FDIC should take action on risky deposits: Schumer

By John Poirier

WASHINGTON (Reuters) - Regulators should take action on risky "brokered deposits" that are putting some cash- hungry banks in danger of failing, a senior member of the the Senate Banking Committee said on Wednesday.

New York Democrat Charles Schumer urged the Federal Deposit Insurance Corp to consider assessing higher premiums on banks using deposits gathered by third parties such as securities firms and individual brokers who then sell interests in them to investors.

"These 'hot money' deposits have fueled a spate of recent bank failures that has left the deposit insurance fund on the hook for hundreds (of) millions of dollars," Schumer said.

Brokered deposits are short-term deposits that often attract banks in remote areas to increase lending activity, but they are considered highly volatile because investors chasing immediate high returns can withdraw the money and move it to another institution.

Brokered deposits also usually offer higher rates than other bank products such as certificates of deposits. Well- capitalized banks can use the practice, while adequately- capitalized banks need the FDIC's permission. Undercapitalized are prohibited from using brokered deposits.

In March, a small Arkansas bank called ANB Financial, which had $2.1 billion in assets, failed because it could not keep up with high short-term interest rates offered on deposits.

The FDIC picked up the $214 million tab when ANB -- which was taken over by Pulaski Bank and Trust, a unit of Iberiabank Corp (IBKC.O) -- failed.

The FDIC oversees a $53 billion fund that can be used to insure up to $100,000 per deposit and up to $250,000 in certain retirement accounts at banks.

At the end of March, there were almost 8,500 banks and thrifts with more than $7 trillion in domestic deposits, but $4.4 trillion are estimated to be insured.

ANB, which also struggled after over-extending into construction and development lending with poor underwriting standards, became the third bank to fail this year.

FDIC Chairman Sheila Bair said the trend of some banks accepting brokered deposits is a concern for regulators and examiners are on the lookout.

Regulators, lawmakers and Wall Street are carefully monitoring the health of banks, which will be one of several focal points of a Senate Banking Committee hearing with federal regulators on Thursday.

At the end of the last quarter, the number of problem banks on the FDIC's watch list ticked up to 90 with combined assets of $26 billion from 76 with $22 billion at the end of 2007. While that number is expected to head higher among smaller institutions, Bair told Reuters in February the chances of a big bank failure are remote.

In a letter to Bair, Schumer said the FDIC should use its risk-based premium authority to increase premiums for banks that heavily rely on brokered deposits.

"The risk-based pricing authority gives you the discretion to target these premium increases to especially risky institutions without penalizing well-managed banks," Schumer said.