WASHINGTON - Voting unanimously to hold second-half premium rates steady, the Federal Deposit Insurance Corp. on Tuesday released its forecast of potential losses this year and predicted reserves held by the bank and thrift funds would remain above the statutory minimum of $1.25 for every $100 of insured deposits.
Keeping the funds' reserves above 1.25% is important, because if they dip below that mark, banks and thrifts could face hefty premiums for the first time since 1995, when the FDIC stopped charging most institutions for insurance. At the end of last year the Bank Insurance Fund held $30.975 billion, putting its reserve ratio at 1.35%. By yearend, the FDIC said, the reserve ratio could drop as low as 1.28% or grow to 1.38%. The outcome depends on three factors: deposit growth; insurance losses; and the value of short-term securities held by the fund.
The agency's pessimistic scenario assumes deposits will grow 7% this year, which would match last year's pace but is much higher than in recent years. Banks that add deposits without paying premiums dilute the bank fund's reserves.
Roughly a quarter of the 7% increase was caused by investment banking firms like Merrill Lynch & Co. sweeping funds into insured accounts, according to the FDIC. Stock market volatility and higher interest rates also made certificates of deposits more attractive, the agency said.
Insured deposits would have to grow $170 billion this year to bring the bank fund's reserve ratio below 1.25%. The FDIC termed that "unlikely," but noted that in addition to Merrill Lynch's and Salomon Smith Barney's sweep programs, "there are other large brokerage/mutual fund companies with uninsured money market balances totaling in excess of $180 billion.
"These companies have not announced any plans to sweep these balances into insurance accounts, but this cannot be ruled out."
The second variable is insurance losses, which the FDIC breaks down into losses on banks that have already failed and provisions it must make for potential future failures. This second component is much larger, as the FDIC estimated these contingent liabilities at $100 million to $600 million this year. Which end of that spectrum becomes reality will depend on "the duration and depth of the current economic slowdown," the FDIC said.
Finally, the bank fund's reserves are affected by the value of the securities it holds available for sale. According to the FDIC's forecast, these securities could range from an unrealized loss of $91 million this year to an unrealized gain of $377 million.
The agency said banks will pay an average annual premium this year of 0.13 cents for every $100 of domestic deposits at banks, compared with 0.11 cents last year. Total revenue from premiums paid by banks this year is expected to be $43 million.
How much a bank pays depends on its capital level and supervisory rating. The FDIC slots banks into one of nine boxes on a matrix based on these two factors. Banks in what's called the 1-A box - the best-capitalized and best-managed ones - receive deposit insurance without paying any premium.
Roughly 97% of the industry's assets fall in this category, which has led critics to question how well the system works. The agency has sent Congress a series of suggested improvements.
For the current assessment period, the FDIC said it kicked 189 banks with $38.3 billion of assets out of the 1-A box, and moved 145 banks with $36.8 billion of assets into the prized category.