Assessment aimed at replenishing nation's depleted insurance fund
NORTH BAY - Banks are facing a one-time increase in their insurance premiums to shore up the Federal Deposit Insurance Corp., a move experts are saying will further inhibit lending.
The board of directors of the FDIC voted to levy a special assessment on insured institutions as part of the agency's efforts to rebuild the insurance fund, which has been dwindling due to the increasingly high number of bank closures. The final rule establishes a special assessment of five basis points on each FDIC-insured depository institution's assets, minus its Tier 1 capital, as of June 30. The special assessment will be collected Sept. 30. Each basis point is equal to one one-hundredth of a percent.
For instance, a bank with assets at $100 million would have to come up with $50,000.
Some said community banks are being unfairly punished for the mistakes of large institutions.
"There isn't much question that the big banks that are called 'too big to fail' have caused much more damage to the FDIC fund and the United States government than community banks," said John Friedemann, an attorney with Friedemann Goldberg in Santa Rosa who advises banks.
He said it is unfair that community banks are bearing a disproportionate share of that cost incurred by the larger banks.
"There ought to be a special premium for being 'too big to fail' to level the playing field for community banks."
He contends that most of the dangerous loans that caused the problems are not generally done by community banks but by banks that the government will not allow to fail.
FDIC Chairman Sheila Bair said she recognizes the "assessments are a significant expense, particularly during a financial crisis and recession when bank earnings are under pressure."
She said the FDIC acknowledges assessments reduce the funds that banks can lend in their communities to help revitalize the economy.
"On the other hand, deposit insurance provides a benefit for which banks have always paid. And backed by deposit insurance, deposit funding costs have fallen significantly, approaching historic lows. Indeed, the unique ability of banks to access low-cost, government-backed deposits has contributed to the recent increased profitability of many banks. For these reasons, we have tried to strike the right balance between keeping the assessment low enough so that it does not unduly burden lending capacity with our longstanding commitment to cover all projected costs through industry assessments, not taxpayer borrowing."
There have not been assessment fees like this anytime recently.
"This is probably not going to be the last time this happens," said Dennis Kelley, chief financial officer of Summit State Bank in Santa Rosa.
In the FDIC report on the first quarter of 2009, there is a reported $13 billion balance for the Deposit Insurance Fund, covering $4.8 trillion in deposits. In the first quarter of 2008, the fund had $52.8 billion covering $4.4 trillion.
Bankers said they expect the FDIC will be back.
"There are going to be more bank failures across the United States," said Brian Kelly, president and chief executive officer of Charter Oak Bank in Napa.