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Losses From Bank Failures to Reach $100 Billion

The FDIC today proposed shoring up its depleted deposit insurance fund by requiring banks to contribute in advance a total of $45 billion in quarterly payments they're scheduled to make to support the DIF through 2012. The agency also wants to slightly raise that periodic assessment beginning in 2011.

"Our analysis suggests that the industry can step up, and so we're asking them to do so," said FDIC chairman Sheila Bair in a board meeting to discuss the plan.

One thing's for sure -- the fund, which as of June 30 was down to $10.4 billion, is nearly tapped out. Barring any action to replenish it, the DIF will have a negative balance as of Sept. 30, while its longer-term liquidity will dry up in the first quarter of 2010. Meanwhile, banking industry conditions are worsening. One FDIC boardmember said in the meeting that losses from bank failures through 2013 are projected to reach $100 billion, a significantly bleaker forecast than the agency's prediction in May of $70 billion.

Requiring insured banks to pre-pay their fund obligations is aimed at bolstering the DIF in the short-term without weakening bank earnings just as some companies are starting to heal. Banks, which lobbied against the FDIC imposing a special assessment, wouldn't have to account for the advance payments until they're ordinarily due.

Politically, for the FDIC it's also a preferable alternative to borrowing more money from the Treasury Department, a move that would be certain to spur public outcry. The agency says the banking industry is sufficiently recovered to help bolster the DIF, noting that insured institutions had more than $1.3 trillion at their disposal, a 22 percent hike from a year ago.

Banks squawked after the FDIC earlier in the year hit them up for $5.6 billion to refill the DIF. This proposal is a far gentler alternative, and it's about they best they can expect.

Longer term, the plan leaves some questions. For instance, the FDIC should reexamine whether it needs to raise how much money it keeps in reserve. The agency is required by law to maintain a so-called "designated reserve ratio" of 1.15 percent of insured deposits. That threshold looks too low given the DIF has had to run on fumes in recent decades, first during the Savings & Loan crisis decades ago and in the latest bust.