Reacting to a report that banks may be asked to recapitalize the Federal Deposit Insurance Corp. by purchasing FDIC stock, several bankers say they are not ready to concede such a drastic step is necessary.
But they said if the FDIC's Bank Insurance Fund does require a major infusion of reserves, the stock-purchase proposal might be less painful and more appropriate than other approaches.The Bush administration and regulators are considering several alternatives for aiding the FDIC, according to agency spokesman Alan Whitney. He confirmed a report in Wednesday's Wall Street Journal that one proposal would require banks to buy preferred FDIC stock in exchange for a market rate of return. The holdings would count toward the equity capital that banks must keep under federal regulations.
First Wachovia Corp. chairman John Medlin said it is far from clear that the FDIC's Bank Insurance Fund needs additional help now. The industry is better capitalized today than it was in 1987, he said, and it has been recording strong profits even while building up loan-loss reserves.
"I would reserve judgment on the preferred stock proposal until we see if there is a problem and, if there is, the size of it," Medlin said.
But if the fund requires help, he said, it should come from the nation's banks, rather than taxpayers. He said he has an open mind about the preferred-stock option, adding, "It may well turn out to be the best way" should the fund require assistance.
An executive of a money center bank, who asked not to be identified, agreed that the preferred-stock route may be the lesser of evils.
"Taking 50 cents per $100 of insured deposits - that way is probably better than taking 50 cents as a premium hit," the money-center banker said. A 50-cent assessment would raise about $14 billion for the Bank Insurance Fund, which at its current rate of erosion is expected to be left with $10 billion at the end of the year.
The plan under consideration by the administration reportedly calls on banks to purchase preferred stock from the FDIC in an amount anywhere from 50 cents to $1 for each $100 of deposits.
"The big question is: Why are they proposing this?" asked David Ballweg, president of Community State Bank, Union Grove, Wis., and the president-elect of the Independent Bankers Association of America. "Are they facing losses from a big bank failure?"
Ballweg said that while the banking industry "certainly is going to support a strong insurance fund," he believes the administration should first consider alternatives such as assessing deposits at foreign branches.
Some bankers warned against evaluating any deposit insurance proposal in a narrow context. "We are saying that any deposit insurance reform proposal ought to be looked at in the context of reform of the whole system, not in isolation," said Charles Cook, executive vice president for corporate administration at SunTrust Banks, Atlanta.
Cook argued, however, that the FDIC's bank fund is in sound condition, and said the premium schedule should be changed to a risk-based system.