msnbc.com staff and news service reports
updated 3/6/2009 5:56:24 AM ET 2009-03-06T10:56:24

Senate Banking Committee Chairman Christopher Dodd has moved to allow the Federal Deposit Insurance Corp. to temporarily borrow up to $500 billion from the Treasury Department, The Wall Street Journal reported Friday.

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The effort by Dodd, D-Conn., comes in response to pressure from FDIC Chairman Sheila Bair, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner, the Journal reported. The move would give the FDIC access to more money to rebuild its fund that insures consumers' deposits, which have been hard hit by a string of bank failures, the paper said.

In return, Bair has agreed to halve a new emergency fee on U.S. banks.

Dodd was expected to introduce the measure, which would set Dec. 31, 2010, as the end date for the credit line, soon. Any increase in funds would require the approval of the Federal Reserve, the Treasury Department and other federal regulators.

In a letter to Dodd on Thursday, Bair said raising the permanent credit line "would give the FDIC flexibility to reduce the size" of the emergency premium to be charged to banks.

Dodd spokeswoman Kate Szostak declined to comment.

The Journal said that Dodd's bill could also give the FDIC greater ability to help address risks in the economy, potentially creating another source of bailout money on top of the $700 billion already approved by Congress.

Bernanke said in a letter last month to Dodd that such a "mechanism would allow the FDIC to respond expeditiously to emergency situations that may involve substantial risk to the financial system," the Journal reported.

Meeting credit needs
The moves "are important for maintaining a strong deposit insurance fund while also ensuring that banks can continue to meet the credit needs of their communities," Edward Yingling, president and CEO of the American Bankers Association, said in a statement.

"We remain deeply concerned about (the cost of the new premium) and appreciate the FDIC's willingness to consider alternative approaches," he said.

Earlier this week, Bair warned that the fund insuring Americans' deposits could be wiped out this year without the new fees on U.S. banks and thrifts. Banks, especially smaller community banks, have been chafing over the new insurance fees, saying they will place an extra burden on an already struggling industry.

Bair is agreeing to cut the new emergency premium, to be collected from all federally-insured institutions on Sept. 30, to 10 cents for every $100 of their insured deposits from the 20 cents the FDIC approved last Friday. That compares with an average premium of 6.3 cents paid by banks and thrifts last year.

The agency has never drawn on its long-term credit line, which is currently $30 billion, but Bair told lawmakers in letters Thursday that an increase in the FDIC's borrowing power "would leave no doubt that the FDIC will have the resources necessary to address future contingencies and seamlessly fulfill the government's commitment to protect insured depositors against loss."

‘Full faith and credit of the ... government’
FDIC spokesman Andrew Gray said the idea behind increasing the credit line is to give the agency additional flexibility in funding, and is unrelated to its ability to meet obligations to bank depositors.

The FDIC is "backed by the full faith and credit of the United States government," Gray said. "We can and always will be able to meet our obligations to depositors."

In addition to $18.9 billion now in the insurance fund, the FDIC also has a contingency reserve of $22.4 billion set aside for potential bank failures this year.

Housing rescue legislation approved by the House on Thursday evening includes the boosted borrowing authority for the FDIC. The package faces a tougher road in the Senate amid the same banking industry opposition and reservations among moderate Democrats that nearly derailed it in the House.

As the economy sours, home prices tumble and loan defaults soar, bank failures have cascaded and sapped billions out of the fund that insures regular accounts up to $250,000. The fund now stands at its lowest level in nearly a quarter-century, $18.9 billion as of Dec. 31, compared with $52.4 billion at the end of 2007.

The law requires the insurance fund to be maintained at a certain minimum level, but it fell below the mandated 1.15 percent of total insured deposits in mid-2008.

The FDIC now expects that bank failures will cost the insurance fund around $65 billion through 2013, up from an earlier estimate of $40 billion. There have been 16 bank collapses already this year, following 25 in 2008 — which included two of the biggest savings and loans, Washington Mutual Inc. and IndyMac Bank.

The new emergency premium approved last week, plus an increase in regular insurance fees for banks, was intended to raise $27 billion this year to replenish the fund. The regular insurance premiums will rise to between 12 and 16 cents for every $100 in deposits starting in April, up from a range of 12 to 14 cents.

More on FDIC   |  Christoper Dodd

The Associated Press contributed to this report.

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