November 12, 2009 / 3:36 PM / 10 years ago

Banks to prepay fees to cover failure costs

WASHINGTON (Reuters) - U.S. banks will prepay three years of industry fees to give the government about $45 billion in cash to handle the rising tide of bank failures, under a rule finalized by the Federal Deposit Insurance Corp on Thursday.

The industry has generally spoken favorably of the approach because banks would pay the cash upfront but would not have to book the expense until the assessments came due over the three years.

The FDIC would not be able to use the money to bring up the balance of the insurance fund that safeguards bank deposits, but it would have operating liquidity.

U.S. banks that offer insured deposit accounts must pay quarterly fees that are a risk-based percentage of their domestic deposits.

The prepayment has been described as an alternative to imposing another hefty emergency fee on the still-recovering industry, or having the FDIC tap its line of credit with the Treasury Department.

“Many institutions are only beginning to recover,” said FDIC Chairman Sheila Bair.

The deposit insurance fund went into the red at the end of the third quarter due to the highest annual level of bank failures since 1992.

The FDIC estimates that its cash needs would have outstripped its resources in the first quarter of next year if it had not acted to gain more immediate funds.

The American Bankers Association, an industry group that represents banks of all sizes, said the prepayment would be a strain, but is preferable to other options for meeting the costs of bank failures.

“The prepaid assessment does come at a cost to the banking industry, impacting bank liquidity and reducing resources available for lending,” ABA Chief Economist James Chessen said in a statement.

So far this year, regulators have closed 120 banks as the industry struggles with deteriorating loans. That compares with 25 last year and only three in 2007.

Bair has said the pace of bank failures will remain elevated through next year. The FDIC has estimated the total cost of failures at $100 billion from 2009 through 2013.

Under the rule finalized on Thursday, banks on December 30 would prepay their estimated quarterly fees for the fourth quarter of this year and for all of 2010, 2011 and 2012.

The FDIC will consider exempting some banks if the prepayment would harm their safety and soundness, but the agency said it did not expect to grant many exemptions.

Comptroller of the Currency John Dugan, who serves on the FDIC board, had previously raised concerns that the prepayment approach could drain needed cash from the industry. But he said on Thursday that his concerns had been addressed and that the prepayment method was far more preferable than another emergency fee like the one for $5.6 billion imposed earlier this year.

“I strongly believe this is not the time to increase pay-as-you-go assessments on the industry,” he said.

Reporting by Karey Wutkowski, editing by Gerald E. McCormick and John Wallace

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