FDIC Seeks OK to Borrow Up to $30 Billion : Banking: The agency’s chief says the money will come from the industry, not taxpayers. The insurance fund’s board quickly approves higher premiums.
The head of the Federal Deposit Insurance Corp., girding for a possible wave of bank failures, proposed Thursday to borrow $30 billion during the next four years to replenish the nation’s depleted deposit insurance fund.
FDIC Chairman L. William Seidman emphasized that the industry--not American taxpayers--ultimately would be responsible under his proposal for shoring up the fund, which protects bank depositors up to $100,000 per account.
The plan “does not involve the taxpayers in any way,” Seidman told the financial institutions subcommittee of the House Banking Committee.
The additional $30 billion, combined with the existing premiums collected each year from the nation’s banks, should provide a total of $64 billion through 1995, enough to pay for any level of bank failures short of an “inconceivable” collapse, Seidman said.
The banking industry, which recently proposed a much more modest $10-billion plan, reluctantly embraced Seidman’s idea.
Forcing banks to pay higher premiums “is a bitter pill,” said Richard A. Kirk, president of the American Bankers Assn. “But if it’s needed to ensure that the bank insurance fund is strong enough, it’s in everyone’s best interests for banks to swallow the pill.”
Despite that assessment, opposition to the plan could develop within the industry, as individual banks examine the financial impact of permanently higher premiums. “We are not a bottomless pit,” observed one industry official.
As a first step under Seidman’s plan, the FDIC board voted Thursday to raise the annual insurance premium paid by banks to 23 cents for every $100 in deposits, up from 19 1/2 cents. The premium increase, effective July 1, would cover the cost of borrowing $10 billion for the fund’s short-term cash needs.
Seidman is seeking congressional authority to borrow up to $20 billion more to pay for unanticipated bank failures.
“We are not proposing to borrow all of this money now, and hopefully we’ll never have to borrow it,” Seidman said during a meeting with reporters. “On the other hand, we think a standby plan is prudent if the fund is to be protected.”
Seidman, in effect, is asking Congress to give him permission to open a big line of credit at the Treasury in case there are many more bank failures than expected.
During the early stages of the savings and loan crisis, the federal insurance fund protecting thrift deposits did not have enough cash to close down ailing S&Ls; and pay off depositors. Dozens of dying institutions were kept open, accumulating additional losses of billions of dollars that eventually will be paid by taxpayers.
The banking industry had suggested that its $10-billion plan would be adequate and proposed that premiums should be capped after payment of a one-time special assessment.
Seidman’s more ambitious plan includes the immediate increase in premiums to 23 cents per $100 and congressional approval of a cap of 30 cents. He also seeks authority to levy the premium on a wider base of deposits. Currently, it applies only to banks’ domestic deposits.
If Congress adopts the FDIC chairman’s plan, the healthy portion of the banking industry will face the prospect of permanently higher premiums to pay for the rescue of depositors at failed institutions.
The FDIC fund dwindled to $8.4 billion at the end of last year, as funds were drawn off to pay for cleanups of more than 1,000 bank failures since 1984.
Although Seidman is preparing for the worst with his borrowing plan for the insurance fund, he said he has become modestly optimistic about the U.S. real estate market, the biggest source of business for the banking industry.
“It looks like we may be bottoming out,” he said, discussing the FDIC’s latest report on market conditions. Lower interest rates and falling home prices are making residential housing more affordable for the average family than at any time since 1977, the FDIC chairman said.
The commercial real estate market continues to be plagued by high vacancy rates, he noted. Even so, California’s “office employment growth has held up fairly well,” Seidman said. Vacancy rates, although still high, were easing somewhat in Los Angeles, Orange County, San Francisco and San Diego, the FDIC report said.
