UPDATE 3-Large US banks to shoulder more cleanup costs-FDIC

* FDIC’s Bair says formula fair but Dugan disagrees

* Assessment based on assets, not deposits

* Expected 5-year fund losses revised upward (Adds Dugan comment, details on insurance fund)

WASHINGTON, May 22 (Reuters) - Big U.S. banks will shoulder a larger share of restoring the fund that guarantees bank deposits under a measure approved on Friday despite a dissenting vote from a key regulator.

Federal Deposit Insurance Corp Chairman Sheila Bair defended the formula saying large institutions deserved much of the blame for fueling the financial crisis by funding high-risk mortgages.

By a 4-1 vote, the FDIC’s board decided to impose a levy of 5 basis points on each institution’s assets, minus its strongest capital holdings.

The move modifies a previous decision to charge banks a special fee of 20 basis points based on domestic deposits.

Large lenders like Bank of America BAC.N, Citigroup C.N and Wells Fargo WFC.N will pay more under the new formula because they have relatively low levels of deposits as part of their assets when compared with regional banks.

Comptroller of the Currency John Dugan, whose agency supervises the largest U.S. banks, voted against the measure. He called the shift in the assessment burden “perverse” because the deposit insurance fund has been largely drained by the failure of smaller banks.

Dugan said the change means larger banks will pay for 76 percent of the special assessment when they have not significantly contributed to the insurance fund’s losses.

But Bair said many large banks had been propped up by massive government aid. “If it weren’t for... (that), some big banks would have failed and there would have been costs.”

The new formula shifts about $500 million of the $5.6 billion fee to larger institutions instead of smaller ones.

“Many large institutions played a central role in the securitization process that funded high-risk mortgages,” Bair said.

The special assessment will be collected in the third quarter, and will likely be followed by more special fees. The FDIC raised the expected loss for the insurance fund to $70 billion over the next five years from $65 billion.

The FDIC said it has been forced to charge the emergency fee to stop the deposit insurance fund grinding to zero.

The deposit insurance fund took a big hit during the fourth quarter, plunging almost 50 percent to $18.9 billion in preparation for actual and expected bank failures.

On Thursday the FDIC announced the seizure of BankUnited Financial, the largest Florida-based bank, which will cost the fund about $4.9 billion.


The agency also approved the option to collect additional special assessments in the fourth quarter of 2009 and the first quarter of 2010 if the deposit insurance fund falls to a level that threatens public confidence.

Bair said “it is probable” that the agency will need to charge another such fee in the fourth quarter. But she hopes the additional fee will be less than 5 basis points on assets -- the equivalent of 5 cents for every $100 in assets.

All of the fees will be capped at 10 basis points of the banks’ usual assessment base, which is domestic deposits.

The special fee to be collected in the third quarter is expected to cost JPMorgan Chase Bank about $740 million, Bank of America about $801 million, Citibank about $318 million, and Wells Fargo about $629 million, according to industry estimates based on the institutions’ assets at the end of 2008.

The banking industry said the fee comes at a time when the industry can least afford it.

“It’s still pulling a substantial amount of reserves out of the industry,” said James Chessen, the chief economist at the American Bankers Association.

Bair said she does not expect to have to tap the FDIC’s line of credit with the Treasury, which this week was more than tripled to $100 billion.

The FDIC said the increase in borrowing authority gives the agency more breathing room, and allowed it to reduce the special assessment. (Reporting by Karey Wutkowski and Patrick Rucker; Editing by Gerald E. McCormick, Richard Chang, Tim Dobbyn)