U.S. banks say FDIC fee plan may stifle loans

By Al Yoon and John Poirier

NEW YORK, Nov 18 (Reuters) - U.S. banks and thrifts are launching an offensive against a proposed federal rule that would boost costs on one of their last reliable sources of funding for loans.

Financial institutions have sent more than 100 letters to the Federal Deposit Insurance Corp over the past month protesting a proposal that the government agency says would help restore its deposit insurance fund.

The FDIC charges U.S. banks to insure their deposits. The agency is considering boosting fees on banks that fund loans in significant amounts through secured borrowing from institutions such as the Federal Home Loan Banks rather than through deposits.

The rule is meant to ensure that banks pay insurance fees that are proportional to the risk they pose to the insurance fund. Under current rules, a bank that borrows from a Federal Home Loan Banks pays smaller insurance fees than one that relies on deposits, even though risks of failure and costs to the FDIC may be the same, the agency said.

Bankers say loan advances from the Federal Home Loan Banks are now one of their few reliable sources of funds. The proposed increase of up to 50 percent over current assessments could stifle lending at a time when credit is already at its tightest in years, and economists say a long U.S. recession appears inevitable.

"It's very ironic that the very time the federal government is spending billions to bail out failing institutions, the FDIC comes up with this scheme to increase fees on community banks that do lending on main street," Alfred DelliBovi, president of the Federal Home Loan Bank of New York, said in an interview.

Few question the need to replenish the roughly $45 billion deposit insurance fund as demands on the FDIC are increasing. The financial crisis has led to the failures of 19 banks this year, most notably IndyMac Bank, which the FDIC estimates will cost the fund about $8.9 billion.

More failures are expected with mortgage-related losses reeling out of control.

EQUALIZING OR PENALIZING?

Under the proposed change, a bank's deposit insurance assessment would rise if it had a ratio of secured liabilities such as FHLB advances to deposits greater than 15 percent. The proposal calls for increasing premiums by 12 to 14 basis points in the first quarter and then charge higher rates but no more than 50 percent of their current base assessment.

Chris Cole, senior regulatory counsel at the Independent Community Banks of America, said his trade group is canvassing about 100 institutions on potential impact from the proposal.

"What we don't want to do is penalize community banks that have reasonable amount of advances," Cole said.

Advances to the FHLB's more than 8,000 member banks topped $1 trillion in September, up 58 percent from the end of 2006.

FHLB debt outstanding has ballooned as a result, competing for investor dollars with other "AAA" rated assets, including U.S. government debt. The FHLBs and other "agency" issuers -- Fannie Mae and Freddie Mac -- carry only "effective" guarantees from the government, subordinating them to to U.S. Treasuries.

Funding costs for the FHLBs have risen, but community banks still cherish advances.