Republicans knock FDIC fee plan as accounting trick

* Republicans say FDIC plan is creating money

* Fed's Bernanke says agency struggling with options

* Bernanke says prepaid fees are a loan from banks to FDIC

By Karey Wutkowski

WASHINGTON, Oct 1 (Reuters) - Republican lawmakers on Thursday criticized a government plan to make U.S. banks prepay fees to replenish the insurance fund that safeguards bank deposits, while the Federal Reserve chairman defended the move.

Lawmakers derided the plan as an "accounting gimmick" that will not help stabilize the banking industry.

Fed Chairman Ben Bernanke said the prepayment is essentially a loan that banks are extending to the government, but added the Federal Deposit Insurance Corp was facing "no good solutions" and chose an option that would not impair banks' lending.

"They made the decision based on what they thought would be the least negative effect on the banking system, and I don't want to second-guess that," Bernanke told the House Financial Services Committee during a hearing on financial reform.

The board of the FDIC voted on Tuesday to propose that banks prepay three years of regular assessments, but not have to take a hit to their earnings until the fees would normally be due.

The $45 billion prepayment, if approved, would give the FDIC the cash it needs to help cover the rising cost of bank failures, now estimated at $100 billion through 2013.

The proposal is an alternative to charging the banks another $5.6 billion emergency fee that could crimp their earnings and lending abilities, or tapping the FDIC's $500 billion line of credit with the Treasury Department.

FDIC Chairman Sheila Bair said she wanted to avoid borrowing from Treasury because it could be perceived as a taxpayer bailout, even though banks would have to repay the loan.

The banking industry has expressed tentative support for the prepayment plan. The American Bankers Association said a plan that spreads the cost of failures over time is the right policy.

Representative Tom Price, a Republican from Georgia, said it seems that banks are being allowed to count a dollar twice because they are paying the FDIC cash, but not immediately recognizing it as an expense, meaning that money can also be lent to consumers.

"Is that not some kind of accounting gimmick?" Price asked Bernanke.

Republican Representative Scott Garrett from New Jersey was also skeptical of the plan, saying it seemed as if the FDIC was trying to create money.

"Well, I don't think it's creating money technically," Bernanke said. "But it is basically a loan from the banking system to the FDIC, which will have to be replaced eventually by actual assessments on the rest of the banking system.

The FDIC is seeking comments for 30 days and will then hold another vote on whether to adopt the proposal.

Bair said the prepayment of assessments strikes a good balance that keeps liquidity in the banks and gives more liquidity to the FDIC, while avoiding the temporary use of taxpayer funds.

"There are not any perfect options out there," she said.

The deposit insurance fund's balance stood at just $10.4 billion at the end of the second quarter, and became negative as of the end of September, the FDIC said.

It will retain a negative balance through 2012 because the FDIC will not be able to immediately include the amount of prepaid assessments in the fund's balance, even though the agency will have the cash.

The FDIC has been forced to seek creative funding sources because of a sharp increase in bank failures triggered by deteriorating loans and a weak economy.

So far this year, 95 U.S. banks have failed, compared with 25 last year and just three in 2007. (Reporting by Karey Wutkowski, editing by Maureen Bavdek)