Oklahoma Bankers Association President and CEO Roger Beverage joined a conference call yesterday with FDIC Chairman Sheila Bair and expressed the views of Oklahoma bankers regarding the FDIC proposed special assessment. Here is an article the OBA published on March 2, 2009:
In a conference call this afternoon, FDIC Chairman Sheila Bair acknowledged that there has been a very strong (and negative) reaction among bankers to the FDIC Board’s decision to impose a special assessment against banks to replenish the Deposit Insurance Fund. Importantly, Bair noted that the Agency has established a 30-day comment period. She said the agency specifically asks for comments on charging larger banks a higher proportionate amount in terms of the special assessment by using assets rather than deposits as a basis for its calculation.
Bair stated that the FDIC staff has projected $65 billion in losses to the DIF through 2013, and the losses will be “front-loaded,” i.e., they will occur and cost the DIF more money in 2009 and 2010 than in the out years. She told more than 150 bankers and state association executives on the call that the Board considered a number of options but took the action it did to “avert what would have been a public relations disaster.” She acknowledged that the decision – announced Friday – has caused a lot of shock across the banking industry and that it will cause some bankers a great deal of pain.
The chairman noted that FDIC’s current borrowing authority from the Treasury Department is limited to $30 billion. In explaining why the Board declined to exercise that borrowing authority, Bair told the bankers that FDIC is currently trying to raise its borrowing authority to $100 billion in the 111th Congress, and members of the House and Senate have indicated they would not be supportive of raising the borrowing limit if the FDIC drew on its current authority.
Bair also noted that if the FDIC used up the total of its borrowing authority now, it would not leave the agency with any alternatives in the event a large institution had to be closed and liquidated. She also said, in her opinion, it would be further bad news for the banking industry and would paint all banks with the “bailout brush” and perhaps even expose bankers to more Congressional oversight.
Art Burton, a staff member at the FDIC also commented that staff has looked at a number of different options to get the Reserve (DIF) fund back to its statutory position. Without the special assessment and the increase in deposit insurance premiums, the DIF stands a chance of going to zero before the end of the year.
Bair did point out that losses to the Fund are not coming from the too-big-to-fail banks, but rather are coming from the medium-sized and smaller banks that were heavily involved in commercial real estate development.
Several times during the conversation the chairman emphasized the Agency’s need to raise money “soon.”
“Several of us zeroed in on at least two different approaches,” said OBA President and CEO Roger Beverage. “One approach would be to require banks to pay the money up front but permit them to amortize it over a period of up to 10 years. Another would be to borrow from the industry by creating a bond issue similar to the FICO bonds used during the S & L collapse and allow banks to pay off the bonds over time.
“The FDIC staff indicated that accounting rules would prohibit either of these suggestions because the need is for cash in the DIF or the reserves immediately, and the only way to get that accomplished is to require the full payment of the special assessment all at once. I’m not an accountant, and I will defer to the experts, but it seems to me that we should be able to think of a way to wire around such restrictions on a temporary basis in order to accommodate both the FDIC’s immediate need and the bankers’ need to account for the payment over time.”
Beverage noted that there is also authority in the Interim Rule for an additional 10 basis point assessment if, in the judgment of the FDIC Board, the reserve ratio for the DIF is estimated to “fall to a level … the Board believes would adversely affect public confidence or to a level” that would be close to zero or negative at the end of a Quarter.
Bair also noted the difficulty of changing the current mindset of Congress and the general public, which is more “anti-bank” than in past years. Congress is simply tired of being in the “bailout business” and paying for things.
In response to a banker question, Bair also noted that “bidding up” the cost of deposits is something the Agency is trying to combat. She indicated that FDIC is trying to come up with a “market rate” analysis that would force high bidders to justify their actions to the banking Agency.
Unfortunately, there doesn’t appear to be a “Plan B” at this point. Current authority to borrow up to $100 billion for short-term working capital does not relieve the pressure on the FDIC Board to building the DIF reserve, according to the chairman.