FDIC will double premiums to boost insurance fund

WASHINGTON - The Federal Deposit Insurance Corp. plans to double the premiums banks must pay to offer its protection, seeking to replenish its reserves as the government seizes banks at the fastest pace in 15 years.

The agency, which insures $4.5 trillion in US deposits, said yesterday the increases would add $10 billion annually to its insurance fund. They would take effect Jan. 1 after a public comment period.

The fund balance is "likely to experience further declines before recovering as the current problems confronting the banking industry abate," the Washington-based FDIC said in releasing the proposal.

The collapse of 13 banks, including IndyMac Bancorp Inc., drained the deposit insurance fund the FDIC uses to reimburse customers for losses that may occur in a bank failure, and last week Congress increased the limit on that insurance to $250,000 in deposits, from $100,000. The fund had $45.2 billion at the end of the second quarter, and the July failure of IndyMac, a California mortgage lender, will cost about $8.9 billion, the agency said.

The FDIC wants to raise the premiums to an industry average of 13.5 basis points of total domestic deposits from 6.3 basis points. In April, higher premiums would be set for riskier institutions. One basis point on all FDIC-insured banks brings in $700 million annually to the fund.

Bank failures could cost the insurance fund about $40 billion from 2008 to 2013, including $13 billion for actual and projected failures this year, according to the FDIC.

"The premium increases announced today by the FDIC are significant and even though they pose an extra burden on every bank, the industry is quite capable of meeting this obligation," American Bankers Association president Edward Yingling said in a statement.

The FDIC is required by law to come up with a plan to replenish the fund when the reserve ratio, or fund balance divided by insured deposits, falls below 1.15 percent. It stood at 1.01 percent on June 30, the lowest level since 1995.

The ratio will continue to fall through early 2009 to 0.65 percent to 0.70 percent "as the fund's loss reserves for anticipated failures increase," the FDIC projected. The increases would build up the ratio to 1.26 percent by 2013, according to the agency.

The FDIC board "should be working on a methodology over the long term that doesn't impose the highest assessments on the industry when the industry can least afford it," said board member John Reich, director of the Office of Thrift Supervision, the Washington regulator of savings and loans.