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Besides death and taxes, one more thing is certain: IndyMac’s death will raise your bank’s taxes — or more accurately, its deposit insurance premiums. The July 11 collapse of the big California thrift was the second-largest bank failure in U.S. history and may ultimately prove to be the most costly. The Federal Deposit Insurance Corporation (FDIC) estimates the failure of the $32 billion-asset thrift will cost between four billion and eight billion dollars.
The FDIC’s quick opening of a successor institution to clean up IndyMac’s mess was undermined by TV pictures showing long lines of distraught customers, some of whom jostled for position so vigorously that local police had to maintain order. People are not rational when they believe their money is at risk and today’s media practices are not designed to increase public confidence in banks or government agencies.
Banks should definitely be considering how they will respond to televised rumors about their condition, whether the rumors are justified or not. Who knows what Schumer will say next?
In addition to a difficult public relations environment, the FDIC also faced a special problem at IndyMac — the bank’s $10 billion in advances from the Federal Home Loan Bank of San Francisco were fully secured by a lien on the highest quality assets the bank held — a lien that took precedence over the FDIC’s claims. The likely result will be an FDIC payment to the Home Loan Bank to repay the advances in full — a costly proposition for the agency.
This development has prodded the FDIC to renew its campaign to find a way to penalize institutions that rely disproportionately on secured assets or brokered deposits. One possibility would be to treat these banks as high-risk institutions when setting their premium levels.
Also, as the FDIC took over IndyMac, the agency announced that it was implementing a foreclosure moratorium to provide time to work out arrangements with troubled mortgage borrowers — of whom the institution had more than its share.
The moratorium reflects FDIC Chairman Sheila Bair’s earlier arguments that the large volume of borrowers in need of new mortgage terms would require more radical action than most big lenders have been willing to take thus far.
Anywhere in that range would be enough to force a hike in Deposit Insurance Fund (DIF) premiums. The FDIC’s target — set by Congress — is to maintain DIF reserves at 1.25 percent of insured deposits. The agency has fallen a bit short of that goal lately, and reserves are now at 1.19 percent. When fund reserves fall below 1.15 percent — as they surely will when IndyMac’s bills come due — the law says the agency must raise premiums to replenish the fund. That could mean premiums will go up as soon as September.
While nothing is set in stone, unofficial estimates predict that DIF reserves will dip by 10 to 15 basis points because of IndyMac’s troubles, bringing reserves down to the 1.04 to 1.09 percent range. It those estimates are accurate, the FDIC will definitely have to raise premiums above today’s range of five to seven basis points — but by how much?
Already, the industry is fervently arguing for the smallest possible increase. “FDIC doesn’t immediately have to back up those losses,” American Bankers Association economist James Chessen told The American Banker newspaper. “The beauty of the deposit insurance reform law [of 2006],” Chessen said, “was it gives the FDIC flexibility to rebuild the fund and not put an onerous burden on the existing healthy banks.”
Camden Fine, CEO of the Independent Community Bankers of America, made a similar plea. “There is no threat to the FDIC fund whatsoever. I don’t even see one on the horizon,” Fine said. “The FDIC board certainly has some latitude under the law, and it would be our advice that they not try to do one great big fell swoop of getting the fund at some ratio that they’re trying to achieve, but rather try to bring the fund back more slowly.”
No doubt, the two trade associations have a point. However, the industry should not count on their logic prevailing. The huge losses from the failure of IndyMac — an institution that reportedly was not even on the FDIC’s watch list when it failed — can only serve to make the FDIC wonder what else is lurking out there in the morass of subprime and alt-A mortgages. The agency cannot afford to ignore the risk that other big hits are in the pipeline.
Then there is Congress. Whatever that body may have envisioned when it wrote the 1996 law, Congress is a bit jumpy right now. Leaders of the Senate Banking and House Financial Services Committees will lean heavily on the FDIC to get BIF reserves back up to par as quickly as possible. If nothing else, such pressure would be useful in persuading voters their elected officials have economic matters firmly in control — a big change from the voters’ current perception.
Absolutely nobody wants to reawaken memories of the taxpayer bailout that followed the saving and loan crisis of the 1980s and 1990s. The best way to keep those ghosts at bay is to restore the BIF’s reserves as quickly as possible.
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