chessen said. "However, as markets continue to improve, having fewer liquid assets makes it more difficult to meet new demands for credit."

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