A recent article in the Wall Street Journal addresses the FDIC’s need to replenish the Deposit Insurance Fund that is uses to support deposits at insured institutions through an expansion of the FDIC’s borrowing abilities at the Treasury. In the article, the Journal makes a distinction between FDIC borrowings from the Treasury and TARP funds: “One difference between the FDIC’s insurance fund and the TARP is that any money the FDIC borrows from the Treasury would likely have to be repaid through assessments levied on banks rather than on taxpayers. The FDIC finances its fund through bank fees,” the newspaper wrote.
The stated difference seems to imply that taxpayers will be spared any additional expense since it is the banks who will be carrying the burden if the FDIC borrows from the Treasury. But do you really think that the banks will simply absorb the expense or will they pass the expense on to customers in the form of higher fees and higher interest rates?
One way or another, we the people will be paying for higher costs of FDIC insurance.
The banking industry is already facing a 20-basis-point special assessment from the FDIC to be levied on June 30. According to the FDIC press release, there is a possibility for an additional 10 basis point special assessment “if necessary to maintain public confidence in federal deposit insurance.” Again, if approved, the banks will have to pass these costs on to customers or suffer reduced earnings and potentially lower capital levels, neither of which is desirable in today’s environment.
Unfortunately I cannot offer up a valid alternative. It is frustrating that community banks that have maintained prudent lending policies must pay for the sins of those institutions that essentially gambled away their capital, but we are where we are. The public as ultimate beneficiaries of FDIC insurance will be called upon to foot the bill through higher fees and loan costs.
Let’s just remember not to blame the community banks when the higher costs are announced.
(Brian Andrews is a certified mortgage banker specializing in the financing of commercial real estate. His business is Andrews Commercial Mortgage and he can be reached at email@example.com.)