WASHINGTON — Bankers and some lawmakers reacted with a mix of uncertainty and outrage on Wednesday after the conference committee opted to raise deposit insurance premiums on large institutions in an effort to pay the costs of the regulatory reform bill.
The panel approved a 20-basis-point hike in the Federal Deposit Insurance Corp.'s minimum ratio of reserves to insured deposits, to 1.35%, but limited the higher premiums that would cause to banks with more than $10 billion of assets.
Some Republicans derided the move as a "budgetary gimmick," and warned that Congress could again raise the reserve ratio the next time it needs to pay for new legislation.
"There's no question that this opens a Pandora's box relevant to the FDIC," said Sen. Judd Gregg, R-N.H., a member of the conference committee, in an interview. "If Congress can use this to offset dollars here, they can offset billions and billions in new spending claiming that the FDIC funds are available."
Some regional banks were even angrier. The proposed bank tax, which was removed and replaced with the higher reserve ratio, targeted just financial firms with more than $50 billion of assets.
But there are 69 banks between $10 billion and $50 billion that will now be subjected to higher premiums as a result of the bill. (A total of 105 institutions have more than $10 billion of assets.)
Some of those banks argued Wednesday that they had not caused the financial crisis, but now were required to pay for it.
"The midsize banks of $50 billion or less, we aren't the one who caused these problems," said Gerald Howard Lipkin, chairman and president of $14 billion-asset Valley National Bank in Wayne, N.J. "We didn't make subprime mortgages at Valley. We didn't securitize products that were bad for the consumer and bad for the country."
He argued that the largest banks should pay.
"If you cause the problem, you should pay to fix it," he said. "In the case of the oil spill, they're going after BP. They're not going after the little gas station on the corner who sells Gulf Oil."
Still, some observers said the new provision makes sense. They said the use of FDIC premiums as a budget item is not new, and that the FDIC would have been likely to raise the reserve ratio on its own anyway.
"It builds on the overall framework of changes to deposit insurance, which are intended to and will punish banks based on size," said Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc. "In that way, I didn't find it that drastic. The overall framework is a complete rewrite and this is the cherry on top, if you will."
Under the provision, the FDIC could continue its current restoration plan for the battered Deposit Insurance Fund, raising the ratio — now at negative 0.38% — to the current statutory minimum of 1.15% by early 2017. After that, the agency would develop measures to boost it 20 basis points higher by 2020.
Still uncertain was how the FDIC was going to bolster the fund while ensuring community banks did not pay higher premiums.
"The issue is: what happens in that intervening time period?" asked James Chessen, the chief economist of the American Bankers Association. "I can't believe that the FDIC would allow no premiums to be paid by smaller institutions in that interim period. How are they going to have a rule that is consistent with what this law requires?"
Yet FDIC officials, who have argued for years about the need to build up the fund in good times to prepare for future failures, were not alarmed.
Paul Nash, the deputy to the FDIC chairman for external affairs, said the agency projects it can hit 1.35% by simply extending the current premium rates for an additional three years. By the time it reaches 1.15%, it can decide how to shift the proportion of the premium burden toward larger institutions.
"While this was a Congressional initiative, we don't necessarily view this as being as complicated as others do," he said. "When we ran the numbers, it seemed that extending that plan with those same rates gets us to 1.35% in the new statutory time frame. It's not a change in what we're doing. It's just an extension of how long we're going to do it."
He said any change would be put out for comment in advance and ultimately approved by the FDIC's board.
Still, moving to 1.35% is a dramatic step compared with the agency's recent reserve levels. Until 2006, the reserve ratio was mandated by law at 1.25%. If the fund were at or above that level, healthy banks could not be charged premiums. But Congress finally made changes four years ago that let the agency set a target ratio anywhere between 1.15% and 1.5%.
If the final reform bill becomes law, the agency cannot lower the ratio below 1.35%, but due to other changes in the legislation, is free to build up the fund as much as it wants.
Nash said the crisis has proven that premium levels were too low when times were good.
"The FDIC views it as good policy to increase the reserve ratio," he said. Before the last crisis "we wanted to build up the fund but we couldn't, so the idea of having a bigger cushion is sound policy."
But some former FDIC officials disagreed with how Congress arrived at the provision.
Lawmakers turned "the FDIC into a political football," said William Isaac, a former FDIC chairman who is now chairman of Fifth Third Bancorp, who said he was not speaking for the bank. "You want to raise taxes, but you don't want to call it 'taxes,' so you order the FDIC to hike its premiums. That's a tax."
Isaac said targeting firms with more than $10 billion of assets captured too many small banks.
"It's a terribly unfair and unwise tax," he said.
"There are a whole host of banks larger than $10 billion that had nothing to do with creating the crisis and have not cost the Tarp any money at all, and here they are trying to raise their FDIC premiums in order to justify raising taxes without having to call it raising taxes. That's opening a door that we don't want to go through."
John Bovenzi, a former chief operating officer at the Federal Deposit Insurance Corp. and now a partner at Marsh & McLennan Co.'s Oliver Wyman, agreed with the principle of a higher reserve ratio, but a safer system didn't appear to be why Congress was making the move.
"It seemed like it was for a slightly different purpose," he said. "On its own, the idea of a higher reserve ratio makes sense."
Gregg, meanwhile, said the whole idea was a "fraud," saying money in the DIF is there to pay depositors, not fund the reform bill.
"This is double-counting: claiming you're using the money for one thing and then actually using it for another," he said.