FDIC Fund to Be Replenished By Large Banks

A measure approved Friday will make large US banks mainly responsible for replenishing the fund which guarantees bank deposits. The measure passed despite opposition from a key regulator.

Chairman of the FDIC Sheila Bair defended the measure saying that larger banks, by irresponsibly funding high-risk mortgages, shoulder the bulk of the blame for the recent financial crisis.

In a vote of 4 to 1, the FDIC board passed the measure, which will charge a levy of 5 basis points on assets, minus each bank’s biggest capital holdings. It is a modification of a past decision which charged a special fee of 20 basis points on domestic deposits.

Big banks like Bank of America and Wells Fargo, because deposits represent a smaller portion of their total assets compared to regional banks, will pay more under the new rule. Comptroller of the Currency John Dugan, the head of the agency that governs major banks, had the one dissenting vote. He called the change “perverse”, saying that the failure of smaller banks has been chiefly responsible for the draining of the deposit insurance fund. He says that the new rule makes larger institutions responsible for 76% of the replenishing of the fund when they had little to do with its depletion.

On the other side of the argument, Bair says that many larger banks have relied on massive Federal aid, else they would have failed.

The new special assessment will be due during the third quarter, and could be followed by additional special fees. The FDIC’s expected loss for the fund was raised from $65 billion to $70 billion. A spokesman for the agency said the new assessment was necessary to prevent the deposit insurance fund from running out completely.

Actual and expected bank failures caused the fund to drop under $19 billion in the fourth quarter of 2008, a drop close to 50%. Thursday, the FDIC seized BankUnited Financial, the largest bank based in Florida, a move that will cost the fund almost $5 billion.

Also approved by the FDIC, an option to institute additional fees in 2009’s last quarter and 2010’s first quarter, should the fund’s drop in value affect public confidence. Bair says that such assessments are very likely, but hopes they would be less than 5 basis points, or 5 cents per $100 in assets. All fees would have a maximum of ten basis points. The third quarter special assessment will cost JPMorgan Chase around $741 million, Citibank around $319 million, Wells Fargo around $628 million, and Bank of America around $802 million. Officials within the banking sector say that the timing of the assessment couldn’t be any worse.

Bair said that the FDIC shouldn’t have to tap into its line of credit with the treasury, which was more than tripled this week to $100 billion. She said the increase in credit allows the agency to act more comfortably, and made the reduction in the special assessment possible.