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Banks Sigh With Relief as FDIC Insurance Unchanged

WASHINGTON -- Millions of dollars of potential costs for banks were on the line as the Federal Deposit Insurance Corp. (FDIC) met last Tuesday to decide whether to charge premiums. FDIC decided against it.

If the ratio of reserves to insured deposits in the Bank Insurance Fund were to have fallen below the legal limit of 1.25%, the FDIC's board would have had to assess premiums for the first time since 1996. Industry observers said the decision would hinge on the third-quarter economic information the agency has gathered.

Official data for the quarter will not be available until the end of next week at the earliest, but the FDIC has been working to get a preliminary idea of the fund's ratio. The agency is expected to release an estimate, as well as a projection of the ratio's level for the next year, in advance of the official release.

At least one industry representative, Robert Davis, managing director of government relations for America's Community Bankers, predicted that the FDIC will disclose that insured deposit growth was higher than expected in the third quarter and that the ratio fell below 1.25%.

Mutual Funds Suffer

"Based on information I have gotten from the Investment Company Institute about the continued outflow of funds from the stock market, I would suggest that deposit growth did exceed the average," which would have pushed the ratio lower, Davis said.

FDIC Chairman Don Powell has reportedly said that there is a 75% chance that premiums will be charged during the first half of next year. He made the comments at an Institute of International Bankers luncheon in September, according to sources at the gathering. However, that was before the FDIC released second-quarter data showing that the fund's ratio had risen to 1.26%.

Bert Ely, an independent analyst in Alexandria, Va., said there was a good chance the FDIC would charge premiums, not only because of its projections but also because of a political calculation that an assessment would make deposit insurance reform legislation more likely to be passed.

James Chessen, chief economist for the American Bankers Association, said he could not predict whether the FDIC would charge premiums. "It is a 50-50 chance that the fund will fall below 1.25%," he said. "It's going to be a razor-thin margin. It could go one way or another."

Even relatively small growth in insured deposits could dilute the ratio.

The FDIC has said that a third-quarter increase of as little as 1.1% -- about $28 billion -- would be enough to lower the ratio to the statutory minimum. Insured deposit growth is the most volatile component of the ratio and makes it hard to predict. Deposits have risen at a quarterly average of 1.04% during the past 20 quarters but grew only 0.1% in the second quarter.

Observers said that they would not expect a premium to exceed one or two basis points. However, that would still equal big bucks for some banks. For example, for an institution with $10 billion of domestic deposits insured by the bank fund, a one-basis-point premium would translate into a premium of about $1 million. An institution with $100 million of insured deposits would have to pay $10,000.

Any premium assessment would apply only to the first half of next year, and would not take effect until January.

The FDIC faced a similar situation in May, when it met to determine if premiums should be charged for the second half of this year. It decided not to charge premiums, only to find out a few weeks later that the bank fund's ratio had fallen below 1.25% for the first time since 1996. To prevent that from happening again, the FDIC has surveyed some of the nation's largest banks to get the most up-to-date information possible.