U.S. banks will prepay about $45 billion in premiums to replenish a federal deposit insurance fund now in the red, under a plan adopted Thursday by federal regulators.
The Federal Deposit Insurance Corp. board voted to mandate the early payments of premiums for 2010 through 2012. Amid the struggling economy and rising loan defaults, 120 banks have failed so far this year, costing the insurance fund more than $28 billion.
To address concerns of small banks in weak financial condition, the FDIC also set up an exemption process for those that prove the prepaid fees would be a hardship.
The FDIC expects the cost of bank failures to grow to about $100 billion over the next four years.
It is the first time the agency has required prepaid insurance fees. The idea behind it is for banks to spread the costs over three years rather than paying a one-time fee that would deplete their capital reserves.
Unlike a one-time fee, the prepaid premiums won't affect banks' earnings "during these difficult times," FDIC Chairman Sheila Bair said before the vote.
The new premiums were proposed by the FDIC in late September and opened to public comment. They come atop a special emergency fee that took effect at midyear, estimated to have brought in about $5.6 billion.
The early payment will be "manageable" for Southern Arizona Community Bank in Tucson, said its president and CEO John P. Lewis. His institution has been paying an average of around $25,000 per quarter for regular insurance premiums, plus about $70,000 this year for the special fee.
The $70,000 "is a little rough on a community bank," Lewis said in a telephone interview. "It would push some banks over the edge."
The three-year prepay likely will cost Southern Arizona Community roughly $300,000 but will work out under the plan to about $9,000 a month, he said _ against a cash balance now at $9.5 million.
Untouched will be the bank's net profits expected at around $500,000 this year and $750,000 in 2010.
Daniel Blanton, president and CEO of Southeastern Bank Financial Corp. and Georgia Bank & Trust of Augusta, said his bank's assessments doubled from 2008 to 2009, and the FDIC's special fee this year made the number even higher. Compared with those costs, he said, the impact of prepayment is minimal.
"The cost is just the earning capacity of that money I paid in advance _ and in this (low interest rate) environment that's not very dramatic," Blanton said by phone.
The deposit insurance fund stood at $10.4 billion at the end of June _ already its lowest point since 1992 _ and since has fallen into deficit. That hasn't occurred since the savings-and-loan crisis of the late 1980s and early 1990s.
Still, depositors' money is guaranteed _ up to $250,000 per account _ by the FDIC.
Many smaller banks have protested the insurance assessments. They complain that they had nothing to do with the excesses of big Wall Street banks, reckless mortgage lending and risky investments that precipitated the financial crisis, but are being forced to pay to help clean up the mess.
The FDIC established an exemption process for banks that demonstrate that the prepaid premiums would "significantly" diminish their cash or "otherwise create extraordinary hardship." The payment covering the three years, plus the current quarter, is due on Dec. 30. Banks deemed to qualify for the exemption will be contacted by Nov. 23 by the agency, but only a small number are expected to be eligible, FDIC staff said.
The plan for prepayments won't provide a long-term fix for the insurance fund, but it does spare ailing banks the immediate cost paying a second emergency fee this year. And most banks likely will be able to prepay their premiums without having to reduce lending to businesses and consumers.
Most banks still have adequate funds available for lending. In a sluggish economy, fewer people and businesses are seeking loans. And investors wary of stocks and bonds have funneled more of their deposits to banks.
Besides the insurance fund, the FDIC has about $21 billion in cash available in reserve to cover losses at failed banks. The agency could tap a $500 billion credit line at the Treasury Department, but Bair has said that is the least desirable option.
With the prepayment solution, the FDIC will be able to continue paying depositors when banks fail. But banks will have to pay tens of billions more in coming years to keep the fund solvent.
Banks are limited in their lending by the amount of capital they hold in reserve. Capital provides a cushion to protect against loan defaults and other losses. Banks that lack enough capital can't extend new credit.
Some banks have had to tighten lending since the financial crisis struck because regulators say their capital buffers are too low. Because the premiums were expected, banks' long-term financial outlook doesn't change.
"The prepaid assessment does come at a cost to the banking industry, impacting bank liquidity and reducing resources available for lending," James Chessen, chief economist of the American Bankers Association, said in a statement. But the bankers' trade group believes the plan is better than the other options for paying the costs of bank failures and rebuilding the insurance fund.
AP Business Writer Daniel Wagner contributed to this report.