WASHINGTON — Despite signs of economic improvement, banks continue to fail at a brisk pace, forcing regulators to scramble to keep the industry-financed deposit insurance fund from running out of cash.
With the fund technically falling into the red today, the Federal Deposit Insurance Corp. proposed Tuesday to require banks this year to prepay $45 billion, or more than three years' worth, of insurance premiums.
The move would allow the FDIC to avoid drawing on a $500-billion line of credit the agency has with the Treasury Department.
"It's clear that the American people would prefer to see an end to policies that look to the federal balance sheet as a remedy for every problem," said FDIC chief Sheila C. Bair. "In choosing this path, it should be clear to the public that the industry will not simply tap the shoulder of the increasingly weary taxpayer."
Insured bank deposits continue to be "100% safe," Bair emphasized, and analysts agreed.
Kevin Petrasic, a former special counsel at the Office of Thrift Supervision, described the FDIC's decision, which is open for public comment for 30 days, "as the least objectionable of some not particularly good options."
Borrowing from the Treasury "would be viewed as yet another taxpayer bailout of the banking industry," he said.
The deposit insurance fund, which insures accounts up to $250,000 in case a bank fails, is financed by premiums paid by financial institutions. But the fund has dropped below its mandated level as it has covered losses at 95 failed banks so far this year.
At the end of June, the fund had $45.2 billion, its lowest level since the end of the savings and loan crisis in 1993. The agency's staff said the fund would have a negative balance as of today, after subtracting $32 billion set aside as of June 30 to cover losses at banks expected to fail over the following year.
Meanwhile, the cost of bank failures stemming from the financial crisis and the recession has been running higher than expected. The agency now projects that bank failures through 2013 will cost $100 billion, up sharply from the $70 billion projected in May.
As a result, without the proposed accelerated premium payments by banks, the FDIC says the fund will run out of cash in the first three months of next year, left only with troubled assets it cannot easily sell.
The FDIC seizes assets of failed banks and sells them to offset losses to the fund. But many of those assets are troubled loans.
