FDIC Fund Strained by Bank Failures May Have to Raise Premiums
Aug. 11 (Bloomberg) -- The failure of IndyMac Bancorp Inc. and seven other banks this year may erase as much as 17 percent of a government insurance fund and raise premiums for all banks, from Franklin National of Minneapolis to Bank of America Corp.
The closing of IndyMac in July, the third-biggest U.S. bank failure, may cost the fund $4 billion to $8 billion, in addition to an estimated $1.16 billion for seven closures through Aug. 1. Premiums for deposit insurance will likely rise, FDIC Chairman Sheila Bair said in a July 30 interview. A decision on the increase is due by the fourth quarter.
``It's going to be a bloody, expensive mess for the banking industry,'' said Bert Ely, president of Ely & Co. Inc., a bank consulting firm based in Alexandria, Virginia. ``Healthy banks are paying for the mistakes made by failed banks.''
The pace of bank closings is accelerating as financial firms have reported almost $495 billion in writedowns and credit losses since 2007. The FDIC's ``problem'' bank list grew by 18 percent in the first quarter from the fourth, to 90 banks with combined assets of $26.3 billion. A revised list is due this month. The insurance fund had $52.8 billion as of March 31.
The FDIC estimated its shutdown of California-based mortgage lender IndyMac might drain as much as 15 percent from the fund. Seven other banks will take about $1.16 billion, or about 2 percent.
The potential $9.16 billion in withdrawals would be the highest since the insurance account was created in 1933, Diane Ellis, the FDIC's associate director of financial-risk management, said in a telephone interview. The savings-and-loan collapse pulled a then-record $6.9 billion in 1988, Ellis said.
The FDIC is required to shore up the fund when the reserve ratio, or the balance divided by the insured deposits, slips below 1.15 percent or is forecast to fall below that level within six months. A 2006 law directs the agency to take steps to reach the 1.15 percent ratio within five years.
``Raising rates is our first and best option if we need to get more revenue to increase the fund and the reserve ratio,'' Ellis said.
The ratio fell to 1.19 percent in the first quarter from 1.22 percent the previous quarter, the agency reported in March. IndyMac's collapse may push it down at least 9 basis points, to below the 1.15 percent threshold, Ellis said. A basis point is 0.01 percentage point.
Premiums charged banks in 2007, which averaged 5.4 cents per $100 of insured deposits, were based on risk levels and capital determined by the FDIC. Troubled banks pay higher rates, the agency said. A new rate hasn't been determined, Ellis said.
Bank of America is the biggest U.S. bank by deposits, with almost $800 billion as of March 31, followed by JPMorgan Chase & Co., Wachovia Corp., Wells Fargo & Co. and Citigroup Inc., the FDIC said. Franklin National had $100 million in deposits.
The fund will collect about $5 billion this year as insured banks pay an estimated $2.5 billion and the fund balance generates about $2.5 billion in interest, said James Chessen, chief economist at the American Bankers Association, a Washington-based industry group.
``Certainly, the industry is ready to step up to the plate and make sure the FDIC is financially secure,'' Chessen said. ``That has to be balanced against the fact that money coming back to Washington is money that banks can't use'' to lend in local communities.
The 90 banks the FDIC reported on its ``problem'' list as of March, up from 76 in the fourth quarter, had a combined $26.3 billion in assets, or about 0.2 percent of total assets in FDIC- insured banks.
``It's still very small historically and unlikely to cause significant problems to the FDIC fund,'' Chessen said.
Bank regulators, including Bair, said last month more banks will fail as the pace of shutdowns returns to normal levels. She said historically 13 percent of banks on the list fail.
Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine, said he expects 300 U.S. banks to fail in the next few years, mainly because of mounting losses from real estate-related loans.
Besides increasing premiums, the FDIC has options if failures escalate and further drain the fund. The agency can tap a $30 billion line of credit at the Treasury Department and borrow up to $40 billion from the Federal Financing Bank to cover assets at failed banks.
As a last resort, the U.S. Congress can step in to protect depositors with legislation and appropriations as it did during the savings-and-loan crisis by creating the Resolution Trust Corp. in 1989 to manage the closings of 747 failed thrifts.
``So if Armageddon scenarios did play out, the people's deposits would be backed by the full faith and credit of the United States government,'' Bair, 54, said on July 30.
The banking industry would ultimately be responsible for any government spending, Bair added.
``Even if we did have to call upon our taxpayers' backstop, our statute requires us to pay back those funds over time through industry assessment,'' she said. ``So, ultimately, the taxpayer would not pay.''
The FDIC insures deposits of up to $100,000 per depositor per bank and up to $250,000 for some retirement accounts at 8,494 lenders with $13.4 trillion in assets.