FDIC Raises Fees but Does Not Extend Loan Guarantee Program

Rising bank failures forced the U.S. to raise premiums and implement a one-time fee in order to cover the cost of deposit insurance. There were rumours of changes to a debt guarantee program but only minor changes were announced.

The Federal Deposit Insurance Corp. (FDIC) voted to charge banks an additional $27 billion this year due to an expected rise in bank failures. The government-run corporation reimburses customers for up to $250,000 when a bank is forced to close its doors.

The board estimates that bank failures will cost $65 billion through 2013. The fund has fallen far below its government-mandated cushion; it sat at an estimated at $18.9 billion in the fourth quarter.

"We're taking steps today to ensure that the deposit insurance system remains sound," FDIC Chairman Sheila Bair said at a board meeting broadcast on the FDIC website. "These steps are necessary because banks, and not taxpayers, are expected to fund the system."

A one-time fee of 20 cents per $100 in insured deposits will be collected in the third quarter, generating $15 billion according to a Bloomberg report.

The regular fee will also be increased to 12-16 cents from 10-14 cents beginning in April. In 2007, FDIC insurance premiums averaged 5.4 cents and before that, more than 90% of banks didn't pay for deposit insurance.

There was also considerable speculation that the FDIC would extend the Temporary Liquidity Guarantee Program (TLDP). The program allows FDIC-insured banks and bank holding companies to issue government-insured debt with a maturity date of no later than June 30, 2012.

Market watchers suggested the deadline could be extended as late as 2019. The companies pay the FDIC a premium of up to 100 basis point per year to insure senior unsecured debt.

Last week, JPMorgan Chase and Co. used the program to raise $10 billion at a spread of 71.4 - 89 basis points above comparable Treasury notes.

Officials did not announce an extension of the maturity but instead voted to expand the program to include mandatory convertible debt. Officials called it a "very narrow targeted improvement."

By Adam Button and edited by Stephen Huebl
©CEP News Ltd. 2009