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September 29th, 2009

Consumers: Bank Fees Should Rise Even More. Thanks FDIC!

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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.

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5 Responses to “Consumers: Bank Fees Should Rise Even More. Thanks FDIC!”

  1. Chris Says: September 29th, 2009 at 12:29 pm

    Wasn’t there a story out a few months ago about Congress barring the FDIC from collecting the deposit insurance premiums over a 10-year period (1996-2006) because the fund of money just kept growing and there were few bank failures during that time?

    Are bank fees included in the Consumer Price Index?

    Next comes a report saying inflation is still under control, and we’re getting nickeled and dimed to death.

  2. Tim Manni Says: September 29th, 2009 at 2:02 pm

    Hey Chris,

    You’re right on it! Here’s our story: http://blog.hsh.com/?p=2963 (March 2009).

    As the Federal Deposit Insurance Corporation (FDIC) prepares for additional bank failures, chairwoman Sheila Bair has asked Congress for more money. Bair says the FDIC needs $500 billion because the corporation hadn’t collected insurance premiums for 10 years. The blame doesn’t exactly fall entirely on the shoulders of the FDIC:

    The Federal Deposit Insurance Corporation, which insures deposits up to $250,000, tried for years to get congressional authority to collect the premiums in case of a looming crisis. But Congress believed that the fund was so well-capitalized – and that bank failures were so infrequent – that there was no need to collect the premiums for a decade, according to banking officials and analysts.

    I’ll check on the CPI question and I’ll get back to you.

    Good hearing from you,
    Tim

  3. Tim Manni Says: September 29th, 2009 at 2:08 pm

    Chris,

    Hopefully this will answer your CPI question:

    The CPI represents changes in prices of all goods and services purchased for consumption by urban households. User fees (such as water and sewer service) and sales and excise taxes paid by the consumer are also included. Income taxes and investment items (like stocks, bonds, and life insurance) are not included.

    The CPI-U includes expenditures by urban wage earners and clerical workers, professional, managerial, and technical workers, the self-employed, short-term workers, the unemployed, retirees and others not in the labor force. The CPI-W includes only expenditures by those in hourly wage earning or clerical jobs.

    Let me know if you have anymore questions,
    Tim

  4. Chris Says: September 29th, 2009 at 2:37 pm

    Tim, thanks for checking into it.

    My point being that small things add up, and the talk out of Washington is how inflation is in check.

    Fixed costs up this year, so far:

    health insurance premiums: +40%
    newspaper subscription: +18% (at least I still can get a local one in print)
    rent: +5%
    bank fees: ??%

    My local municipality is talking about raising property taxes and sales taxes. Voters get a say in this, however.

  5. Tim Manni Says: September 29th, 2009 at 2:54 pm

    No problem Chris. Consumers get a say in the FICO proposal as well, I just haven’t had a chance to check back in yet with FDIC.gov and see if the proposal has been opened up for public comment.

    You know, part of my intention with this post was to research how much fees (deposit premiums in particular) have increased this year. I did however find a Journal article from Oct 2008 that says the FDIC proposed increased premiums.

    I’ll keep you posted — let me know if you find out anything more.

    Thanks,
    Tim

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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