FDIC weighs extraordinary steps to shore up fund

[September 23, 2009]  WASHINGTON (AP) -- The Federal Deposit Insurance Corp. is weighing several costly -- and never-before-used -- options as it struggles to shore up the dwindling fund that insures bank deposits.

The agency is considering borrowing billions from healthy banks. Alternatively, it may impose a special fee on the banking industry.

Each option carries risk: Drawing money from healthy banks would take dollars out of the private sector, making that money unavailable for investment in the weak economy. But charging the whole industry a fee to replenish the fund could push weaker banks toward failure.

A third option -- borrowing from the Treasury -- is politically unpalatable, since it would resemble another taxpayer-financed bailout.

A fourth option would be to have banks pay their regular insurance premiums early. But this idea wouldn't solve the fund's long-term cash needs.

"The bottom line is, there's no good solution," said Jaret Seiberg, an analyst with the research firm Concept Capital. "This is a fight over which option is least bad."

The FDIC is expected to propose a solution, possibly combining two or more of the options, at a board meeting next week.

Bank failures since the financial crisis struck have drained the fund to its lowest level since 1992, at the peak of the savings-and-loan crisis. The fund insures deposit bank accounts of up to $250,000.

Officials have approached big, healthy banks about making loans to the agency, said two industry officials familiar with the conversations, who requested anonymity because the plans are still evolving. Doing so would help the agency avoid tapping a $100 billion credit line with the Treasury -- something FDIC Chairman Sheila Bair is reluctant to do.

But taking billions from large, healthy banks would remove that money from the private sector and prevent it from being invested. That could slow an economic recovery, analysts said.

Industry and government officials said Tuesday that plan was still on the table. But FDIC spokesman Andrew Gray downplayed its likelihood, saying, "It's an option, but it's not being given serious consideration."

The FDIC also could levy a special emergency fee on the industry. That would allow the healthiest banks to keep more capital for investment. But it could drive shakier banks toward failure -- further depleting the fund. Losses on commercial real estate and other loans are causing multiple bank failures each week.

Banks already have paid one extra fee this year. And Comptroller of the Currency John Dugan, who holds one of the FDIC board's five votes, has cautioned against saddling them with another.

Discussing the option last week, Bair acknowledged, "We don't want to stress the industry too much at this time, when they're still in the process of recovery."

Bair also said then that the agency might collect banks' regular insurance premiums early to infuse the fund with cash. An exemption would likely be provided for banks that are too weak to pay in advance.

This plan would solve the fund's immediate cash needs. But Seiberg called it "a one-time gimmick" that would merely delay another special assessment.

Because the FDIC expects bank failures to cost the fund around $70 billion through 2013, a short-term boost may not be the answer, Seiberg said.

The banking industry and lobbyists oppose another fee. They also want Bair to avoid tapping the Treasury credit line, because it would lead to higher insurance premiums for banks as the FDIC repays the money.

In a letter Monday to Bair, American Bankers Association CEO Ed Yingling endorsed borrowing from the banks or collecting regular premiums early as alternatives to charging another fee.

The special fee imposed earlier this year is hurting banks, already stressed from depressed income and increased loan losses, Yingling said. Another one "may do more harm than good," he said.

One advantage of having big banks lend to the insurance fund would be to give healthy banks a safe harbor for their money and limit their risk-taking, said Daniel Alpert, managing director of the investment bank Westwood Capital LLC in New York.

It also would let the industry's strongest players -- which still rely on FDIC loan guarantees and other emergency subsidies -- help weaker banks avoid paying another fee, he said.

"Lots of banks are going to require more capital, and (Bair is) trying to rob from the rich and give to the poor," said Alpert, who supports the plan as a creative way to avoid another bailout.

Bair's priorities for the industry are different from the Treasury's, analysts said. She is focused on stabilizing the many banks still at risk of failure. Such collapses could further deplete the insurance fund.

Treasury Secretary Timothy Geithner has taken a more hands-off approach to the industry. He wants to wind down government assistance quickly.

Bair and Geithner have sparred on key decisions throughout the financial crisis, including whether to bail out Citigroup Inc. with taxpayer dollars last fall.

In an interview with The Associated Press in December, Bair acknowledged that she and Geithner "have different perspectives frequently," but added, "I think that's a healthy thing."

"You don't want to get everybody in the room nodding," she said.

Ninety-four banks have failed so far this year. Hundreds more are expected to fall in coming years largely because of souring loans for commercial real estate.

The FDIC's fund has slipped to 0.22 percent of insured deposits, below a congressionally mandated minimum of 1.15 percent. The $10.4 billion in the fund at the end of June is down from $13 billion at the end of March, and $45.2 billion in the second quarter of 2008.

Congress in May more than tripled the amount the FDIC could borrow from the Treasury if needed to restore the insurance fund, to $100 billion from $30 billion.

The FDIC then adopted a new system of special fees paid by U.S. financial institutions that shifted more of the burden to bigger banks to help replenish the insurance fund.

That move cut by about two-thirds the amount of special fees to be levied on banks and thrifts compared with an earlier plan. The earlier plan had prompted a wave of protests by small and community banks.

Bair had earlier promised a reduction in fees charged to banks if the Treasury credit line could be expanded.

[Associated Press; By DANIEL WAGNER]

AP Real Estate Writer Alan Zibel contributed to this report.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.