We live in a Salvador Dali economy, a financial picture where normality and correctness have been stretched and melted into a surrealistic mockery. How else does one describe the surprising, striking and utterly incomprehensible actions over the last 10 days by the Federal Deposit Insurance Corp.?
The FDIC sucker-punched the banking industry at the very end of February. It posted its meeting agenda on Monday, Feb. 23. The lineup for the meeting on Friday, Feb. 27 seemed to be routine. But late in the day on Thursday, the FDIC stealthily posted a 15-page notice about its plans to suddenly lay waste to the banking institutions under its charge.
Within less than 24 hours, the FDIC proposed, debated and adopted a plan to strip as much as $15 billion out of bank capital across this country. The insurer levied a special assessment on all FDIC-insured institutions of 20 cents for every dollar in deposits. This is on top of having already raised banks’ regular assessment from a range of 12-14 cents per dollar of deposits to a range of 12-16 cents.
Last Monday, FDIC Chairwoman Sheila Bair sent a letter to every banker telling them of the change, and warning that the action was necessary because otherwise the FDIC itself is facing bankruptcy. The fund as it currently exists is in danger of being wiped out by growing bank failures.
This is absurd. The money collected by the FDIC is already mingled with the rest of the revenue in the U.S. Treasury. And that’s an institution which has shown itself adept at finding bunches of money to throw at financial institutions that need it.
What makes little sense is for the U.S. Treasury on the one hand to plow billions of dollars in capital into American banks in order to shore up those institutions, while the FDIC levies increased premiums that just suck that investment right back out.
For many banks in the Bay State, the insurance assessment would have meant between $500,000 to $2 million taken out of their bottom lines. Every dollar that a bank has in earnings and capital is a dollar that can be leveraged to make 10 to 15 times that much in loans. So a $2 million payout to the FDIC means as much as $30 million in loans that won’t get made in Worcester, or Fitchburg, or Brockton.
By last Thursday, Bair backed down from her original stand, and cut the proposed special assessment in half. But even that remains too high. In this economic tumult, the FDIC should be funded by Congress, and every available dollar possible should be left in the hands of the banking industry. The community banks of this state are ready to put those funds to work. But that can’t happen if the money is traipsing back to Washington, while local businesses traipse to the poorhouse.
The Massachusetts Bankers Association was reaching out last week to U.S. Rep. Barney Frank. The brash Massachusetts Democrat controls the House Banking Committee, and is seen as the key to getting congressional action to overruling Bair’s piracy. But there was little bombast coming from Frank’s office last week about wanting to save the nation’s community banks from this unjust action.
The FDIC has its game plan backwards. When times are good, it lessens premiums on banks and doesn’t build up its reserves. Now when times are bad, it imposes fee hikes when they do the most damage, not the most good.
This is not a difficult situation to deduce. The public already believes that their deposits are insured by the full faith and credit of the United States. Let that be the truth, and let local bankers keep the capital they need to do their job right.
