August 27, 2008 / 7:01 PM / in 9 years

FDIC says has options if bank failures soar

WASHINGTON, Aug 27 (Reuters) - The Federal Deposit Insurance Corp has no current need to seek help from the U.S. Treasury Department to bolster reserves to meet an expected surge in bank failures, an agency spokesman said on Wednesday.

Analysts have said dozens or perhaps hundreds of U.S. banks and thrifts might fail in the next couple of years as mounting losses tied to the housing crisis and tight credit markets eat into capital. The number of “problem” lenders increased in the second quarter to 117, with $78.3 billion of assets, from 90 lenders with $26.3 billion of assets three months earlier.

The watchlist indicates financial, operational or managerial weaknesses that threaten a bank’s viability. Not all the banks on the list are expected to fail because some may either be nursed back to health or be acquired by another institution.

The FDIC has short-term lines of credit of up to $40 billion from the Federal Financing Bank, which is supervised by the U.S. Treasury Department and has not been tapped since 1991. The FDIC also has another $30 billion line of credit with the Treasury Department.

In 1990 the FDIC received authority to borrow from Treasury for working capital. In 1991 the FDIC started borrowing and eventually borrowed $15.1 billion, which plus interest was repaid by August 1993.

“That’s not something we are currently weighing or considering,” FDIC spokesman Andrew Gray said. “It’s an option available to the FDIC for additional liquidity and more broadly our borrowing resources. It’s not something we expect to be using in the near-term.”

The FDIC’s industry-paid deposit insurance fund has fallen to $45.2 billion, hurt by an $8.9 billion hit from last month’s seizure of IndyMac Bancorp Inc IDMC.PK, the biggest U.S. banking failure since the 1980s. IndyMac had not been on the “problem” lender list in the first quarter.

While FDIC Chairman Sheila Bair has repeatedly warned of an increase in bank failures -- there have been nine so far this year -- her agency on Wednesday downplayed the need from Treasury.

Other options the FDIC is considering is to raise premiums it charges banks, a big source of its income.

It may also choose to assess higher fees on banks that rely on funding sources that are less secure or more volatile, such as third-party brokered deposits or advances from the federal home loan banks. FHLB advances are paid first by the FDIC when a lender fails, even ahead of depositors.

Charlie Peabody, a bank analyst at independent research firm Portales Partners in New York said higher premiums will hurt weak banks even more.

“The weak are going to get weaker and the strong will be able to take advantage of the weak,” he said.

The insurance fund’s $45.2 billion balance represents just 1.01 percent of all insurance deposits, below the minimum 1.15 percent reserve ratio that the FDIC is required to maintain. A federal law requires the agency to take steps to bolster the ratio to that level within five years.

The fund reimburses depositors who lose money when a bank fails, typically up to $100,000. (Reporting by John Poirier and Jonathan Stempel, editing by Richard Chang)

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