FDIC Asks Banks to Give Some Back

Throughout the financial crisis, there has been much ado about big banks feeding off the government dime. But a quarterly banking report released Thursday implies a bailout reversal, as the FDIC is likely to keep charging those same banks higher assessment fees in order to replenish its coffers.

The big news of the The Federal Deposit Insurance Corp.'s quarterly banking report was as follows, though much of it was widely expected: The FDIC's reserves are depleted, down to $10.4 billion. That's because more banks are failing, and even more are in danger of failing.

So far this year, 81 banks have collapsed, costing the deposit insurance fund about $19 billion. The banking industry lost money and boosted reserves last quarter, as unemployed consumers and businesses with lagging revenue had more difficulty repaying loans. The FDIC added 111 names to its "problem list" of banks in danger of failure, which stood at 416 on June 30, indicating more pain lies ahead.

"Deteriorating loan quality is having the greatest impact on industry earnings as insured institutions continue to set aside reserves to cover loan losses," Chairman Sheila Bair said in a statement released Thursday. "Of all the major earnings components, the amount that insured institutions added to their reserves for loan losses was, by far, the largest drag on industry earnings compared to a year ago."

The number of problem banks, which hold $300 billion in assets, is the highest in 15 years, when the aftermath of the savings and loan crisis was in full effect.

To deal with the spate of failures, the FDIC began assessing banks higher fees this year. The amount of the assessment depends on the size of the deposit base insured, meaning mega-banks like Bank of America (BAC Quote), Wells Fargo (WFC Quote), JPMorgan Chase (JPM Quote), Citigroup (C Quote) stand to get slapped the hardest with bigger assessments. Large regional banks like U.S. Bancorp (USB Quote), BB&T (BBT Quote), Regions Financial (RF Quote), Sun Trust (STI Quote) and Capital One (COF Quote) also face higher fees, as will trust banks like Bank of New York Mellon (BK Quote), State Street (STT Quote) and Northern Trust (NTRS Quote), and Goldman Sachs (GS Quote), Morgan Stanley (MS Quote), which transferred to bank holding companies last year.

Such assessments added $11.7 billion to the fund in the first half of this year, $9.1 billion of it last quarter. The FDIC has also received $8 billion in fees since the implementation last fall of a guarantee program for banks to issue debt at a lower cost. The FDIC received $1.1 billion in those fees last quarter.

Rochdale Securities analyst Richard Bove notes that the assessments rose from "virtually nothing" a few years ago to the level they're at today and predicts they will go much higher before a full recovery takes place. He estimates the banking industry may pay $11 billion in regular assessments and another $11 billion in special assessments next year.

"If this actually occurs, the FDIC premiums could be 25% of the industry's pretax income," says Bove, but notes that the insurer can also sell failed banks' troubled assets or ask Congress for more money, which lawmakers are legally required to give if necessary.

"A decline in the fund balance does not diminish our ability to protect insured depositors," Bair said.