Modern News

The Federal Deposit Insurance Corporation (“FDIC”) took action at its board meeting yesterday to require member banks to “prepay” $45 billion in assessments by the end of the year that otherwise would have been paid over the next three years. The FDIC’s action requires banks to prepay their estimated quarterly risk-based assessments for 2010 through 2012 with their normal 4th quarter payment due by the end of the year.

Given the failure of some 120 banks so far this year, the FDIC’s fund has dropped precipitously to the point where the ratio of the fund’s balance to insured deposits was .22 percent. Technically, the FDIC was required to bolster the fund when the ratio hit 1.15 percent, but was struggling as to how to do that without damaging the healthy banks that would have to bear the brunt of the replenishment costs. Other options had included adding a special fee to the normal assessments or obtaining a loan from the US Treasury.

The inside story here as reported by The Business Insider is far more interesting and explains why the banks are not screaming. Having the payment be a “prepayment” essentially turns it into an “asset” which has no capital reserve requirements. The Business Insider goes on to note yet another benefit to this deal:

”An even bigger gift to banks is that the new rule will treat the roughly $300 billion worth of FDIC-guaranteed bonds issued under a special financial crisis program as having zero risk. Previously, the bonds have been deemed “high-quality” debt, which meant banks had to keep $1.6 million of capital in reserve for each $100 million of the bonds they own. The change will result in an instant boost to available capital of banks.”

Of course, this only delays the inevitable for the FDIC, who says they expect bank failure losses to hit $100 billion by 2013. Where will the rest of the money come from?? FDIC chairman Sheila Bair says not to worry: “No depositor has ever lost a penny of an insured deposit and no depositor ever will.”

Stay tuned…

Submitted by Rick Eckert www.73wire.com

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