U.S. banking regulators proposed on Tuesday that banks prepay three years of fees to help cover the rising cost of bank failures, now put at $100 billion through 2013.
Banks would prepay $45 billion of regular quarterly assessments under the plan, but would not have to recognize the hit to their earnings until the fees are normally due.
The five-member board of the Federal Deposit Insurance Corp voted unanimously to put the proposal out for 30 days of public comment.
Regulators have been exploring ways to replenish the fund that safeguards bank deposits without putting a huge burden on healthy banks or taxpayers.
Tuesday's proposal avoids levying another hefty special assessment that would crimp banks' earnings or tapping the FDIC's $500 billion line of credit with the U.S. Treasury.
Everybody has bailout fatigue, FDIC Chairman Sheila Bair said of avoiding drawing on the Treasury.
FDIC staff raised their expectations for bank failure costs from 2009 through 2013 to $100 billion, up from a previous estimate of $70 billion.
If finalized, the proposal would require banks to prepay on December 30, 2009 their regular assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012.
The FDIC said the insurance fund's balance is expected to become negative this quarter and will remain negative through 2012, but said the agency will still have plenty of cash to operate and handle bank failures.
We have tons of money to protect insured depositors, Bair said before the vote. This is really about the mechanics of funding.
It would be the first time the agency has asked banks to prepay regular fees. It needs the money now because the FDIC's cash needs will outstrip liquid assets early next year.
Because of accounting requirements, the agency must set aside money for failures expected over the next 12 months.
NEGATIVE FUND BALANCE
The FDIC last had a negative fund balance in 1991, during the savings and loan crisis, when the agency chose to borrow from Treasury. FDIC officials insist bank deposits, up to $250,000 per account owner, are safe, even with a negative insurance fund balance.
Western civilization did not come to an end when the fund balance last went negative, agreed banking industry consultant Bert Ely. But there is a public perception issue.
So far this year 95 U.S. banks have failed, compared to 25 last year, and only 3 in 2007.
Those failures whittled the balance of the insurance fund down to $10.4 billion at the end of the second quarter, from $45 billion a year earlier. The FDIC has an additional $32 billion provisioned for failure costs over the next year.
FDIC officials said they expect bank failures to peak in 2009 and 2010, and that industry earnings will have recovered enough in 2011 to absorb a proposal to raise regular assessment rates by three basis points that year.
The FDIC in May authorized a $5.6-billion emergency fee on the banking industry and warned of similar special fees.
But banks have argued that more fees would be a significant hit to their balance sheets just as they are starting to recover.
It makes sense not to increase assessments now at the worst possible time, said Comptroller of the Currency John Dugan, who serves on the board of the FDIC.
Dugan said the only potential downside is the outflow of cash from the banks to prepay the fees could affect their ability to lend. But he said he did not see that as a likely outcome.
James Chessen, chief economist for the American Bankers Association, said the prepayment represents a lot of cash, but is a much better alternative to more emergency fees that have to be expensed immediately.
The initial cash outflow will be a bit of a shocker, but the fact that they expense it over time... will be a big benefit, Chessen said.
Bair said the prepayment proposal demonstrates that the banking industry will not reflexively fall back on taxpayers to help clean up its mess.
But she declined to rule out the option of tapping the Treasury line of credit, saying it is a necessary backstop if conditions worsen.
I never say never, and there is much we cannot control for, Bair said.
For graphic about FDIC and bank failures, click here:
(Reporting by Karey Wutkowski; Editing by Tim Dobbyn)