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Bank regulators consider how to replenish fund

U.S. bank regulators will meet at the end of the month to explore options, including some that are not well-known, to replenish the dwindling fund that safeguards bank deposits, the chairman of the Federal Deposit Insurance Corp said on Friday.
/ Source: Reuters

U.S. bank regulators are considering tapping a line of credit with the U.S. Treasury Department and may explore other lesser-known options to replenish the dwindling fund that safeguards bank deposits.

Federal Deposit Insurance Corp. Chairman Sheila Bair said on Friday that the agency would meet at the end of the month to discuss options to rebuild the fund, which has been significantly drained by a sharp increase in bank failures.

"We are carefully considering all our options, including borrowing from Treasury," Bair said, referring to the agency's $500-billion line of credit with the Treasury Department. She was speaking at a global finance conference in Washington.

But regulators are still reluctant to tap the line of credit because they want to avoid temporarily using taxpayer money to clean up the banking mess, she said.

Bair said the FDIC also had lesser-known alternatives for replenishing the fund, such as prepayments of assessments on banks and issuing a note. She did not give further details on those options.

Other options include more special assessments on banks. The FDIC has already charged the industry one emergency fee of $5.6 billion this year, and is authorized to levy two more.

Bair said the FDIC would seek comment on these options before making a final decision.

So far this year, 92 U.S. banks have failed, compared with 25 during all of last year and only three in 2007. Those failures have whittled the balance of the insurance fund down to $10.4 billion from $45 billion a year ago. The FDIC is careful to note that it has $42 billion in reserves to handle failures over the next year.

"There are a few options available to the fund - none of them very palatable," said Brian Olasov, a managing director with McKenna, Long & Aldridge in Atlanta. He said the long-term solution to replenish the fund will be higher quarterly assessments.

Bair's comments touched on a range of topics, from her view that regulators should not have the option of extending "open-bank assistance" to troubled financial firms, to her concerns about accounting proposals that could imperil banks in times of stress.

She said she generally agrees with actions by the Financial Accounting Standards Board but is worried about a proposal to further extend "mark-to-market" accounting to bank loans.

"During periods of market stress, losses could be exacerbated," Bair said. "We don't need to deepen the crises."

FASB met last month to discuss whether to force companies to value nearly all financial instruments on their balance sheets, including loans, at market value, and to reflect them in earnings. Banks oppose such a change. FASB is expected to release a proposal in the first half of 2010.

Bair also took aim at proposed reforms to combat systemic risk. She said large financial institutions should not be allowed to believe they will receive government assistance if they run into trouble.

The Obama administration has proposed giving the FDIC authority to wind down troubled, large financial firms, but it also gives regulators the option to provide open-bank assistance on a temporary basis.

"So-called open-bank assistance... should be prohibited," Bair said.

She said the FDIC's system for resolving failed depository banks is effective and should be extended to large financial firms. The change is especially crucial because the recent crisis has further concentrated the financial industry, and no firm can be considered too big to fail, she said.

"The process is harsh, it's painful, but it works," Bair said of the FDIC system. "Unless we enact reforms ... our system will be more, not less, fragile after this crisis."

Regarding pay, Bair said she hopes Wall Street has learned its lesson. She urged business students in the crowd to steer clear of the pay structures that contributed to the financial crisis.

"I hope you will be advocates for compensation structures that reward long-term profitability and penalize quick-buck schemes that reward employees who put an entire company at risk for the sake of high, upfront fees," she said.

Her comments come as the Federal Reserve is close to proposing wide-ranging rules on bankers' pay that would apply to any employee able to take risks that could imperil the institution.