Gloomy outlook reported for FDIC insurance fund

January 26, 1991|By American Banker

WASHINGTON -- The Federal Deposit Insurance Corp. is privately projecting that it could have a $4 billion deficit by the end of next year if it is not recapitalized, according to banking sources.

The projection, reportedly made in closed-door meetings this week with bankers on how to recapitalize the dwindling fund, would be the most pessimistic yet by the agency.

However, FDIC Chairman L. William Seidman said late Thursday afternoon that the banking sources misunderstood what was said in the meetings.

He said the $4 billion figure was not an agency estimate but rather one made by the Office of Management and Budget. "I can't argue with them on the projection because I don't have our '92 numbers," Mr. Seidman said.

The insurance fund has $9 million in reserves, and Mr. Seidman has said that the level will fall to $4 billion by the end of the year.

According to bankers at the meetings, FDIC officials also said that insurance premiums will be raised at midyear to 23 cents for each $100 of deposits. The rate was raised to 19.5 cents this month, from 12.5 cents.

The $4 billion deficit projection includes higher revenues from premiums but does not count any infusion from the banking industry or the government to rebuild the fund, the sources said.

The projection assumes that eight relatively large banks, including some Northeastern savings banks, will need FDIC assistance, the banking representatives said.

One person at the meetings said Mr. Seidman emphasized that the $4 billion figure was a rough estimate. Another source said that within a half-hour, the projected deficit rose to $4 billion from $2 billion after FDIC staffers reviewed their calculations.

But it is becoming clear from such forecasts that the banking industry faces a massive liability in rebuilding the FDIC.

In fact, OMB has concluded that the FDIC will have a $22.5 billion deficit by the end of fiscal 1995, even with a premium increase, according to industry and FDIC sources. The budget agency, by law, must include five-year forecasts for the FDIC in the administration's budget, due to be sent to Congress Feb. 4.

FDIC officials are comfortable with the assumptions the agency has used, but FDIC research director W. Roger Watson said Thursday that it is impossible to make five-year forecasts because no one knows precisely how the economy will perform.

Congress has mandated that the FDIC increase its ratio of coverage to 1.25 percent of industry deposits, which will require the agency to raise about $25 billion. That amount, when combined with the predicted deficit of $22.5 billion, would mean the FDIC needs $47.5 billion over five years.

Bankers and regulators are quick to note that the $25 billion target is becoming an unrealistic goal for the banking industry to pay by itself. Extracting that much money from the industry would exacerbate the credit crunch and slow an economic recovery, they said.

"Over time, it should build up to that $25 billion, but not tomorrow," Mr. Seidman said in an interview this week.

Mr. Watson agreed. "We can't give them a big hit. This is just a bad time to do it."

"For every dollar of capital we take out of the industry in assessments, that is $6 of credit taken out of the system," he added.

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