FDIC plans to raise cost to banks
Posted on Friday, October 3, 2008
When banks were flush, most of them paid nothing for a golden government guarantee. Bank failures were so rare that, for a decade, the Federal Deposit Insurance Corp. waived most of the premiums it normally would have collected to insure bank deposits.
But now the government plans to raise the amount of deposit insurance that consumers have, leaving the FDIC — and potentially taxpayers — in a bind.
After forgoing premiums from 1996 to 2006, the agency must now turn to struggling banks and ask them to pay more, putting more pressure on the industry. If a large number of banks fail, the FDIC may have to turn to the Treasury for more money, forcing taxpayers to foot the bill.
“It’s unfortunate that we didn’t have more time to build up the fund in the good times,” said FDIC Chairman Sheila Bair in an interview Wednesday. “It is what it is, and we are dealing with the situation.”
The measure to raise the limit is part of the government bailout plan that the Senate passed Wednesday night by a vote of 74-25. The FDIC board, for its part, will propose raising premiums for its member banks on Tuesday to shore up the insurance fund, and that increase may not be the last, Bair said. Banks that the FDIC deems risky will have to pay higher rates.
The FDIC insures roughly $ 4. 5 trillion in deposits and has $ 45. 2 billion in its fund. If the bill passes, those numbers would change substantially. Currently, the FDIC insures deposits up to $ 100, 000. The proposal is to raise that to $ 250, 000.
The limit has not been raised for nearly three decades and the increase is intended to bolster customers’ confidence and avert the kind of runs that toppled Washington Mutual, the nation’s largest savings and loan.
The Congressional Budget Office estimated that the new provision would extend FDIC coverage to $ 700 billion of currently uninsured deposits. That would increase insured deposits nationwide by about 15 percent, according to a letter sent Wednesday to Christopher Dodd, the Senate Banking Committee chairman.
Proponents say that the move should help calm the nerves of depositors and stabilize the banking industry. After the emergency takeovers of Washington Mutual and Wachovia Corp., bankers have worried about customers withdrawing their money.
Among the biggest beneficiaries will be retirees and smallbusiness customers, who tend to have higher account balances.
Raising the limit should help reassure depositors they do not need to withdraw their money at the first sign of trouble. It sharply reduces the risk of keeping more than $ 100, 000 in the bank.
“It will bring peace of mind to grandmother and mom and dad,” said Cam Fine, the head of the Independent Community Bankers of America, an industry group that lobbied for the increase. “My bankers are getting numerous customers coming into their lobbies and saying, ‘ Is my money safe ?’”
But Fine acknowledged that potentially the biggest effect would be on small-business customers, which often must have more than $ 100, 000 in cash to meet payroll requirements and other needs. If the insurance coverage is increased to $ 250, 000, about 68 percent of all small-business deposits will be insured, according to Oliver Wyman data. Today, about 51 percent of small-business deposits are protected.
Indeed, the move will likely strengthen the competitive position of smaller banks, which are being elbowed out by giants like Bank of America, Citigroup and JPMorgan Chase. Small-business customers have flocked to those institutions, thinking their money is safer because they are “too big to fail.” Some consider keeping deposits in community banks more risky: Despite their local touch, they may be too small for the government to save.
Others, however, question how much the measure will really help. One reason is that customers most likely to pull their money tend to be midsize corporations that keep more than $ 250, 000 in cash in an account.
“A greater stabilizing source would be to insure all deposits in transaction accounts, without limits,” said Michael Poulos, an Oliver Wyman consultant. That would cover about 81 percent of small-business deposits, “but that would look like a giveaway to businesses, rather than helping mom and pop with a big CD.”
William Isaac, who was the chairman of the FDIC between 1981 and 1985, said that lifting the limit to $ 250, 000 is “all show, no substance.”
“It doesn’t do what needs to be done,” he said. “It might make somebody’s grandmother feel good, but that is not the problem that we have in the financial world: Banks won’t lend to other banks.”
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