February 3, 2009 / 7:44 PM / 11 years ago

UPDATE 2-US FDIC seeks power to charge 'systemic risk' fees

(Adds Bovenzi comments, details on bank failures, liquidity problems)

By Karey Wutkowski

WASHINGTON, Feb 3 (Reuters) - The Federal Deposit Insurance Corp asked U.S. lawmakers on Tuesday for permission to impose special fees on “a range of entities” if they pose a high risk to the stability of the financial sector.

John Bovenzi, chief operating officer of the FDIC, told Congress that the authority to impose “systemic risk special assessments” would be consistent with the agency’s current powers to charge the banking industry to cover losses.

Bovenzi said it would impose the assessment on banks that take insured deposits, those banks’ holding companies, or both, as the FDIC sees fit.

The FDIC is an independent agency created by Congress that maintains the stability and public confidence in the U.S. financial system by insuring deposits, examining and supervising financial institutions and managing failed banks.

The statutory change would also allow the FDIC to shift the timing of when it charges the banking industry to recover losses in a way that does not excessively burden banks during tough times, Bovenzi said.

In his prepared testimony to the House Financial Services Committee, Bovenzi also asked Congress to give the FDIC additional support to handle future bank failures.

He asked that Congress more than triple its existing line of credit with Treasury to $100 billion from $30 billion.

“The FDIC believes it would be appropriate to adjust the statutory line of credit proportionately to ensure that the public has no confusion or doubt about the government’s commitment to insured depositors,” Bovenzi said.

The FDIC also asked that the line of credit be adjusted further in “exigent circumstances.”

The move comes as the FDIC’s deposit insurance fund has been shrunk by a significant uptick in bank failures over the past year. The insurance fund’s value dropped 24 percent in the 2008 third quarter to $34.6 billion. The FDIC said in December it expects the fund to drop to about $29 billion in the first quarter of this year.

Bovenzi also addressed a bill being prepared by Rep. Barney Frank, chairman of the committee, that would make permanent Congress’ October decision to increase deposit insurance temporarily to $250,000 per customer account.

He said if Congress goes forward with permanently increasing the level of deposit insurance, the FDIC should also be able to charge banks increased fees against the increased coverage.

MORE LIQUIDITY NEEDED

Bovenzi said more needs to be done to stabilize banks’ liquidity, as many bank failures in late 2008 occurred because of a lack of access to cash, not their capital levels.

“While the assets of these institutions were quickly deteriorating, their liquidity positions were deteriorating at a faster rate,” Bovenzi said.

“Stabilizing liquidity could potentially avoid unnecessary costs to the Deposit Insurance Fund (DIF) by eliminating the need to close, or prematurely close, otherwise viable institutions.”

A total of 25 U.S. banks were seized by bank regulators in 2008, up from only three in 2007. So far this year, six banks have failed as the financial system grapples with mortgage securities and other distressed investments weighing down their balance sheets.

Bovenzi said banks have been able to improve their access to funding through the FDIC’s temporary liquidity guarantee program. That voluntary program was established in October and provides a government guarantee to certain senior unsecured debt and to banks’ transaction deposit accounts.

The programs were established to boost confidence in the U.S. banking industry and reduce the risk of bank runs.

As of Jan. 28, outstanding debt covered by the FDIC guarantee program totaled about $221 billion, Bovenzi said.

“Indications to date suggest the program has improved access to funding and lowered banks’ borrowing costs,” he said.

But Bovenzi said a lack of liquidity in the financial services sector remains “a major obstacle to efforts to return the economy to a condition where it can support normal economic activity and future economic growth.”

And he said recent data has led the FDIC to upwardly revise its bank failure cost estimate over the 2008 to 2013 period.

The agency had previously forecast a cost of $40 billion. Bovenzi did not say how much that estimate has gone up. (Reporting by Karey Wutkowski with additional reporting by John Poirier; Editing by Lisa Von Ahn and Matthew Lewis)

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