- The Washington Times - Friday, November 13, 2009

U.S. banks will prepay about $45 billion in premiums to replenish a federal deposit insurance fund now in the red, under a plan adopted Thursday by federal regulators.

The Federal Deposit Insurance Corp. board voted to mandate the early payments of premiums for 2010 through 2012. Amid the struggling economy and rising loan defaults, 120 banks have failed so far this year, costing the insurance fund more than $28 billion.

To address concerns of small banks in weak financial condition, the FDIC also set up an exemption process for those that prove the prepaid fees would be a hardship.

The FDIC expects the cost of bank failures to grow to about $100 billion over the next four years.

While FDIC officials moved to head off a possible shortfall, the Federal Housing Administration said its financial cushion had fallen to a dangerously low level, but government officials maintain the agency should avoid a taxpayer bailout under “most economic scenarios.”

The agency, a major source of funds for first-time homebuyers, faces mounting concerns that it will eventually need an infusion of cash. FHA losses have increased with the unemployment rate as more homeowners default on their loans. About 17 percent of FHA borrowers are at least one payment behind or in foreclosure, compared with 13 percent for all loans, according to the Mortgage Bankers Association.

For the FDIC, it is the first time the agency has required prepaid insurance fees. The idea behind it is for banks to spread the costs over three years rather than paying a one-time fee that would deplete their capital reserves.

Unlike a one-time fee, the prepaid premiums won’t affect banks’ earnings “during these difficult times,” FDIC Chairman Sheila Bair said before the vote.

The new premiums were proposed by the FDIC in late September and opened to public comment. They come atop a special emergency fee that took effect at midyear, estimated to have brought in about $5.6 billion.

The deposit insurance fund stood at $10.4 billion at the end of June - already its lowest point since 1992 - and since has fallen into deficit. That hasn’t occurred since the savings-and-loan crisis of the late 1980s and early 1990s.

Still, depositors’ money is guaranteed - up to $250,000 per account - by the FDIC.

Many smaller banks have protested the insurance assessments. They complain that they had nothing to do with the excesses of big Wall Street banks, reckless mortgage lending and risky investments that precipitated the financial crisis, but are being forced to pay to help clean up the mess.

The FDIC established an exemption process for banks that demonstrate that the prepaid premiums would “significantly” diminish their cash or “otherwise create extraordinary hardship.” The payment covering the three years, plus the current quarter, is due Dec. 30. Banks deemed to qualify for the exemption will be contacted by Nov. 23 by the agency, but only a small number are expected to be eligible, FDIC staff said.

The plan for prepayments won’t provide a long-term fix for the insurance fund, but it does spare ailing banks the immediate cost paying a second emergency fee this year. And most banks likely will be able to prepay their premiums without having to reduce lending to businesses and consumers.

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