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.

"The funds will be short. The banks are fortunate it is only five points," he said.

Mr. Kelly attended a breakfast last month given by Ms. Bair in Washington.

"She said it is almost assured there will be another five basis points due at the end of the year. The funds need to be replenished. This is not going to be enough to cover what is needed."

Dennis Pedisich, president and CEO of Napa Community Bank, said this increase will help shore up the banking system. But, he said, "It hurts the short-term risk of the banks. It is a big hit."

And it is not just the one-time assessment that is causing community banks harm.

Because last year the FDIC agreed to insure deposits up to $250,000, up from $100,000, and because of bank closures, which was not an issue more than a year ago, regular bank premiums have skyrocketed, according to Sean Cutting, president and chief executive officer of Sonoma Valley Bank.

"It is up to 14 basis points a year," he said. "Go back a few years and it was one."

The additional $150,000 coverage has been extended through 2013.

Because of this, said Mr. Cutting, "You are covering more dollars. It is not like other insurance; you can't shop around and ask anyone else for a rate quote. It is what it is."

Meanwhile, the closure of banks has been increasing. From 2003 to the first half of 2008, there were less than 20 banks forced to close down. Since then, more than 80 banks have been shut down, and each time the FDIC is forced to dip into the quickly depleting fund to cover deposits.

Fifteen banks closed in June.

While Mr. Friedemann argues that healthy community banks should not have to suffer because of the failures of others, it appears that thus far there is no other answer to the question of how to keep deposits insured.

Mr. Kelly said the good news is that the North Bay's banks can absorb the added cost.

"It is fortunate," said Mr. Kelly, "that in the North Bay, relatively speaking, the banks are healthy. "