U.S. banks yesterday (Tuesday) got what they wanted by avoiding another special assessment from the Federal Deposit Insurance Corp. (FDIC). However, the FDIC's mandate that all banks prepay their regular assessments through 2012 to replenish its near-zero fund will likely put further strain on banks' ability to lend, and force the FDIC to take further steps to keep its fund intact.
Banks insured by the FDIC will be required to prepay their regular quarterly assessments for the fourth quarter as well as the next three years by December 30, but are not required to show the charges on their balance sheets until the earnings report of a given quarter. The FDIC is expecting $45 billion to be raised from the prepayments. Additionally, the FDIC will increase the assessments by 3 cents on every $100 deposited. The healthiest banks currently pay 12 to 16 cents on every $100.
"The premium increase in the out years was a surprise," American Bankers Association (ABA) President Edward Yingling told The New York Times. "The industry agrees that this is a better alternative to what clearly would have been several special assessments, but this prepayment will decrease the ability to lend."
Since the banking crisis began a year ago, credit has been harder to come by for consumers and businesses alike. While the FDIC's requirement of banks to prepay their assessments may not affect banks' bottom lines, it will take away from their cash positions.
Larger banks like Bank of America Corp. (NYSE: BAC), which had roughly $140 billion in cash at the end of its second quarter, shouldn't have trouble with a prepayment. But the FDIC mandate will likely take its toll on smaller banks, already struggling with losses from the battered commercial real estate market. Money Morning warned in April that a collapse in commercial real estate threatened to blot out a recovery of the U.S. economy.
Commercial real estate makes up for a large part of the toxic assets on banks' balance sheets. The quality of those assets isn't expected to get better in the near-term, the FDIC said yesterday (Tuesday).
Negative Fund Balance, Ratio Will Be Around For Years
The balance of the FDIC's fund and its, which is required by law to be 1.15% of the deposits it insures, is expected to be negative as of today (Wednesday). At the end of the second quarter, the fund was at $10.4 billion. Since then, 14 banks have failed.
The FDIC projects its fund – which insures roughly $4.5 trillion in deposits – may remain negative until 2013, and the reserve ratio would not return to 1.15% until late 2018, adding that these projections are subject to "considerable uncertainty."
The FDIC said in May that it anticipates $70 billion in bank failure costs through 2013, but has since revised that number to $100 billion. And with the number of failures this year almost four times 2008's level, another revision could be necessary.
Several options were considered by the FDIC on how to replenish its fund that insures bank deposits, none of which were entirely appealing to banks, taxpayers or legislators. It could still implement other options – such as borrowing from the Treasury – if its fund and reserve ratio projections are off.
"This prepayment will be a short-term asset, like an investment, but particularly for banks with a high percentage of loans, the prepayment will mean they have less money to lend as it will be tied up in this asset," the ABA's Yingling told The Times. "There will and should be a discussion of whether it makes sense to use the Treasury line. Banks will pay the whole thing one way or another, but the line will not constrict lending as much in the short term."
Banks can apply for an exemption from the prepayment if it would "significantly impair the institution's liquidity or would otherwise create significant hardship," the FDIC said, adding that it does not expect the number of exemptions to drastically affect the amount of prepayments it will receive.
News and Related Story Links:
- The New York Times:
FDIC Moves to Replenish Bank Fund
- Money Morning:
Will Commercial Real Estate Pose the Next Hurdle for the Federal Reserve?
- Money Morning:
Will the Dark Cloud of Commercial Real Estate Blot Out the U.S. Recovery?
- Money Morning:
FDIC Weighing Unappealing Options for Fund Replenishment