When U.S. regulators voted unanimously the other day to raise insurance fees for banks by a whopping 62 percent, they did so in an admirable effort to bolster the weakened Federal Deposit Insurance Corporation and avoid the kind of taxpayer bailout that has rocked the S&L industry.
Banks around the country are still folding at near post-Depression era highs, although the rate seems to be declining - 221 in 1988, 207 in 1989 and 118 so far this year. The resulting drain on the FDIC has reduced the fund to $11 billion from a high of $18 billion in 1987.If the fund were to be depleted at the same rate as in 1987-88 and higher fees were not imposed, the FDIC could find itself out of money in about three years.
The higher fees will bring an estimated $4.8 billion into the FDIC in 1991, considerably more than any expected payout. Yet even with the bigger premiums, it will take about five years to bring the FDIC back to full strength. Congress by law has defined a fully-funded FDIC as having reserve of $1.25 for every $100 in deposits.
But regulators must take care that in their eagerness to protect the FDIC fund, they don't inadvertently cause more banks to fail. The new fee will be 19.5 cents per $100 in deposits, up from 12 cents this year. That doesn't sound like an enormous amount, but when it is added up, it represents more than 7 percent of banks' after-tax income in 1989, when the FDIC insurance premium was only 8 cents.
If the 1991 fees had been in effect this year, an additional four banks likely would have failed and another 179 would have posted losses for the year instead of making a profit.
In addition to this year's hefty hike, Congress has given the FDIC authority to raise fees by another 7.5 cents a year until it reaches 32.5 cents. That level would really hurt many banks. It hardly makes sense to insure themselves into bankruptcy.
A better approach might be to reform the FDIC rules. For one thing, the insurance level of $100,000 ought to be lowered to, say, $50,000 or $60,000. That would still cover all the money of most depositors while lowering the potential claims against the FDIC. Congress also would have to limit the number of insured accounts for each depositor.
The trick is to keep a delicate balance between a healthy FDIC and assessing banks so much that they lose money. In a panic over the S&L crisis, let's not pressure banks so hard that they are pushed right out of business.