Banks to prepay FDIC premiums
WASHINGTON — U. S. banks will prepay about $45 billion in premiums to replenish a federal deposit insurance fund now in the red, under a plan adopted Thursday by federal regulators.
The Federal Deposit Insurance Corp. board voted to mandate the early payments of premiums for 2010 through 2012. Amid the struggling economy and rising loan defaults, 120 banks have failed so far this year, costing the insurance fund more than $28 billion.
To address concerns of small banks in weak financial condition, the FDIC also set up an exemption process for those that prove the prepaid fees would be a hardship.
The FDIC expects the cost of bank failures to grow to about $100 billion over the next four years.
It is the first time the agency has required prepaid insurance fees. The idea behind it is for banks to spread the costs over three years rather than paying a one-time fee that would deplete their capital reserves.
Unlike a one-time fee, the prepaid premiums won’t affect banks’ earnings “during these difficult times,” FDIC Chairman Sheila Bair said before the vote.
The new premiums were proposed by the FDIC in late September and opened to public comment. They come atop a special emergency fee that took effect at midyear, estimated to have brought in about $5.6 billion.
The early payment will be “manageable” for Southern Arizona Community Bank in Tucson, said its president and CEO, John P. Lewis. His institution has been paying an average of around $25,000 per quarter for regular insurance premiums, plus about $70,000 this year for the special fee.
The $70,000 “is a little rough on a community bank,” Lewis said in a telephone interview. “It would push some banks over the edge.”
The three-year prepay likely will cost Southern Arizona Community roughly $300,000 but will work out under the plan to about $9,000 a month, he said — against a cash balance now at $9.5 million.
Untouched will be the bank’s net profits, expected at around $500,000 this year and $750,000 in 2010.
The deposit insurance fund stood at $10.4 billion at the end of June — already its lowest point since 1992 — and since has fallen into deficit. That hasn’t occurred since the savings-and-loan crisis of the late 1980s and early 1990s.
Still, depositors’ money is guaranteed — up to $250,000 per account — by the FDIC.
The FDIC established an exemption process for banks that demonstrate that the prepaid premiums would “significantly” diminish their cash or “otherwise create extraordinary hardship.” The payment covering the three years, plus the current quarter, is due on Dec. 30.
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