Interesting notes on the FDIC plan from Stifel's Christopher Mutascio
Scenario 1 - Borrowing Directly From the Banks
Does anyone out there see this potential plan as a conflict of interest? So, one of the lead U.S. bank regulators may
borrow money from the banks in which it regulates? That is absurd on so many levels, in our view. Let us count just a
1) The arms-length transaction/relationship between regulator and the regulated would no longer exist. The proposed
plan would be breaking the golden rule regulation as the two parties would be too closely aligned with one of the
parties indebted to the other. Objectivity would have to be called into question when the bank regulator examines one
of the banks that provided it emergency funding.
2) Would those banks that provide lending to the FDIC get preferential treatment as a quid pro quo? Would their
voices on hot topics be heard over the rest of the industry?
3) Could the lending/borrowing relationship compromise the FDIC's position on re-regulation when pitted against other
regulators on how to reshape the bank regulatory landscape?
4) What happened to concerns over institutions that are "too big to fail"? In order to borrow enough money to support
the insurance fund for the bank failures that are to come it is probable that many large banks would have to contribute
to the lending structure. It is ironic to us that the FDIC is having to use some of these "too big to fail" banks to mop up
the industry of its problems with the acquisitions of several troubled institutions and now may ask the very same large
banks for loans. Perhaps too big to fail is not as bad as many think?
Because of these issues, we have a hard time believing the FDIC would borrow directly from the banks in which it
regulates. It simply makes no sense to us and could cause numerous issues.
Scenario 2 - "Borrowing" from the Banks via Several Years of Upfront Assessments
Of course there could be other options at hand for the FDIC (assuming it does not want to tap its line of credit with the U.S. Treasury). One option we have heard is that the FDIC collects a few years of assessments upfront from the banks in order to replenish the fund. Could this be the "borrowing" that the NY Times refers to? The only problem with that potential solution is that it is uncertain that the banking industry has the capital and/or earnings at present time to be assessed a few years' worth of FDIC assessments in an upfront manner.
In our view, the FDIC should draw on its line of credit with the U.S. Treasury as needed. We believe the sooner the FDIC addresses the bank failures to come, the sooner the industry will regain sound fundamental footing. To the FDIC's credit, it is trying to find ways to keep the insurance fund solvent. It is doing so with one hand tied behind its back, in our view. While hindsight is always 20/20, we believe Congress should have re-instituted the Resolution Trust Corp that would provide the FDIC with the manpower and funding to deal with the building problem of bank failures. The failure to reinstitute the RTC has put the FDIC in a bind. If it ends up "borrowing" directly from the banks it could compromise its regulatory authority. On the other hand, if it "borrows" from the banks via several years of upfront assessments, it could further deplete capital levels of an already fragile industry.