Banks May Prepay Assessments to Strengthen FDIC Fund
A long year of weekly bank closures — the most recent costing about $892m —pressured the Federal Deposit Insurance Corp.'s (FDIC) insurance fund as the financial industry handles the full extent of default-related loan losses. The FDIC is seeking to proactively replenish a pressured insurance fund, proposing a rule Tuesday that would require insured institutions to prepay three years of quarterly assessments. Banks that pay for Q409 assessments would also prepay the estimated quarterly assessments for all of 2010, 2011 and 2012. This strategy should allow the industry to strengthen the cash position of the FDIC's deposit insurance fund outside of alternatives like borrowing from the Treasury Department. "The decision today is really about how and when the industry fulfills its obligation to the insurance fund," said FDIC chairman Sheila Bair in a statement Tuesday. The FDIC estimates the prepaid assessments would raise about $45bn for the insurance fund. The banking industry should have sufficient liquidity to prepay the assessments, the FDIC said, indicating insured institutions held more than $1.3trn in liquid balances as of June 30 – A 22% increase over the same time last year. The FDIC said pursuing prepaid assessments should prove less likely to impair bank lending than a one-time special assessment. "In choosing this path, it should be clear to the public that the industry will not simply tap the shoulder of the increasingly weary taxpayer," Bair added. "This proposal is a vote of confidence for the banking industry's resilience and will continue to recover its strength as we work through the significant challenges ahead." The FDIC board also voted to adopt a uniform 3bps increase in assessment rates effective Jan. 1, 2011 and to extend the restoration period from seven to eight years. The FDIC is seeking public comment on the proposed rule for up to 30 days after its publication in the Federal Register. Industry groups are already speaking up on the proposed rule, with the American Bankers Association (ABA) issuing a response early Tuesday. ABA chief economist James Chessen indicated prepaid assessments would represent money the FDIC expects to receive from banks over the next several years. Having the cash on hand sooner rather than later, Chessen added, provides more flexibility in managing "contingencies" and covering losses related to bank closures. “This year banks will pay nearly $17bn in premiums – including the large $5.6bn special assessment paid in the second quarter," Chessen said. "Another special assessment would likely do more harm than good as it would directly reduce bank income, hinder capital growth, and make lending much more difficult. At this critical time, when the economy is just beginning its recovery, looking to options that are less pro-cyclical and that spread the cost over time is the right policy.” Write to Diana Golobay.