The depletion of funds from the Federal Deposit Insurance Corporation’s deposit insurance fund has left the FDIC with few options, and they consequently decided to rebuild the fund by having banks across the nation pay insurance premiums for the next three years. Those gigantic premiums will be due at the end of December.
With over 500 banks being identified as problem banks, and the very real possibility of another large bank going under, the FDIC’s Chairman Sheila Bair preferred going to the banking industry first to build the fund back up rather than tapping into the $500 billion emergency credit line available to the FDIC in case of emergency.
Part of the reason is the tumultuous relationship between Bair and Treasury Secretary Timothy Geithner, where there is no love lost. The other part is Bair has resisted having her agency labeled as having to have been bailed out by using government funds.
Why this is having such a dramatic effect on smaller banks is their assets have grown significantly recently from consumers abandoning the huge banks and placing their cash in the smaller banks. This is relevant because the amount of the insurance premiums paid is based upon the assets held by a bank, so in many cases it’s not just a three-year premium being paid, in the sense of being three times the payment from the year before, but it has actually risen with the smaller growing banks to four and five times the payments they paid last year because of the growth in assets they held. Some banks have even reported their growth has been so good their premiums will be over twenty times what they were from their last payment.
As some point out, it’s getting hard to do business for many smaller banks because “The government wants us to fund our loan growth with core deposits, but it’s making it more expensive for us to have core deposits.”
Some consequences looked at for the smaller banks is an inability to increase their capital base, leaving CD rates low, and pay out dividends.
Basically the resistance is primarily the timing of this happening, which couldn’t have come at a worst time in the opinion of many banking industry watchers. They openly wonder why this wasn’t when the industry was healthy and whole, but the answer to that is most people in the government didn’t see this coming, and so didn’t see the need to add anything significant to the deposit insurance fund of the FDIC.
