Seeking to replenish its reserves with a $45 billion transfusion, the Federal Deposit Insurance Corp. is requiring member banks to prepay premiums for the next three years on Dec. 30 - a strategy that's largely viewed as ill-timed yet necessary.
Since June 2008, the regulatory agency has paid out tens of billions of dollars in claims to depositors who sustained losses when banks holding their money failed. As of Sept. 30, 95 banks had failed this year, and 28 failed in 2008, according to the FDIC, which last October raised its insurance coverage to $250,000 per depositor from $100,000.
FDIC officials have predicted a negative fund balance by Sept. 30. At the end of June, the fund balance had dropped to $10.4 billion, down from more than $45 billion a year ago.
The alarming trend prompted agency officials to impose a one-time special assessment on member banks at the end of September.
On Sept. 29, the FDIC Board of Directors adopted a notice of proposed rulemaking that would require banks to pay their fourth-quarter premiums plus all of their premiums for 2010, 2011 and 2012 on Dec. 30.
"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," FDIC Chairwoman Sheila Bair said in a news release. "This proposal is a vote of confidence for the banking industry's resilience, and it will continue to recover its strength as we work through the significant challenges ahead."
Local bankers polled about the FDIC's move said they're accustomed to paying the regulatory piper, but at least one executive questioned the timing - and logic.
"A lot of these banks don't have the money to pay it," said Dave Tooley, president and CEO of Springfield-based Metropolitan National Bank. "If they're not making the revenue to generate the payment, then it's going to come out of capital, and a lot of banks are thinly capitalized. Most regulators are really pushing these banks ... to get their capital ratios up."
According to the FDIC, the U.S. banking industry has "substantial liquidity to prepay assessments." As of June 30, FDIC-insured institutions held more than $1.3 trillion in liquid balances, or 22 percent more than a year ago.
Ann Marie Baker, southwest region president for Kansas City-based UMB Bank, said that prepaying premiums at the end of the year would affect banks differently, depending on their financial health.
"There's also a concern that this sets cash aside as a nonearning asset," she said. "For some, it may be a liquidity issue, but for some, it's an earnings issue. ... This is probably a good policy choice, but we wish it could be different."
Banks should be able to report the prepaid FDIC premiums as assets on future balance sheets, but cash flow is a consideration, said Jeff Jones, an associate professor of finance at Drury University. At year's end, banks will face a bill roughly 12 times their regular quarterly premium payment.
Jones suggested the FDIC could have softened the blow on banks by offering discounts to those that prepaid their premiums farther out. Such an incentive might have made the regulatory edict slightly more palatable, he said.
FDIC quarterly premiums are based on bank deposits, capitalization, unsecured debt, secured liabilities and brokered deposits. Assessments range from 7 cents per $100 in deposits for the strongest banks to as much as 77.5 cents per $100 in deposits for undercapitalized banks in the highest risk category, according to www.fdic.gov.
Tooley said he'd like some assurances that the FDIC won't hit banks with another special assessment next year after collecting billions of dollars in prepaid premiums in December. Including its special assessment, Metropolitan National Bank's premiums have more than doubled in a year's time, he added.
"We're managing our balance sheet based on regulatory expectations now," Tooley said. "That's just reality. It's going to have to change. We've got to figure out how to make money, so we can preserve the bank's capital."
The FDIC, however, reserves the right to levy special assessments on banks should the fund balance again plummet to perilously low levels.
David McBeath, executive vice president at Springfield-based Citizens National Bank, said that paying the FDIC premiums in advance is preferable to additional special assessments, which amount to unplanned expenses. This year's special assessment - plus second-quarter premiums - cost Citizens National about $160,000, which it paid last week, McBeath said.
"The other side of it is ... people aren't too happy with taxpayer bailouts," he said. "I think it's important that the (banking) industry, along with the FDIC, come up with a solution. Even though the FDIC has the authority to borrow from Treasury, that's ... been considered one of the lesser options."
The FDIC has a $100 billion standing line of credit through the Treasury, and may borrow up to $500 billion through 2010.
This installment of Springfield Business Journal’s Architects & Engineers Project Report showcases 26 endeavors by area design and engineering professionals.
