FDIC asks banks to cover an expected $100B in losses

Updated 5m ago
By Paul Wiseman, USA TODAY

WASHINGTON — U.S. bank regulators, expecting bank failures to cost $100 billion through 2013, said Tuesday that they plan to make banks prepay three years worth of deposit insurance premiums in an attempt to salvage the fund that insures bank deposits.

The Federal Deposit Insurance Corp. (FDIC) says the insurance fund will technically run out of money Wednesday, drained by $25 billion worth of bank failures this year and nearly $18 billion in 2008. The FDIC said bank failures will cost $100 billion from 2009 to 2013, up from an earlier estimate of $70 billion.

ARE YOU INSURED?: Ask the FDIC
RELATED: More on the proposal for banks to prepay fees

The insurance fund, financed by bank fees, insures deposits up to $250,000 per account and is supposed to stay at 1.15% of insured deposits. In addition to the insurance fund, the FDIC has set aside reserves — $32 billion at the end of June – to cover bank failures.

Despite the fund's financial problems, FDIC Chairwoman Sheila Bair says "bank customers should know that their insured deposits have and always will be 100%, no matter what. This commitment to depositors is absolute."

The FDIC on Wednesday proposed raising $45 billion on Dec. 30 by requiring banks to prepay their deposit insurance fees for fourth-quarter 2009, 2010, 2011 and 2012. The FDIC decided against two other options: imposing a special assessment on banks as it did in the second quarter this year; or borrowing from the Treasury and putting taxpayer money at risk.

"It's clear that that the American people would prefer to see an end to policies that look to the federal balance sheet as a remedy for every problem," Bair said. " In choosing this path, it should be clear to the public that the industry will not simply tap the shoulder of the increasingly weary taxpayer."

The banking industry welcomed the plan, which could be revised after the FDIC receives 30 days of feedback. "The pre-paid assessments represent money that the FDIC expects to receive from banks anyway over the next several years," said James Chessen, chief economist at the American Bankers Association. "But having the cash on hand sooner rather than later provides more flexibility for dealing with any contingencies over the foreseeable future."

The FDIC is fully backed by the government, which means depositors' money is guaranteed up to $250,000 per account. But it was the first time the agency has required prepaid insurance fees.

An emergency insurance fee on banks, which took effect June 30, brought in around $5.6 billion. Another such levy would allow the healthiest banks to keep more capital for investment, but could drive weaker banks toward failure, further depleting the insurance fund.

"There's lots of liquidity; there's lots of cash. Liquidity's not an issue for the banking system right now," Bair told reporters.

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