Bank-insurance fund dwindles; solutions elusive

By Daniel Wagner
Associated Press / September 23, 2009

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WASHINGTON - The Federal Deposit Insurance Corp. is weighing several costly and never-before-used options to shore up the dwindling fund that insures bank deposits.

It might borrow billions from healthy banks, or impose a special fee on the industry.

Borrowing would take dollars out of the private sector, making that money unavailable for investment. But charging the whole industry a fee could push weaker banks toward failure.

A third option, borrowing from the US Treasury, may be politically unpalatable.

A fourth option would be to have banks pay their regular insurance premiums early. But this would not solve long-term needs.

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

The FDIC is expected to propose a solution next week.

Bank failures have drained the fund to its lowest level since 1992, in the depths of the savings-and-loan crisis. The fund insures deposit bank accounts of up to $250,000. Ninety-four banks have failed this year; hundreds more are expected to fall in coming years.

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

But taking billions from large, healthy banks would prevent it from being invested. That could slow an economic recovery, analysts said.

An emergency fee levied on the industry would allow the healthiest banks to keep more capital for investment. But it could drive shakier banks toward failure - further depleting the fund.

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

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 the FDIC might collect banks’ regular insurance premiums early, but exempt banks too weak to pay in advance. That would solve immediate cash needs. But Seiberg called it “a one-time gimmick.’’

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. The American Bankers Association endorsed borrowing from banks or collecting regular premiums early.