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 by federal regulators.
The Federal Deposit Insurance Corp. board voted Thursday 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.
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 new prepaid insurance 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.
Many smaller banks have protested the insurance assessments. They complain that they had nothing to do with the excesses of big Wall Street banks, reckless mortgage lending and risky investments that precipitated the financial crisis, but are being forced to pay to help clean up the mess.
The FDIC established an exemption process for banks that demonstrate that the prepaid premiums would "significantly" diminish their cash or "otherwise create extraordinary hardship." Banks deemed to qualify will be contacted by Nov. 23 by the agency. Only a small number of banks are expected to be eligible, FDIC staff said.
The plan for prepayments won't provide a long-term fix for the insurance fund, but it does spare ailing banks the immediate cost paying a second emergency fee this year. And most banks likely will be able to prepay their premiums without having to reduce lending to businesses and consumers.
Most banks still have adequate funds available for lending. In a sluggish economy, fewer people and businesses are seeking loans. And investors wary of stocks and bonds have funneled more of their deposits to banks.
Besides the insurance fund, the FDIC has about $21 billion in cash available in reserve to cover losses at failed banks. The agency could tap a $500 billion credit line at the Treasury Department, but FDIC Chairman Sheila Bair has said that is the least desirable option.
With the prepayment solution, the FDIC will be able to continue paying depositors when banks fail. But banks will have to pay tens of billions more in coming years to keep the fund solvent.
Banks are limited in their lending by the amount of capital they hold in reserve. Capital provides a cushion to protect against loan defaults and other losses. Banks that lack enough capital can't extend new credit.
Some banks have had to tighten lending since the financial crisis struck because regulators say their capital buffers are too low. Because the premiums were expected, banks' long-term financial outlook doesn't change.