- The Washington Times - Tuesday, August 12, 2008

The failure of IndyMac Bancorp Inc. and seven other banks this year may erase as much as 17 percent of a U.S. government insurance fund and raise premiums for all banks.

The July closing of IndyMac, the third-biggest U.S. bank failure, might cost the Federal Deposit Insurance Corp. fund $4 billion to $8 billion, while the seven others are estimated to cost $1.16 billion, the FDIC estimates.

The potential $9.16 billion in withdrawals would be the highest since the insurance account was created in 1933, said Diane Ellis, the FDIC’s associate director of financial-risk management. Bank failures pulled a record $6.9 billion from the fund in 1988 during the savings-and-loan collapse, she said.

“It’s going to be a bloody, expensive mess for the banking industry,” said Bert Ely, president of Ely & Co. Inc., an Alexandria bank-consulting firm. “Healthy banks are paying for the mistakes made by failed banks.”

The pace of bank closings accelerated as financial firms reported almost $495 billion in write-downs and credit losses since 2007. Between the first quarter and the fourth, the FDIC’s “problem” bank list grew 18 percent to 90 banks with combined assets of $26.3 billion. A revised list is due this month. The insurance fund had $52.8 billion as of March 31.

The FDIC is required to shore up the fund when the reserve ratio, or the balance divided by the insured deposits, slips below 1.15 percent or is forecast to fall below that level within six months. IndyMac’s collapse may push it below the 1.15 percent threshold, Ms. Ellis said.

“Raising rates is our first and best option if we need to get more revenue to increase the fund and the reserve ratio,” Ms. Ellis said.

The premiums charged to banks in 2007, which averaged 5.4 cents per $100 of insured deposits, were based on risk levels and capital determined by the FDIC. Troubled banks pay higher rates, the agency said.

“Certainly, the industry is ready to step up to the plate and make sure the FDIC is financially secure,” said James Chessen, chief economist at the American Bankers Association, a Washington-based industry group. “That has to be balanced against the fact that money coming back to Washington is money that banks can’t use” to lend in local communities.

The FDIC insures 8,494 lenders with $13.4 trillion in assets, covering deposits of as much as $100,000 per depositor per bank, and up to $250,000 for some retirement accounts. The $26.3 billion in “problem” assets represents 0.2 percent of the total assets in FDIC-insured banks.

“It’s still very small historically and unlikely to cause significant problems to the FDIC fund,” Mr. Chessen said.

Bank regulators, including FDIC Chairman Sheila C. Bair, said last month that more banks will fail as the pace of shutdowns returns to normal levels. She said that, historically, 13 percent of banks on the list fail.

Besides increasing premiums, the FDIC has options if failures drain the fund. The agency can tap a $30 billion line of credit at the Treasury Department and borrow up to $40 billion from the Federal Financing Bank to cover assets at failed banks.

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