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Banks Back The Banks’ Backer

The Federal Deposit Insurance Corporation continues to stand behind bank deposits up to $250,000. The only problem is that it doesn’t have any money.

After nearly 100 bank failures this year, the agency’s pockets are empty. The fund it uses to protect depositors, which began the year with more than $30 billion, is now in the red.

So the FDIC is doing the same thing you or I might do: It is turning to its friendly neighborhood bankers for help. But the FDIC has a few advantages over the rest of us. Its neighborhood is the whole country, and the banks don’t get to say no.

The plan proposed by the FDIC would require banks to prepay their annual assessments through 2012 to raise a total of $45 billion dollars to replenish the cash-strapped fund. Banks ordinarily must pay an annual charge of 12 to 16 cents on every $100 in deposits to support the insurance program. However, that rate is scheduled to increase by 3 cents beginning in 2011.

Banks do not have to record the payments as an expense until the assessments would ordinarily come due, meaning that they can preserve the appearances of their balance sheets a little longer, but that is little consolation for the fact that they must give up the money now.

Since, officially, the banks are making early payments, not granting a loan, the FDIC will not pay any interest—a pretty nice deal if you can get it (you can’t, but the FDIC can). All that money going to the FDIC is money that banks cannot lend to interest-paying customers, which hurts both the banks and potential borrowers.

Edward L. Yingling, president of the American Bankers Association, said, “The industry agrees that this is a better alternative to what clearly would have been several special assessments, but this prepayment will decrease the ability to lend.”

Now, you may remember that, just recently, the government force-fed large amounts of money to banks precisely to increase their ability to lend. As the government told us then, if individuals and businesses cannot get credit, they cannot buy homes, build new factories, or do any of the other things that are necessary to create jobs and rebuild the economy.

So it does not make a lot of economic sense for Washington to reclaim $45 billion of the money that it gave to banks to help them restart their lending businesses. But it does make political sense.

The FDIC must get the money one way or another, and it only has two options: Go to the banks or go to the Treasury. When the insurance fund was created in 1933, it was designed to be supported by the industry in ordinary times but backed by the U.S. government. FDIC officials can borrow up to $100 billion from the Treasury whenever they want, and up to $500 billion with the approval of the Treasury secretary and the Federal Reserve. After a series of bank failures during the savings and loan crisis of the 1980s and 90s, the FDIC drew on this line to replenish its coffers. That is why it is there.

But the FDIC is reluctant to rely on this backing today because of the fear that Americans would see such a move as another bailout for bankers. Sheila C. Bair, chairwoman of the FDIC, defended the proposal to squeeze money from banks, saying “In choosing this path, it should be clear to the public that the industry will not simply tap the shoulder of the increasingly weary taxpayer.”

The taxpayer is weary, all right, but let’s all row the boat in the same direction. Congress passed a $787 billion economic stimulus package earlier this year, most of which still has not reached the economy and, therefore, has not stimulated anything. It makes no sense to suck $45 billion out of the banks just as the economy is beginning to turn the corner and there is hope that demand for credit might soon pick up. If you want to relieve the taxpayer, stop playing politics with financial management, and get this boat to shore.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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