Federal Deposit Insurance Corp. Chairman L. William Seidman said Monday that "action should be taken early next year" to inject billions of dollars from banks into the government fund protecting deposits.
Seidman, in testimony for the House Banking subcommittee on financial institutions, suggested the nation's commercial banks need to inject 1 percent of their deposits, or $24 billion, into the fund.Also, annual deposit insurance premiums should be raised for the third time in as many years to 23 cents for every $100 in deposits, nearly triple the 8.3 cents charged last year, he said.
Such a burden "would add only marginally to bank failures," he said, but even that may not be enough to keep the fund solvent in the event of a severe recession.
Seidman's remarks to the subcommittee followed the presentation of a report by three private economists, who estimated a mild recession would produce bank failures costing the government $31 billion to $43 billion and a severe recession would produce failures costing as much as $63 billion.
However, the FDIC chairman said, "the report's estimates in this worst-case scenario of a major deep recession are too low."
In his testimony, Seidman did not explicitly endorse the $24 billion assessment on banks, but his figures on how much the fund would have available assume that such an assessment would be collected.
"A coherent plan should be in place before money is actually needed. In other words, action should be taken early next year," he said.
Seidman also raised the possibility that regulators may hold off shutting down weak banks that appear likely to recover.
"The FDIC's . . . experiences have shown that forced liquidation of large amounts of assets in weak markets is expensive," he said. "Thus, carefully supervised management of weak but viable institutions is another option."
However, members of the subcommittee criticized that "forbearance" approach as one of the root causes of the savings and loan crisis. Several panel members suggested that deposit insurance should be curbed, and others said regulators should stop banks from paying dividends to stockholders.
"The (economists') report makes it abundantly clear forbearance doesn't work. . . . That is a pathway to hell," said Rep. Charles Schumer, D-N.Y.
"We need to reduce taxpayers' liability by reducing the amount of insurance coverage," said Rep. Cliff Stearns, R-Fla.