Banks brace for FDIC charge covering failures

The Federal Deposit Insurance Corporation (FDIC) is mulling the possibility of charging member banks yet another special assessment this fiscal year to make sure funds are available to cover the increasing cost of bank failures across the nation.
How much the fee would be hasn’t been decided, said David Barr, a spokesman for the agency based in Washington, D.C. Barr said the board is in the process of deciding if another assessment is needed and there is no timetable for when a decision will be made.
“It’s a decision the board has to make based on a lot of factors,” Barr explained. He noted that the main reason for the special assessments is to render the FDIC insurance fund “industry-backed, rather than turning to the U.S. Department of the Treasury or the taxpayers for a loan.”
The assessments are needed because of an increasing number of bank failures in the nation. The banking industry lost $3.7 billion in the second quarter, the FDIC has said, and the agency’s deposit insurance fund dropped 20 percent in the same period, to $10.4 billion – the lowest level in nearly 16 years – compared to $45.2 billion one year ago, The New York Times reported late last month.
As of Sept. 15, 92 member banks in the United States had closed since the start of the year, according to the FDIC Web site (www.fdic.gov), including 47 so far in the third quarter: eight in September, 15 in August and 24 in July. Twenty-four closed in the second quarter and 21 in the first quarter, according to the FDIC. None of the failed banks is in Rhode Island or Massachusetts. There are more than 8,000 banks in the country.
The FDIC also reported that the number of “problem banks” in the country increased to 416 in the second quarter, from 305 in the first. When banks fail, the FDIC provides insurance to protect deposits, so the nation can be spared the turmoil that struck Rhode Island in 1991 when some financial institutions without FDIC backing went under and the state insurer, the Rhode Island Share and Deposit Indemnity Corporation (RISDIC), went bankrupt.
Even though some experts say the recession is nearing an end, bank failures can be expected to last longer. “These credit problems will outlast the recession by a couple of quarters,” Sheila C. Bair, FDIC chairwoman, told The Times.
On top of elevated insurance fees, the FDIC imposed a special assessment on banks in the second quarter to replenish the deposit insurance fund. The first proposal in February would have set an extra fee of 20 cents on every $100 of deposits, Barr said, but it produced “a lot of backlash” from banks that felt the charge was too high.
Once Congress increased the FDIC’s borrowing authority with a $500 billion line of credit, Barr said, the assessment was dropped to 5 cents for every $100 in assets rather than deposits. The idea, Barr explained, was that the larger banks would hold more assets than the smaller community banks and so would pay more for the protection.
“You do get to a point where the [FDIC] board has to decide how much the industry can afford to pay, without costing too much,” Barr said.
At rates before the assessment, the FDIC would take in about $12 billion in revenue each year for the deposit insurance fund; the special assessment, based on assets as of June 30, is expected to bring in another $5.5 billion, according to Barr.
The financial impact of special assessments on local banks can be seen in the earnings reports filed each quarter. For the second quarter, Bancorp Rhode Island Inc., the parent company of Providence-based Bank Rhode Island, posted a profit of $740,000, a 66.98 percent drop from $2.24 million in the same period a year ago. Higher-than-normal premiums from the FDIC were cited as the main cause for the smaller profit. The payment to the FDIC totaled $1.18 million, including the special assessment, compared to $162,000 the year before.
Washington Trust Bancorp, the parent of Westerly-based Washington Trust Co., reported a second-quarter profit of $3.77 million, down 38.2 percent from $6.1 million in the same period the year before. Earnings were lower due to FDIC premiums that were $1.89 million higher than the previous year, including $1.35 million for the special assessment alone, bank officials said.
John C. Warren, chairman and CEO of Washington Trust, told Providence Business News last week that the FDIC is expected to make its decision about a second assessment by the end of September. He said he is “guessing” that, if another charge is assessed, it will be “similar” to the $1.35 million the bank already paid in the first assessment.
Warren said he and his colleagues “understand the situation” and fully recognize the need for a healthy deposit insurance fund, but he is “disappointed that the strong banks are put in the position of replenishing it.”
At Bank Newport, Kathleen A. Charbonneau, assistant vice president for public relations, reported that the bank paid the FDIC a special assessment of “slightly over $500,000.” Thomas W. Kelly, president and CEO, said the bank “would not be happy” about another special charge “mainly because we didn’t create the problems.” &#8226