Banking industry authorities Tuesday criticized a proposal for a one-time assessment of as much as $25 billion to shore up the sagging deposit insurance fund, arguing that many banks can't afford it, that it will worsen a national credit crunch and that bank customers may pick up a disproportionate share of tab through higher fees.
Bankers interviewed agreed that there is a clear need to bolster the fund, protect taxpayers and halt the slip in public confidence plaguing banks. But they reacted unfavorably to a proposal outlined Monday by Federal Deposit Insurance Corp. Chairman L. William Seidman that banks be assessed a special fee equal to $1 for every $100 in deposits.
"A 1% assessment on deposits is an enormous amount of money. I don't see any way you could do it in a one-time shot," said former Comptroller of the Currency C. Todd Conover, who now is a banking consultant with the KPMG Peat Marwick accounting firm.
The $25 billion is so large that it will far exceed what the nation's banks are expected to earn this year. Treasury Secretary Nicholas F. Brady has said the banking industry is healthy enough to bail itself out, as has Seidman. That point was challenged by Brookings Institution economist Robert Litan, who said it would result in additional bank failures costing the bank insurance fund $8 billion.
But some banking authorities questioned whether the industry can provide such a large infusion at a time when profits are sliding and when capital--the financial cushion banks maintain to protect against losses--is so hard to come by. Investors are already shunning banks, and Seidman's proposal, analysts said, would undoubtedly make them even more wary.
"I think the critical question is whether the banking system can withstand that kind of depletion at a time when they are trying to build capital and are under regulatory pressures," said Joe Belew, president of the Consumer Bankers Assn.
Seidman said regulators are discussing with banks details about the huge financial contributions, which are needed to protect the fund that insures bank deposits up to $100,000. Regulators and lawmakers are eager to spare taxpayers from any bailout like the one they are already paying for in the nation's savings and loan debacle.
In return for the assessment, Seidman said, banks should be granted expanded powers, including the right to diversify into other businesses and to open branches across state lines without setting up separate banks. In addition, banks should be allowed to count the money they pay to the fund as capital regulations require them to maintain.
Some industry executives criticized the linking of the assessment with expanded powers, saying the Administration is effectively putting a price tag on new powers that should be granted to banks regardless. They also criticized the proposal that the money paid to the fund be counted as capital, calling it an accounting gimmick.
Independent banks were among the most critical of the proposal, saying the "carrot" offered banks as an incentive to pay the assessment is designed almost exclusively for large banks that are in a position to take advantage of the expanded powers.
"There is almost nothing in this for smaller banks except reduced profitability," said Kenneth Guenther, executive vice president of the Independent Bankers Assn. of America.
Banking officials also said the proposal will probably meet heavy resistance in areas such as the Northeast, where banks can least afford to pay the fee.
"No doubt it will be a factor. New England banks are under a tremendous amount of strain in comparison to California banks," said Stan Cardenas, senior deputy superintendent for the California Banking Department.
A number of bankers said they were reserving judgment, noting that the proposal is one of several possibilities being discussed. Executives said they favor bolstering the fund over time instead of a one-time assessment.
The American Bankers Assn., the industry's main trade group, had little specific to say about the proposal because officials there are still studying it.
"It is going to be a burden, no question about it. It's a burden we are going to have to shoulder to make sure the fund gets on a solid footing," spokesman Mark Burneko said.
Bankers also said the proposal would drain too much from the banking system and appears to conflict with efforts by others in the Administration to ease the nation's credit crunch. One banker noted, for example, that an assessment of $20 billion to $25 billion effectively takes some $400 billion to $500 billion out of the system that would be available for lending. That assumes that for every $1 in capital that a bank maintains it loans $20.
Separately, regulators recommended Tuesday that troubled banks pay a higher rate for deposit insurance than healthy ones. Banks now pay a flat rate.