Consumers: Bank Fees Should Rise Even More. Thanks FDIC!by Tim Manni
It has been nearly impossible to dodge the near-constant news of bank failure after bank failure. It seems as though every Monday morning our inboxes have been contained another news alert that a bank has either failed or been taken over.
We’ve advised readers on the ways to ensure that their money will be protected: verify that your bank is FDIC insured, keep your accounts under the $250,000 insurance limit, etc. However, you need to be concerned, or at least aware, of individual bank failures — even if they aren’t happening to your bank or even if they’re happening hundreds of miles away.
During this troubled economy, each bank failure eats up more of the FDIC’s reserves. It’s no secret that when those reserves get low, the FDIC begins to develop “creative” ways — as Craig Pirrong writes — of raising capital that raises caution flags for financial professionals like us and Pirrong.
Just this morning, the FDIC proposed that banks prepay three years worth of deposit insurance premiums in order to shore up their reserves and hedge against the growing number of failures. The Wall Street Journal reported that the FDIC is looking to raise $45 billion in these prepayments.
FDIC premiums have already risen, eating up banks’ capital. “I don’t how the FDIC expects banks to come up with this money,” said HSH VP Keith Gumbinger. “With capital already dear, there isn’t much available right now. Less available capital necessary leads to tighter lending conditions, and if you thought lending restrictions were tight before, just wait until banks run even lower on money.”
Gumbinger further alluded to FDIC Chairman Sheila Bair’s reluctance to open a line of credit with the Treasury. “Perhaps she’s afraid the using of taxpayer money will mean losing some FDIC control to Congress…A scenario recently played out with TARP funds.”
From the WSJ:
The FDIC proposal avoids having the agency assessing the banking industry an immediate special fee, which already happened once this year, or tapping the agency’s line of credit with the Treasury. Ms. Bair said the agency may have to borrow from the Treasury at a later date, but that it would prefer to rely on the banking industry to pay for the deposit insurance fund without causing too much shock for banks.
You can bet that if these prepayments come at a cost to banks, those added costs will directly be passed down to all of us. According to the Journal, consumers will have 30 days to comment on this proposal. We’ll keep you posted.