WASHINGTON — The Federal Deposit Insurance Corp. said Tuesday that it will raise the fees it charges to guarantee bank debt, and that it will use the money to reduce a planned special assessment on institutions.
The surcharge will range from 10 to 50 basis points and will apply only to banks that use the program after April 1 and issue debt that matures after a year.
The FDIC is responding to complaints by small banks that they are footing the bills for extraordinary government programs used mainly by large banks.
FDIC Chairman Sheila Bair acknowledged that point at a board meeting Tuesday.
"Only a relatively small portion of the industry — primarily the largest insured depository institutions and their holding companies — actively use the debt guarantee portion" of the program, "but all insured depository institutions ultimately bear the associated risk," she said. "Putting the surcharges directly" in the Deposit Insurance Fund "immediately benefits nonusers, including the majority of smaller institutions, by potentially reducing the proposed special assessment that the board adopted at its last meeting a few weeks ago."
Money the FDIC raises through the surcharge will go into the fund and be used to reduce the cost of a 20-basis-point assessment the agency proposed Feb. 27. Though the agency would not quantify the reduction, industry representatives said they expected the money raised by the surcharge to translate into a reduction of 2 to 4 basis points.
The agency's plans are designed to wean banks off of its debt guarantee by raising the price, as well as to find a new way to rebuild federal reserves. "It's clear that the FDIC is trying to allocate the escalating costs" of replenishing the fund "to those who are making use of the extraordinary features" offered by the agency, said James M. Rockett, a partner at Bingham McCutchen LLP in San Francisco.
The moves were made through an interim rule, which is out for a 15-day comment period.
The FDIC said its Temporary Liquidity Guarantee Program has generated $5.3 billion of fees. The standard fee is 50 to 100 basis points of the debt issued.
The agency is also charging a 10-basis-point fee for separate coverage of no-interest deposits. Both fees are held in a special reserve to cover program losses, but the new rule would allow the surcharges to be added directly to the deposit fund.
This is the second time since the 20-basis-point fee was announced last month that the FDIC has held out the promise of reducing it. Bair said March 5 that the agency would cut the fee if Congress passed legislation to more than triple the agency's line of credit with the Treasury Department, to $100 billion. Sources have said the special assessment could drop to around 10 basis points if the bill were enacted.
Adding in surcharge fees could further reduce the assessment to approximately between 6 and 8 basis points, according to Jim Chessen, the chief economist at the American Bankers Association.
The agency also tacked four months on to the deadline for issuing government guaranteed debt, to Oct. 31, and it said debt could mature six months later than originally planned, at the end of 2012. It also increased surcharges for holding companies that use the program.
Under the plan, banks and thrifts issuing government-guaranteed debt with a maturity of up to three years during the second quarter would pay a 10-basis-point surcharge on top of the standard fee. Holding companies and other qualified affiliates would pay a 20-basis-point surcharge to guarantee such debt.
Those that use the program extensions would pay even more. Insured institutions that issue debt during the extended window — from June 30 to Oct. 31 — or utilize the longer maturity length would pay a 25-basis-point surcharge. Holding companies and other affiliates would pay an added charge of 50 basis points.
FDIC officials and industry representatives say increased costs for holding companies are necessary because they do not pay standard deposit insurance premiums.
If the standard fees were unable to cover losses from any debt defaults, the agency would have to charge an additional premium on the whole industry, including nonparticipants, but by law it could not charge that assessment to holding companies.
"There is a certain disconnect in that both insured institutions and their holding companies can take part in the program, but if there are losses, assessments would only be paid by insured institutions," FDIC Vice Chairman Martin Gruenberg said at the meeting.
Camden Fine, the president and chief executive officer of the Independent Community Bankers of America, agreed that "holding companies should have to pay their fair share anytime they receive advantages through the FDIC."
Agency officials said the surcharges were also designed to force companies to reconsider whether to stay in the program as it reaches its end. Bair said the program extension would continue to provide liquidity, "while at the same time encouraging participants to reduce their reliance on government-guaranteed debt."