As mounting bank failures continue to drain funds from the Federal Deposit Insurance Corp., Connecticut banks are being asked to help replenish its coffers, a move that could reduce lending in the state by as much as $540 million.
“It’s certainly painful,” said Gerald Noonan, president of the Connecticut Bankers Association. “There is an amount of resentment that we will have to shoulder this burden.”
But, while the levy will cut deeply into Connecticut banks’ profitability in 2009, they are well equipped to handle the expense because they have largely remained well capitalized throughout the financial crisis, Noonan said.
The Federal Deposit Insurance Corp. voted in February to charge banks the one-time “emergency” fee to refill its insurance fund to protect depositors, increasing costs to financial institutions by $27 billion.
Originally the regulator agreed to charge banks 20 cents per $100 in deposits that they own, but FDIC chairwoman Sheila Bair recently requested to reduce that expense by half, if Congress expands the agency’s line of credit with the Treasury Department to $100 billion from $30 billion.
U.S. Senate Banking Committee Chairman Christopher Dodd, a Democrat, has proposed legislation that would allow the FDIC to temporarily borrow as much as $500 billion from the Treasury Department.
Regardless, the assessment fee is an added expense to the insurance premiums Connecticut banks already pay to the FDIC, which have also doubled this year.
“It’s a terrible time to take money out of the system because that’s money that can’t be lent to the community,” Noonan added.
John Perotti, chairman and CEO of Salisbury Bank and Trust in Lakeville, with $480 million in assets and seven branches, said no one is happy with the special assessment, but that banks in Connecticut are stronger than most elsewhere and should be able to shoulder the burden.
“It’s a concern for all community banks,” Perotti said. “In some respects, we are paying for the sins of other banks.”
The special assessment that Bair is asking for — 10 cents on every $100 in deposits — would be calculated on a bank’s deposits as of June 30.
At the end of 2008, Connecticut banks had $54.3 billion in deposits, according to FDIC data. Based on those numbers they would be forced to surrender nearly $54.3 million to help replenish the FDIC fund.
That could reduce lending in the state by as much as $543 million, since banks roughly lend up to $10 for each dollar of capital they own.
In 2008, Connecticut’s 58 federally insured banks and savings institutions reported a net income of $30 million, according to FDIC data.
In 2008, Perotti said Salisbury Bank paid $215,000 for its FDIC insurance premiums. This year those premiums nearly doubled to about $490,000. With the special assessment fee, the bank will have to cough up an additional $350,000, meaning its total payments to the FDIC will be about $850,000.
“It’s certainly a dramatic increase,” Perotti said.
Perotti said his bank remains highly rated and well capitalized, meaning they will be able to bear the increased expenses but that it could curb lending.
Ed Steadham, a spokesperson for Waterbury-based Webster Bank, said Webster will have to pay about $30 million to the FDIC in total fees this year.
Steadham said the bank anticipated increased costs and has reduced overall expenses to offset them.
In 2008, Webster Bank reported a net loss of $322 million, slashed its dividend and cut its workforce.
Connecticut bank executives agreed that the extra fees will have a much more dramatic effect on smaller institutions that are marginally capitalized and have fewer options to raise new money.
But they also agreed that refunding the FDIC is important and must be done to maintain confidence in the banking system.
“It’s a vital fund,” said Chandler Howard, president and CEO of Middletown-based Liberty Bank. “We understand that the FDIC fund needs to be sound.”
The FDIC guarantees the safety of deposits in member banks up to $250,000 per depositor per bank.
Twenty-five bank failures in 2008 caused the fund’s value to sink to $18.9 billion in the fourth quarter from $52.4 billion in the preceding year-ago period. Seventeen banks have already failed so far this year, further straining the fund. The FDIC projects that they could pay out $65 billion from bank failures over the next four years.
Without these assessments, the deposit insurance fund could become insolvent, Bair warned.
Noonan, of the CBA, said he is lobbying the FDIC to allow banks to pay the new fees over a five-year period.
“To do it all at once might be asking too much,” he said.
