FDIC To Force Fee Prepayment
Last week, I wrote about the odd possibility that the Federal Deposit Insurance Corporation (FDIC) might seek a bailout from the banks. I said that such a move would be nonsensical, since the FDIC could instead utilize its incredible government borrowing capacity. Well, there's good news and bad news. The good news is recent news reports suggest that bank-funded bailout is off the table. The bad news is a nearly as bizarre an option has taken its place: the FDIC may instead force banks to prepay their depository guarantee fees for the next three years.
To banks, this will still feel like an assessment, as it will drain them of cash immediately. While they'll probably like this prepayment option a little better, since they won't technically be paying more than they would have over the next three years, it's still just as potentially harmful. Indeed, assuming a recovery, banks would be much more able to pay those premiums over the next three years, rather than now.
I still can't understand why the FDIC wouldn't, instead, just use government debt. From what I've read FDIC Chairwoman Sheila Bair is for some reason morally opposed to this option, despite the fact that it's clearly the most sensible. It could them pay that debt back with the proceeds from those regular insurance fees over the next three years that it would have collected upfront through the prepayment option. If the whole point is to try not to stress the still fragile banking industry, then this new option fails just as badly as an assessment.
Update: My understanding of this prepayment option has changed slightly, but I still think it's an odd idea. Apparently, the prepayment will be classified as an expense, so will not reduce the capital on a bank's balance sheet immediately -- it will reduce it over three years, as before. Of course, that still means that the banks will have less cash for lending immediately, something that will concern many.