March 4 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency. â€œWithout these assessments, the deposit insurance fund could become insolvent this year,â€ Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group.
â€œA large numberâ€ of bank failures may occur through 2010 because of â€œrapidly deteriorating economic conditions,â€ Bair said in the letter. â€œWithout substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative.â€
The FDIC last week approved a one-time â€œemergencyâ€ fee and other assessment increases on the industry to rebuild a fund to repay customers for deposits of as much as $250,000 when a bank fails. The fees, opposed by the industry, may generate $27 billion this year after the fund fell to $18.9 billion in the fourth quarter from $34.6 billion in the previous period, the FDIC said.
The fund, which lost $33.5 billion in 2008, was drained by 25 bank failures last year. Sixteen banks have failed so far this year, further straining the fund.
Smaller banks are outraged over the one-time fee, which could wipe out 50 percent to 100 percent of a bankâ€™s 2009 earnings, Camden Fine, president of the Independent Community Bankers of America, said yesterday in a telephone interview.
â€œIâ€™ve never seen emotions like this,â€ said Fine, adding that heâ€™s received more than 1,000 e-mails and telephone messages from angry bankers.
â€œThe FDIC realizes that these assessments are a significant expense, particularly during a financial crisis and recession when bank earnings are under pressure,â€ Bair wrote. â€œWe did not want to impose large assessments when the industry and economy are struggling. We searched for alternatives but found none better.â€
The agency, which has released the change for 30 days of public comment, could modify the assessment to shift the burden to the large banks â€œthat caused this train wreck,â€ Fine said. â€œCommunity bankers are feeling like they are paying for the incompetence and greed of Wall Street,â€ he said.
Bair dismissed that suggestion.
â€œFor risk-based assessments, our statute restricts us from discriminating against an institution because of size,â€ Bair wrote.
The deposit insurance fund wonâ€™t dry up because the government can get funds from the industry and congressional appropriations, and borrow from the Treasury, Chip MacDonald, a partner specializing in financial services at law firm Jones Day, said today in a telephone interview.
â€œAs a depositor, I am not worried in the least,â€ MacDonald said. â€œNo one is going to let the FDIC go without any money.â€
Consumers should watch this issue closely, said Edmund Mierzwinski, consumer program director at U.S. PIRG, a Boston- based consumer-watchdog group.
â€œI wouldnâ€™t take their money out of the bank yet,â€ Mierzwinski said. â€œIf the FDIC is saying that there is this serious problem, then we should all be concerned. I think there is a chance the FDIC is going to have to ask taxpayers for money in the future.â€
No Taxpayer Funds
Bair rejected arguments that the agency should use government aid to rebuild the fund. The FDIC has authority to tap a $30 billion line of credit at the Treasury Department and legislation pending in Congress would boost the amount to $100 billion.
â€œBanks, not taxpayers, are expected to fund the system,â€ Bair said. Asking for taxpayer support â€œcould paint all banks with the â€˜bailoutâ€™ brush.â€
The FDIC â€œwill revise the interim rule, if appropriate, in light of the comments received,â€ the agency said in a Federal Register notice.
To contact the reporter on this story: Alison Vekshin in Washington at email@example.com .