Regulators Hike Premiums on Insured Bank Accounts : Finance: Officials are anxious to avert problems that collapsed hundreds of savings and loan associations.
Federal regulators voted Tuesday to increase insurance premiums for banks by nearly $2 billion--the biggest single increase in history--to bolster the weakening insurance fund that protects saving deposits.
The federal officials, anxious to avert the problems that produced the collapse of hundreds of savings and loan associations, have been striving to assure the basic strength of banks. Tuesday’s move by the Federal Deposit Insurance Corp. will boost the financial resources of the fund designed to protect millions of depositors by increasing banks’ premiums to 19.5 cents for every $100 of deposits as of Jan. 1.
The current premium is 12 cents per $100. Overall, the move will increase bankers’ premiums from $2.8 billion to about $4.8 billion.
The insurance fund has lost money for the last two years and it will suffer another loss this year, battered by more than 200 bank failures.
“What we are doing is increasing the cost of deposit insurance to meet the problems of the declining fund,” FDIC chairman L. William Seidman told reporters after the board meeting.
Although the fund has been shrinking, it can handle any expected financial problems, Seidman said. “It’s clear under everything we can see now (that) we can meet our obligations,” he said. “We can handle any failures we can currently foresee.”
Bankers objected that they should not be expected to shoulder a heavier burden, particularly at time when profits are down.
But Seidman denied that the FDIC was acting precipitately. “We’re making a reasoned judgment. I don’t see any panic here.”
The insurance fund, $13 billion at the end of 1989 compared to $18 billion two years ago, will suffer another substantial loss this year. FDIC directors apparently believed it vital to raise additional money, even though the move cuts into the profits of the already beleaguered banking industry, which is feeling the squeeze of reduced earnings from real estate and commercial loans that have gone bad.
The insurance premiums will take about 4% of the banking industry’s net profits after taxes if banks do not pass along any of the costs to customers. This amount is “a very small part of the operational picture,” Seidman said.
Higher premiums would have a very slight impact on customers if banks pass along the increase. The interest paid on deposits would fall by $4.50 on a one-year deposit of $10,000, without considering compound interest.
The insurance premium had been scheduled to rise by 3 cents per $100 next year. But the FDIC’s vote to instead raise it 7.5 cents represents the maximum increase permitted under law.
Additional increases seem certain in future years. Seidman said that the board had explored whether it could go beyond 7.5 cents before deciding that the limit could not be legally breached this year. However, he and other board members noted that they will have the power to boost the rate again next year and the following year.
“The level of reserves in the fund is historically low and the unfortunate trend in recent years has been downward,” said Seidman. “Clearly, this is unacceptable and a change in direction is needed. We believe our proposals will address concerns about the strength of the fund without imposing dramatic new costs or changes on the industry.”
The payment of higher premiums “will place additional strain on bank earnings and affect the industry’s ability to raise capital,” countered Donald G. Ogilvie, executive vice president of the American Bankers Assn. “The banking industry cannot nor should it be expected to go on endlessly paying higher premiums.”
“We wish they had looked at other untapped sources for premiums instead of getting (the money) from federally insured banks that have been carrying the full burden all along,” said John Alderman, regulatory counsel for the Independent Bankers Assn. of America. His organization, which includes many small and medium-sized institutions, maintains that the insurance fund could collect additional revenues by charging premiums on money on deposit in foreign branches of American banks.
The insurance fund’s $13 billion provided the backing for $1.8 trillion in insured deposits at the end of last year.
The ratio of protection has been steadily declining since 1987, when it was $1.10 for every $100 in deposits. Last year’s level of 70 cents is expected to fall to 60 cents this year as the fund continues to lose money.
Seidman predicted that it would take five years to reach the target of $1.25 for every $100.
