WASHINGTON — Lawmakers moved one step closer to lightening the premium load on financial institutions Wednesday, when the Senate voted 91 to 5 to let the Federal Deposit Insurance Corp. borrow more from the Treasury Department to bolster its reserves.
The bill, authored by Senate Banking Committee Chairman Chris Dodd, would more than triple the FDIC's credit line with the Treasury Department, to $100 billion, to help shoulder costs from bank failures. In addition, the bill would make an even higher credit line available temporarily in emergency situations.
But the legislation would restrict the FDIC from using the funds to help a program devised by the Treasury to allow private investors to buy troubled bank loans.
The bill also would make improvements to the Hope for Homeowners program to help underwater borrowers refinance into government-insured mortgages, and provide servicers that modify mortgages with liability protection.
It would also extend the temporary increase on FDIC insurance to $250,000 per account — originally supposed to expire at the end of this year — to the end of 2013.
With more borrowing power, and additional revenue streams from new government programs, the FDIC has pledged to lower a planned special premium in the second quarter from 20 basis points to less than 10.
"The expansion of that line of credit is just critical to significantly reducing any special assessment on the industry," said James Chessen, the chief economist for the American Bankers Association.
In addition to raising the borrowing limit, the legislation would allow the FDIC to borrow up to $500 billion until the end of next year if the Federal Reserve Board and the Treasury concur it is necessary.
However, in response to some concerns that the funding increase could give the FDIC a blank check to help the Treasury get around restrictions on the Troubled Asset Relief Program, the final bill stated that the agency cannot use the money to "fund obligations … incurred as part of a program established by the Secretary of the Treasury … to purchase or guarantee assets."
The FDIC is set to run a Treasury program that would auction off toxic assets to private investors, who would receive government-backed financing.
The House, which passed its own version of the bill March 5, is expected to support the Senate legislation. The House version would increase the FDIC insurance limit permanently, and it lacks both the restriction against the spending of funds on the Public-Private Investment Program and the emergency funding of up to $500 billion.
Senators said they wanted to ensure the extra money was not used to help the Treasury.
"We tried to address the public concerns that the borrowing authority could be used to cover losses from the PPIP," said a spokeswoman for Sen. Mike Crapo, R-Idaho.
However, the agency would still have significant authority to spend the money as it sees fit.
"They've got some broad leeway," said Sen. Richard Shelby of Alabama, the Banking Committee's ranking Republican. "You should ask" FDIC Chairman "Sheila Bair what she intends to do with the money."
Shelby noted that resolving closed institutions is still the agency's biggest priority.
He said the FDIC had 30 banks that it was close to failing.
During a press conference Wednesday, Dodd said he did not think the FDIC would use the funds for anything other than resolving failed banks.
Andrew Gray, a spokesman for the FDIC, said it has never been the agency's intention to use additional borrowing authority — which was last increased in 1991 — to support the toxic loan program. "We have been clear that we view the $100 billion as just the same authority we have had for years, adjusted for growth in the industry," Gray said.
The spokesman noted that the FDIC already has restrictions on the $30 billion line; for example, borrowings are required to be repaid by charging premiums on the industry. "We also are required to consult with Congress on a repayment schedule that must be pre-approved by Treasury before the funds are released."
