FDIC May Add to Special Fees as Mounting Failures Drain Reserve

By Alison Vekshin

Aug. 20 (Bloomberg) -- Colonial BancGroup Inc.’s collapse and the prospect of mounting failures among regional lenders may prompt the Federal Deposit Insurance Corp. to impose a special fee as soon as next month to boost reserves by $5.6 billion.

The FDIC board might act sooner than expected after the Aug. 14 failure of Alabama-based Colonial cost the agency’s insurance fund $2.8 billion, and as banks such as Chicago-based Corus Bankshares Inc. report dwindling capital and Guaranty Financial Group Inc. of Austin, Texas, says it may fail. The fund fell to the lowest level since 1992 in the first quarter.

“With the failure of Colonial Bank and the possible near- term failures of one or two more large banks, the FDIC may be forced to levy a special assessment on the industry sooner than it had planned,” said Camden Fine, president of the Independent Community Bankers of America, an industry group.

The failure of 77 banks this year is draining the fund, prompting the agency in May to set an emergency fee of 5 cents for every $100 of assets, excluding Tier 1 capital, to raise $5.6 billion in the second quarter. The agency has authority to set fees in the third and fourth quarters, if needed, to prevent a decline in the fund from undermining public confidence.

The FDIC board has until Sept. 30 to adopt a fee that banks would set aside in the third quarter. The agency has already signaled another special fee this year.

“We will likely have to have another special assessment in the fourth quarter,” FDIC Chairman Sheila Bair said in an Aug. 5 Bloomberg Television interview.

Two additional assessments this year are “very possible” amid the rising cost of failures, Chip MacDonald, a partner specializing in financial services at law firm Jones Day, said in a telephone interview.

‘Painful For Industry’

The FDIC is unlikely to add a third-quarter fee, said Joseph Longino, a principal at Sandler O’Neill & Partners LP, a New York-based investment bank focused on financial-services firms. “The FDIC understands this is painful for the industry,” he said.

FDIC spokesman Andrew Gray declined to comment.

The fund had $13 billion on March 31, the lowest since 1992 when it was $178.4 million, the FDIC said. The 56 bank collapses since March 31 cost an estimated $16 billion. First-quarter failures cost the fund $2.2 billion, the agency said.

The agency is required by law to shore up the fund when the reserve ratio, or balance divided by insured deposits, falls below 1.15 percent. It was at 0.27 percent as of March 31.

The industry will pay $17 billion in premiums this year, including $11.6 billion from the annual fee, said Robert Strand, a senior economist at the American Bankers Association, said in a telephone interview.

‘Great Expense’

“This is not a good time for the industry to pay an additional special assessment,” Strand said. “This is a great expense while banks are trying to recapitalize and make loans.”

If the fund is drained, the FDIC also has the option of tapping a line of credit at the Treasury Department that Congress extended in May to $100 billion, with temporary borrowing authority of $500 billion through 2010.

Separately, a proposal Bair made last month to charge banks additional fees tied to risks when their business expands beyond traditional lending, such as proprietary trading, hasn’t advanced during Congress’s recess. A fund created with the fees would cover losses when a large firm collapses, avoiding government bailouts of companies deemed too big to fail.

“Those institutions that have been the riskiest and have engaged in the riskiest behavior should be assessed,” House Financial Services Committee Chairman Barney Frank said in a July 23 interview with Bloomberg Television

FDIC May Add to Special Fees as Mounting Failures Drain Reserve - Bloomberg.com