FDIC lowers expected cost of bank failures by $8B

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Posted: Oct 19, 2010 1:12 PM
FDIC lowers expected cost of bank failures by $8B

Federal regulators decided against raising the fees that banks pay to insure deposits after determining the losses from bank failures this year were lower than anticipated.

The board of the Federal Deposit Insurance Corp. voted Tuesday to cancel a scheduled fee increase and instead proposed a new plan for ensuring that the insurance fund, now in deficit, reaches the level mandated by Congress.

The decision was made after the FDIC staff provided a new estimate of $52 billion in losses from 2010 to 2014. That's down from a previous projection of $60 billion.

The financial overhaul law enacted last summer mandates that the insurance fund be restored to at least 1.35 percent of total insured bank deposits by 2020. With 297 banks having failed since the start of 2008, the fund is in the red by about $15 billion and is at 0.28 percent of total deposits.

The FDIC on Tuesday proposed setting a goal of 2 percent for the fund by 2027.

The board also proposed to end a policy that allowed banks to receive rebates when the insurance fund reaches healthy levels. Instead, the proposal would reduce the fees when the fund hits those levels. The FDIC opened the proposal to public comment for 30 days; it could be formally adopted sometime after that.

"I am pleased that we are able to provide some (insurance fee) relief now in light of our lower loss projections," FDIC Chairman Sheila Bair said. "While it is difficult to make long-term projections, we are trying to give the industry greater certainty regarding what rates will be over the long run."

The fee increase that was canceled, which was to have taken effect Jan. 1, was 3 cents for every $100 of a bank's insured deposits.

Last year, for the first time, the FDIC required banks to prepay three years' worth of insurance fees. The new premiums came on top of a special emergency fee that took effect in mid-2009.

Smaller banks protested the new fees. They said they were being penalized for risky moves made by larger banks that led to the financial crisis.

Besides the insurance fund, the FDIC had about $44 billion in cash available in reserve as of June 30 to cover losses at failed banks.

(This version CORRECTS fund deficit to $15 billion. This story is part of AP's general news and financial services.)