FDIC Hikes Reserves of Bank Fund : Federal Agency’s Chairman Insists System Is Strong

The Federal Deposit Insurance Corp. on Friday increased to $4.5 billion the special reserve for losses that it uses to help ailing banks.

That increase raises the total reserve fund for losses by $2.3 billion, FDIC Chairman L. William Seidman said. Holding a rare news conference, Seidman also strongly expressed confidence in the financial well-being of the deposit insurance fund.

The FDIC is a government agency that insures deposits up to $100,000 for about 15,000 member commercial and savings banks.

“Despite a record 120 bank failures and assistance transactions during 1985, the insurance fund has grown, continuing a long-term trend,” Seidman said.

Seidman said the deposit insurance fund was in a “sound position” despite the bank failures and the enormity of the Continental Illinois agreement with the FDIC for financial aid in 1984.

“The position of the fund has not eroded,” Seidman emphasized at the news conference held at FDIC headquarters.

He said the banking industry’s insurance fund is expected to show a $1.4-billion increase for 1985, ending the year with a net worth of $17.9 billion. That compares to $16.5 billion for the end of 1984.

The FDIC chairman said the extra money will be raised by the federal agency keeping rebates that had in most prior years been given to member banks.

Money in the insurance fund comes from premiums assessed on banks, currently 1/12 of 1% of their deposits. In almost all years, because fund managers considered its size to be sufficient, some of the yearly income was rebated to banks after examination expenses and amounts paid out in connection with bank failures were subtracted. The last non-rebate year was 1949.

Seidman said the current rebate due to banks, which he said amounts to $67 million, will not be in the mail to them.

The chairman said the $2.3-billion increase in the special reserve earmarked for losses will be used in the following ways:

- A $1.3-billion loss allowance for the 1984 assistance agreement between the FDIC and Continental Illinois National Bank & Trust of Chicago.

- An increase of about $400 million in loss allowances established for bank failures that occurred before 1985. Seidman said actual losses in that time period were greater than expected.

- A loss allowance of about $600 million for the 120 bank failures and assistance transactions that took place in 1985.

Over the past weeks, Congress has raised concern that falling oil prices, problem agriculture loans and Third World debt could drain the FDIC system if ailing banks in the Southwest and Midwest were to be declared insolvent.

Federal regulatory officials have said they expect at least 120 banks to collapse this year. For the first 45 years of the existence of the deposit insurance fund, there were few failures among insured institutions and few losses to the FDIC.

One of the great successes of the New Deal was thought to be deposit insurance. The experience sharply changed in the late 1970s.

One spectacular failure, that of Continental Illinois, cost the FDIC $4.5 billion in 1984, almost one-fourth of the reserves at that time.

In January, 1,100 institutions were on the FDIC’s list of problem banks.