NEW YORK -- While Congress prepares today to begin yet another round of discussion on bills to reinvigorate the banking system, bankers themselves are preparing for the only certainty: higher costs.
A decision last week to raise premiums paid to the Federal Deposit Insurance Corp. in July from 19.5 cents to 23 cents per $100 in deposits comes on top of an increase last year from 12 cents per $100 in deposits and another increase the year before from 8.3 cents per $100, an amount that had been constant since the 1930s.
"We can control almost all our other costs, but we can't control this one," said H. Furlong Baldwin, chief executive of Mercantile Bankshares Corp. "It's a major wild card."
Added Charles Cole, chief executive of First National Bank of Maryland, "It's like a tax, and it definitely hurts."
Deposits are for banking much like soil is for farming. Like farmers trying to deal with depleted land when crop prices are down, banks are being forced to increase their allocation for conservation at a time when their business is embattled. The proposal to raise premiums comes in response to mounting pressure on the federal bank insurance fund, which has been rocked by record numbers of bank closings.
The FDIC reckons the higher premiums will provide another $435 million in annual income for the fund. That would support about $10 billion in borrowing the FDIC believes will be needed to pay off recent or imminent bank closings, including about $5 billion for Bank of New England.
Last year, the fund's reserves fell from $13.2 billion to $8.4 billion, despite the collection of about $3 billion in premiums.
For strong banks such as Mercantile and First Maryland, security analysts suggest the higher fees will merely reduce profits between 1 percent and 3.5 percent. That's a "noticeable but not significant" amount, said Reid Nagle, of SNL Securities in Charlottesville, Va.
But for weaker banks, it will mean another cost to come out of an already insufficient income and could serve to further impair their ability to survive in an industry that is structured to favor the healthy.
Because competition has become so intense, passing on the added charges to customers will be difficult, but not impossible. Banks have recently witnessed a sharp decline in the rates they pay for money but have only modestly reduced the rates they charge for loans -- a rational move, analysts say, given the industry's need to rebuild capital.
The spread between the funding costs and lending price will probably stay high for quite a few years, predicted Francis Suozzo of S. G. Warburg & Co.
Many bank customers have recently been exposed to the realities of a credit crunch, and Mr. Suozzo suggests they are now willing to pay the higher costs to a stable bank rather than endanger the relationships to lenders that become critical in difficult times.