New FDIC Proposal Aids Banks In Declaring Brighter Balance-Sheets

On the surface, it seems quite sensible that banks ought to prepay Federal Deposit Insurance Corporation (FDIC) premiums through 2012 in order to give the regulator some much-needed cash.

A total 95 bank failures this year has left FDIC-coffers dry, to the tune of around $42 billion, according to reports. The pre-payment of premiums would give it another $45 billion in cash, helping it to soften the projected $100 billion blow created by further banking failures through 2013, according to officials.

But as observers have pointed out before, the FDIC doesn't actually need to collect a pre-payment of premiums to do its job. That's because it already has a credit line of $500 billion, or roughly five times the amount it needs in the worst possible case scenario of another banking fall-out.

So why then is (FDIC Chairman) Sheila Bair's gang proposing the pre-payment of premiums? Here is one possible reason, embedded down at the bottom of the Bloomberg write-up on the story (bold mine):

The banking industry lobbied against a special fee that would be added to the regular annual premium paid by banks, telling the FDIC and Congress such a levy would hurt their ability to raise capital. Banks paid a special assessment in the second quarter that raised $5.6 billion. The agency also has authority to impose fees in the third and fourth quarters.

Banks backed prepayment because the premiums are classified as an asset when the payment is made, becoming an expense during the quarter in which the obligation is due.

The FDIC claims that it doesn't want to draw down on its line of credit from Treasury because that move would anger taxpayers who are already steaming from the ears over this year's unprecedented bailout spending. But that explanation seems a little far-fetched: especially given that the brunt of the fury has already passed, when Treasury expanded the line of credit earlier in the year.

Far more likely is the fact that the big banks want to engineer healthy balance-sheets for the next few quarters in order to keep their market performance strong, and in some cases, to raise capital. The problem with this strategy of course is that the premiums will eventually become due, and thus will eventually have to be declared as a liability. In other words, it's just another tactic to artificially make the balance-sheet look a bit healthier for a bit.

More than anything, the story illustrates just how beholden the FDIC is to the big banking lobby.