FDIC takes first steps toward raising $45 billion from banks

US BanksFederal regulators on Tuesday proposed raising an additional $45 billion from the nation’s banks to help rebuild the fund that insures customer deposits as an increasing number of failures threaten to drain the fund’s reserves.

The board of the Federal Deposit Insurance Corp. voted unanimously to seek public comment on a plan to have banks prepay the next three years of premiums into the agency’s Deposit Insurance Fund. The fund, which insures bank accounts up to $250,000 in case a bank fails, is paid through assessments on financial institutions.

But the financial crisis and deep recession have caused the fund to drop below its mandated level as it has paid to cover deposits at failed banks. So far this year, 94 banks have failed. The FDIC now projects bank failures through 2013 could cost an additional $100 billion, up sharply from the $70 billion projected in May.

If no action is taken, the FDIC projects the fund would run out of cash in the first three months of next year.

The FDIC could raise more money for the fund by increasing the premiums that banks pay. But it has already done that once this year, and regulators are concerned about how another increase would affect the struggling banking industry. And the FDIC is hesitant to tap a line of credit with the Treasury Department because of concerns about a public backlash to more taxpayer money going to help banks.

So FDIC Chairwoman Sheila Bair proposed that the agency essentially get an advance from the banks by having them prepay three years of assessments. Banks will be able to write off the expense quarterly, spreading the cost over the three years.

Bair stressed that the fund remains solid and that bank deposits continue to be “100 percent safe.” She noted the fund is backed by the U.S. government, but that she did not want to turn to that option yet.

“It’s clear that the American people would prefer to see an end to policies that look to the federal balance sheet as a remedy for every problem,” Bair said. “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.”

The public will have 30 days to comment on the proposal.

The American Bankers Association praised the FDIC proposal, saying it was better than increasing the insurance assessment that banks pay. The group noted that banks will pay almost $17 billion into the fund in assessments this year, including a $5.6-billion increase in the second quarter.

“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,” said James Chessen, the group’s chief economist.

(c) 2009, Tribune Co. Source: McClatchy-Tribune Information Services.