Bailouts For Large Firms Rile Small Banks, Credit Unions

Community banks and credit unions didn't contribute to the national financial collapse, didn't get billions of tax dollars in a government bailout and shouldn't have to help shoulder the burden of keeping the country's largest banks afloat, banking industry officials told a Senate subcommittee.

"Community bankers are angry," Stephen Verdier of the Independent Community Banks of America told the Senate Banking Financial Institutions Subcommittee.

While Congress is pumping up the FDIC to protect more of customers' deposits and to help turn around troubled banks, the FDIC is tapping all of the institutions it insures with a special assessment intended to recoup the money the agency is paying out.

That additional charge is forcing smaller community banks, which remain largely focused on traditional services rather than the exotic investment vehicles that were more profitable but ultimately detrimental to larger banks, to redirect money they would have used to make loans in their communities to the FDIC instead, industry officials said.

William Grant, a spokesman for the American Bankers Association, told the subcommittee that his own bank, First United Bank and Trust in Oakland, Md., will have to pay an additional $2.5 million in the second quarter alone to the FDIC to cover its share of the special assessment. That will ultimately reduce the bank's lending capacity by about $1.6 million, he said.

"This new burden will make new lending practically impossible," Grant told the subcommittee.

The community bankers proposed having the FDIC create a separate insurance fund that would support -- and be subsidized by -- large, troubled banks, those often referred to as those "too big to fail," to cover the extraordinary costs involved in the bailout rather than level the assessment against every FDIC-insured institution.

"The too-big-to-fail banks should finally being paying their fair share," Verdier said.

Arthur Murton, director of the FDIC's division of insurance and research, told the subcommittee that increasing the amount the FDIC can borrow from the Treasury from the current $30 billion limit to $100 billion, with a process in place to go as high as $500 billion, could help relieve some of the pressure on the agency and lead to a reduction in how much banks are asked to contribute under the special assessment. It was unclear, however, how much of a discount was possible or how it would impact smaller banks.

All of the bankers who testified before the subcommittee supported raising the size of deposits the FDIC will insure from $100,000 to $250,000. That's being done temporarily during the crisis, but lawmakers are considering keeping the higher limit permanently.