FDIC Wants to Raise Bank Premiums

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WASHINGTON -- The Federal Deposit Insurance Corp. on Tuesday proposed charging banks higher premiums to insure protected deposits due to the continuing turmoil in the banking industry and the likelihood of more banks failing.

The proposal from the agency's staff calls for a dramatic increase in the assessment rate that banks pay the federal government to back deposit accounts, particularly for firms more likely to face financial troubles. As soon as April the average assessment rate for the entire industry will be 13.5 cents for every $100 of domestic deposits, compared to 6.3 cents under current regulations.

More immediately, the agency proposed an across-the-board increase of seven basis points for the first quarter of 2009, boosting the assessment rate to between 12 cents and 50 cents from the current range of five cents to 43 cents based on a bank's risk profile.

"Staff expects that housing price declines, financial market turmoil, and generally weaker economic conditions will continue to exert stress on banking industry earnings and credit quality in the near term," the FDIC proposal said.

The increase comes as the FDIC's deposit insurance fund has come under significant pressure in recent months due to the rising number of bank failures, including the collapse of sizable firms such as IndyMac. The agency predicted Tuesday that bank failures could cost the fund around $40 billion from 2008 to 2013, $13 billion of which is expected to stem from failures this year alone.

Those failures have strained the FDIC's ability to maintain the 1.15% reserve ratio for the fund required under federal law. The agency said the ratio was 1.01% as of June 30, the lowest ratio for a combined bank and thrift insurance fund since 1995. More importantly, the agency warned that the reserve ratio could fall a low of 0.65% in early 2009 as failures continue.

Beginning in the second quarter of 2009, the FDIC proposal calls for a new risk-based premium structure that would charge banks higher premiums if they engage in more risky behaviors that raise the FDIC's liability if a bank fails. For those banks considered the least risky, which covers around 90% of the industry, the new premium rate would range from eight cents to 21 cents for every $100 of deposits.

For all banks, the new premium rate guidelines called for an assessment of between eight cents and 77.5 cents, with the latter figure reserved for banks with high levels of brokered deposits and secured liabilities.

In an effort to encourage banks to limit the FDIC's exposure, the new premium structure would reduce a bank's premium rate by up to two basis points based on the amount of unsecured debt held by the institution. Unsecured debt is subordinate to claims by depositors so agency staff said they wanted to include a bias to encourage firms to use unsecured debt.

Conversely, the new guidelines would increase a bank's assessment rate if they have high levels of secured liabilities, since those claims must be paid before depositors can make claims in the event of a failure. The secured liability charge could increase a bank's premium rate by between 0 and 22.5 basis points based on their risk profile.

The proposal also takes aim at banks that have taken on large numbers of brokered deposits, which FDIC Chairman Sheila Bair has blamed for contributing to some of the bank failures this year. Under the new plan, banks already considered more risky would face a higher charge if brokered deposits make up more than 10% of the institution's domestic deposits.

The FDIC said the greater risk tied to broker deposits warrants the higher charge.

"The lower franchise value of the failed institution created by its reliance on brokered deposits leads to a lower price for the failed institution, which increases the FDIC's loss upon failure," the proposal said.

The FDIC said it expects this new system to generate an additional $10 billion of revenue for the fund annually, as a one basis point increase brings in $700 million annually based on the agency's current deposit base.

The FDIC proposal does not take into account Congress' decision to temporarily increase the deposit insurance limit for many accounts to $250,000 from $100,000 as part of the financial industry rescue package enacted last week. Staff said that if the increase is made permanent it would have to adjust its assessment system to account for the agency's higher liability.

The proposal was scheduled to be voted on by the FDIC's board of directors on Tuesday, and would be open to 30 days of public comment. The FDIC's board would then issue a final rule, with a final vote expected in December.