Banks will prepay $45B in FDIC premiums to raise cash

WASHINGTON (Reuters) — Banks will prepay three years of deposit insurance premiums to give the government cash to handle the rising tide of bank failures, under a rule adopted by the Federal Deposit Insurance Corp. Thursday.

The industry has generally spoken favorably of the approach. While banks would pay about $45 billion in cash upfront, they would not have to book the expense until the assessments were normally due over the three years.

The FDIC would not be able to use the money to bring up the balance of the insurance fund that safeguards bank deposits, but it would have operating liquidity.

The prepayment has been described as an alternative to imposing another hefty emergency fee on the still-recovering industry, or having the FDIC tap its line of credit with the Treasury Department.

"Many institutions are only beginning to recover," said FDIC Chairman Sheila Bair.

The deposit insurance fund went into the red at the end of the third quarter due to the highest annual level of bank failures since 1992.

So far this year 120 banks have been closed by regulators as the industry struggles with deteriorating loans. That compares with 25 last year and only three in 2007.

Bair has said the pace of bank failures will remain elevated through next year. The FDIC has estimated the total cost of failures will be $100 billion from 2009 through 2013.

Under the rule adopted Thursday, banks on Dec. 30 would prepay their estimated quarterly fees for the fourth quarter of this year and for all 2010, 2011 and 2012.

The FDIC will consider exemptions for some banks if the prepayment would harm the safety and soundness of those institutions, but the agency said it does not expect to grant many exemptions.

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