FDIC May Tap Treasury Line to Boost Insurance Fund

FDIC May Tap Treasury Line to Boost Insurance Fund

Friday, September 18, 2009 11:26 AM

WASHINGTON -- 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.

Chairman Sheila Bair said the agency would put out for public comment the options to rebuild the fund -- which has been significantly drained by a sharp increase in bank failures -- including tapping the FDIC's line of credit with the U.S. Treasury.

"We are carefully considering all our options, including borrowing from Treasury," Bair said at a global finance summit in Washington.

She 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.

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 brought the balance of the insurance fund down to $10.4 billion from $45 billion a year ago. But the FDIC is careful to note that it has $42 billion in reserves to handle failures over the next year.

Bair's comments at Georgetown University 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 for 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."

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