The Federal Deposit Insurance Company (FDIC) has finalized its plan to replenish its quickly drying up insurance fund by ordering banks to prepay their insurance fees through 2012. Back in September, when this plan was cited as possibility I criticized it, because I don't think now is the time to drain the fragile banking industry of $45 billion in cash. Through the accounting treatment of how these fees will be paid, they won't endanger banks' stability. But I think this is still a bad policy from an economic standpoint.

Here's one safeguard, via the Associated Press:

The FDIC established an exemption process for banks that demonstrate that the prepaid premiums would "significantly" diminish their cash or "otherwise create extraordinary hardship."



That's a pretty important exception. But even if banks' survival won't be threatened with the introduction of this forced prepayment, another aspect of the economy will:

"The prepaid assessment does come at a cost to the banking industry, impacting bank liquidity and reducing resources available for lending," James Chessen, chief economist of the American Bankers Association, said in a statement.



Precisely. That $45 billion that the FDIC demands will result in possibly as much less in lending over the next few years. As I mentioned last week, credit is already unlikely to do enough in leading recovery, and this action is likely to make matters worse.

Moreover, what happens if those prepayments through 2012 aren't enough? Do they prepay more, now through 2014? 2018? Who knows? But this problem further demonstrates that this plan isn't the best solution.

Instead, the FDIC should just have requested a loan from the Treasury. From what I've read, FDIC Charwoman Sheila Bair was vehemently opposed to that, mostly for the sake of pride. That's absurd. A loan would have been the proper solution, because the banks would have paid this amount over three years as scheduled, allowing the FDIC to pay the Treasury back under that time frame as well. But in that scenario, lending would not have taken a hit when it could have helped the economic recovery.

We want to hear what you think about this article. Submit a letter to the editor or write to letters@theatlantic.com.