WASHINGTON — As the Federal Deposit Insurance Corp. weighed Tuesday whether to extend a blanket guarantee for non-interest-bearing deposits, the agency revealed that the program has already lost money.
Since the program's inception in October, the agency has paid out $840 million to cover deposits but is set to charge only $700 million in fees. If that $140 million gap is not made up by the time the program expires at yearend, the industry could face a special "systemic risk" premium.
Such an event remains highly unlikely because the FDIC is earning billions in fees from a separate program that guarantees bank debt. The fees from both programs are pooled to pay for the costs of each.
The debt program is currently on track to make the FDIC significant money — by the end of May it had generated $8 billion in fees without incurring any losses — which would be used to cover any shortfall from guaranteeing transaction accounts.
Still, the potential loss demonstrates the risk the FDIC continues to take by guaranteeing transaction accounts — and could lead the agency to reject requests to extend the program beyond yearend.
In a proposal issued Tuesday, the FDIC gave the industry two options for the deposit program. One alternative would give institutions six more months of the coverage, but would raise premiums from 10 to 25 cents for every $100 of covered deposits. The other alternative would be to simply end the program on its expiration date. Commenters have 30 days to provide feedback.
Under the proposal, if the agency opts for an extension, banks currently participating in the program would have a one-time opportunity to opt out before the extended phase begins.
FDIC board members said while the program has been successful in averting severe deposit outflows by transaction customers — primarily businesses that use the accounts for payroll or other purposes — both banks and their customers need to prepare for the program's end.
The rule "reminds people that this program does expire at the end of the year, and puts the public on notice in that regard," said FDIC Vice Chairman Martin Gruenberg.
Chairman Sheila Bair agreed, saying that while the guarantee had prevented bank closures, it was never envisioned as permanent coverage.
"I do think it's been a successful program," she said. "We saw a lot of volatility — especially with this category of transaction accounts — last fall, and I do think this stabilized the system. That said, it is temporary. We want an orderly phaseout. Some good input on the timing of that …, I think, would be very helpful."
The proposal detailed the transaction account guarantee program's losses.
"The cost of providing guarantees for non-interest-bearing transaction accounts at failed" banks since the program's launch "already has exceeded projected total TAG program revenue through the end of December 2009," the proposal said.
The biggest hit came from the May 1 failure of Silverton Bank in Atlanta, which cost the program $693 million, followed by the May 21 collapse of BankUnited in Coral Gables, Fla., which cost the program $28 million. (The figures do not include fees either bank paid into the program to offset losses.)
Of the 50 banks that have failed since its inception in October, 47 had deposits covered by the program. But Silverton, which specialized in correspondent services for other institutions, accounted for 82% of the expenditures. The bank's $1.8 billion in covered deposits at March 31 comprised more than half its $3.3 billion deposit base. Virtually all the deposits guaranteed by the program became eligible for coverage shortly before Silverton's failure. At the end of the fourth quarter, only $175 million of non-interest-bearing deposits exceeded the standard FDIC insurance limit of $250,000; by March 31, that figure had jumped nearly 1,000%.
The increase sparked questions about why regulators allowed this to happen at a troubled institution.
"There was a conscious attempt to shift … a lot of the Silverton insolvency loss into the TAG" program, said Bert Ely, an independent analyst in Alexandria, Va., who speculated regulators may have made the move to protect the banks' customers, which were other financial institutions. "I have to think that the regulators were in on it. I can't imagine the bank was able to do that. What it did was it protected the banks that were members."
Still, others said the guarantee program has been worth the cost.
"The question is: How much greater would the FDIC's losses have been if we had had major liquidity runs that caused the failure of some of the biggest banks in the country?" said Jaret Seiberg, an analyst with Washington Research Group, a division of Concept Capital.
Ron Glancz, a partner at Venable LLP, said the high cost of the program may be the result of the agency's charging too little in fees, which he said would be corrected if the agency chooses to charge higher fees if it extends the program.
"It's a matter of pricing," he said. "It looks like they're dealing with the situation. They're losing money on it now … so they're going to reprice it, so they break even or make money."
