Bank­ing cri­sis has Capi­tol Hill at fever pitch

The Washington Times Weekly - - National - BY DAVID M. DICK­SON

The num­ber of trou­bled banks has risen sharply in re­cent months, and the Fed­eral De­posit In­sur­ance Corp.’s in­sur­ance fund has dipped be­low the min­i­mum level es­tab­lished by Congress, but there is lit­tle chance that tax­pay­ers will be called upon to make up any short­fall.

If a slew of bank fail­ures re­quired the FDIC to tap its line of credit at the U.S. Trea­sury Depart­ment to pay off de­pos­i­tors of failed com­mer­cial banks and thrift in­sti­tu­tions, the pre­mi­ums paid by the re­main­ing banks would be more than ad­e­quate to re­pay the loans, an­a­lysts said two weeks ago.

Ap­pear­ing at the White House on Sept. 19 with Trea­sury Sec­re­tary Henry M. Paul­son Jr. and Fed­eral Re­serve Chair­man Ben S. Ber­nanke, Pres­i­dent Bush tried to re­as­sure av­er­age in­vestors that their money in sav­ings and check­ing ac­counts is in­sured and won’t be lost.

“The FDIC has been in ex­is­tence for 75 years, and no one has ever lost a penny on an in­sured de­posit, and this will not change,” he said.

Pri­vate-sec­tor ex­perts agreed. “There is no long-term prob­lem at the FDIC,” said Christo­pher Whalen, co-founder and manag­ing di­rec­tor of In­sti­tu­tional Risk An­a­lyt­ics, which rates banks and thrifts for pri­vate clients.

Bert Ely, who has spe­cial­ized in de­posit-in­sur­ance and bank­ingstruc­ture is­sues since 1981, agreed. “The most im­por­tant thing to keep in mind is that the FDIC fund is a fic­tion, just like the So­cial Se­cu­rity trust fund,” he said. “What is key is the ca­pac­ity of the bank­ing in­dus­try to pay the higher de­posit-in­sur­ance pre­mi­ums needed to cover bank-fail­ure losses. That ca­pac­ity ex­ists.”

Mr. Ely said it was “highly un­likely” that the FDIC’s de­posit-in­sur­ance sys­tem will prove in­ad­e­quate. “We don’t have the same sit­u­a­tion go­ing on to­day that we had when the sav­ings and loan cri­sis erupted in the 1980s,” he ex­plained. “Sav­ings and loans were bor­row­ing short and lend­ing long, which is what the in­vest­ment banks are do­ing to­day.”

Cit­ing bet­ter bal­ance sheets and a bet­ter reg­u­la­tory regime, Mr. Ely said, “Banks to­day are fun­da­men­tally sounder than S&Ls in the 1980s. There is ab­so­lutely no com­par­i­son.”

Sep­a­rately, the Trea­sury an­nounced Sept. 19 the es­tab­lish­ment of a tem­po­rary guar­an­tee pro­gram for money-mar­ket mu­tual funds. Pres­i­dent Bush au­tho­rized the Trea­sury to use up to $50 bil­lion in the De­pres­sion-era Ex­change Sta­bi­liza­tion Fund to in­sure money-mar­ket mu­tual fund hold­ings over the next year.

At the end of June, the FDIC’s De­posit In­sur­ance Fund held $45.2 bil­lion, which was $6.1 bil­lion be­low the con­gres­sion­ally tar­geted min­i­mum level of $51.3 bil­lion, ac­cord­ing to LaJuan Wil­liams-Dick­er­son, an FDIC spokes­woman. The min­i­mum level is based on a per­cent­age of in­sured de­posits be­tween 1.15 per­cent and 1.25 per­cent. At the end of June, the $45.2 bil­lion in­sur­ance fund rep­re­sented 1.01 per­cent of in­sured de­posits, which to­taled about $4.4 tril­lion, ac­cord­ing to An­drew Gray, an FDIC spokesman. At the end of March, the fund held 1.19 per­cent of in­sured de­posits.

When the in­sur­ance fund falls be­low its min­i­mum level, the FDIC is re­quired by law to raise the pre­mium rates, Mr. Gray said.

FDIC Chair­man Sheila Bair told the House Fi­nan­cial Ser­vices Com­mit­tee on Sept. 18 that the agency planned to un­veil new riskbased pre­mi­ums in Oc­to­ber. In­sti­tu­tions that rely heav­ily on bro­kered de­posits or se­cured lend­ing would have to pay higher pre­mi­ums, while those with rel­a­tively high cap­i­tal lev­els and that is­sued sub­or­di­nated debt would pay lower pre­mi­ums.

“We want to pro­vide pos­i­tive in­cen­tives for them to change their risk pro­file,” Mrs. Bair said.

Mr. Ely said there was no clear way to de­ter­mine pre­cisely how the ad­di­tional costs of higher pre­mi­ums would be dis­trib­uted, but he said they would be passed through to de­pos­i­tors, bor­row­ers and share­hold­ers. “A higher pre­mium is just an­other ex­pense item in op­er­at­ing cost to be re­cov­ered,” he said.

Eleven banks have failed so far this year. Sev­eral of those fail­ures occurred among “out­liers, like IndyMac, which were en­gag­ing in very risky prac­tices,” Mr. Ely said. At the end of the sec­ond quar­ter, the FDIC con­sid­ered 117 banks and thrifts to be in trou­ble. That was an in­crease from the 90 in­sti- tu­tions on the list at the end of the first quar­ter. The cu­mu­la­tive as­sets on the books of the trou­bled banks and thrifts tripled from $26.3 bil­lion on March 31 to $78.3 bil­lion on June 30, in­clud­ing $32 bil­lion in as­sets at IndyMac, which failed in July.

IndyMac, a Cal­i­for­nia-based thrift, was not on the FDIC’s March 31 prob­lem list. “Well, they didn’t know Se­na­tor [Charles E.] Schumer was go­ing to send out a let­ter scar­ing the [devil] out of de­pos­i­tors,” ob­served Gary Townsend of Chevy Chase-based Hill-Townsend Cap­i­tal.

The lat­est es­ti­mates in­di­cate the IndyMac fail­ure will likely cost the FDIC be­tween $4 bil­lion and $8 bil­lion, said Ms. Wil­liams-Dick­er­son, of the FDIC. She added, “We do not an­tic­i­pate there will be enough fail­ures to de­plete the in­sur­ance fund,” which held $45.2 bil­lion at the end of June.

Just in case, how­ever, the FDIC has a line of credit at the Trea­sury, Ms. Wil­liams-Dick­er­son said. Mr. Gray, also of the FDIC, stressed, “The FDIC is backed by the full faith and credit of the U.S. gov­ern­ment.”

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