On September 29th the FDIC announced a plan to bolster its reserves. There were three basic choices:
A) Borrow from the Federal Financing Bank
B) Charge a large special assessment on the banks and
C) Have the banks pre-pay three years of insurance premiums up front.
At the time, the FDIC gave the public a thirty-day comment period before the final determination. That time period is up. The letters are in. I would expect an announcement on this by Ms. Bair before the end of the week.
This is the link to the letters. There are a lot of them. The FDIC may choose to ignore all of the comments, but I think they will address some core issues raised in their final ruling.
The FDIC went after this with a carrot and a stick. They said to the banks:
If you pay up front we will make the accounting work for you. If you don’t, we will charge you a ‘Special Assessment’. That would go through your income statement.
Bankers being bankers it is understandable why they would not want to recognize an expense up front if there was another way around it. Therefore almost all of the letters were in support of the pre-pay deferred recognition approach.
There was some support for the FDIC to tap its credit lines at the Federal Financing Bank. They have a blank check at the FFB for $100 billion. So the pre-pay option isn’t really necessary. But the easier FFB option had a significant cost. Ms. Bair is acutely aware of the ‘anti bailout’ mentality. Her words on the subject:
It's clear that the American people would prefer to see an end to policies that look to the federal balance sheet as a remedy for every problem.
This is why the FDIC made it easy for the banks to choose door (C). It’s cosmetics.
Not surprisingly the Banks all wanted a bone thrown to them. They made a good case. If they did not prepay they would have earned a spread on the cash. So in effect the proposal has a negative impact on income. We wouldn’t want that. A few examples:
Some thought of what may come:
- The $45 b prepay is a done deal.
- There will be exceptions in a number of cases and categories of banks. These banks will get a drawing from the FFB. That drawing will be guaranteed by the FDIC. This is small beer. Maybe $5b. It will look like the FDIC will have no borrowings however.
- There will be no special assessments.
- There will be a discount on the pre-payment. The banks will be allowed to take that as income. Top line benefit that has no substance.
- The assumption that deposits will grow by 5% will be reduced. This will have the impact of reducing the net amount that the FDIC takes in. (by just a few billion)
- The statement will reaffirm that deposits are safe and that the FFB (and this cash) is backstopping that promise.
- This will be made to look like a great success. A true private sector solution.
- The ‘system’ will have created another $45 billion of off balance/income statement funding. This will not show up anywhere.
- If a discount is awarded to the banks then that percentage should be compared to the cost of tapping the FFB for the shortfall. Any excess would be a measure of the Government's willingness to avoid the perception of a bailout.