–FDIC Off’l Sees No Material Effect From TAG Expiratn On Fin Stability

By Yali N’Diaye

WASHINGTON (MNI) – As expected by most banking experts, the Federal
Deposit Insurance Corporation Tuesday lowered its estimate of costs
related to bank failures through 2016 due to lower actual and projected
failure rates as well as a reduction in the average size of failing
banks.

The FDIC staff now projects that bank failures over 2012-2016 will
cost $10 billion, down from $12 billion estimated last April.

The staff also expects the Deposit Insurance Fund to have enough
liquidities to meet its current and future obligations over the
five-year period.

In line with what it had said in April, the staff also expects the
reserve ratio to rise to 1.15% by the end of 2018.

The projections assume that balances above $250,000 in
noninterest-bearing accounts will no longer benefit from the FDIC
insurance starting next year, which is what the current law states.

The banking industry has been pushing for a two-year extension of
the unlimited coverage, stressing the potentially destabilizing effects
of the expiration that could trigger billions of dollars of flows
towards other short-term instruments that provide at least some yield in
exchange for the higher risk.

Without congressional action, the unlimited insurance program
expires on December 31, 2012.

The FDIC has taken no official position on whether Congress should
extend the insurance program, but Acting Chairman Martin Gruenberg has
repeatedly stressed the need to look at the stability of the U.S.
financial system as the key consideration when making the decision.

On that front, an FDIC official said during a press conference
Tuesday prior to the Board meeting that, “We do not at this point think
there is going to be any material effect on financial stability” as a
result of an expiration of the program.

“As long as it expires before we get to 1.35%, it wouldn’t be an
issue,” he commented. Dodd-Frank requires the Deposit Insurance Fund
reserve ratio — DIF balance/insured deposits — to reach 1.35% by
September 30, 2020. That means that as long as the unlimited insurance
expires before that date, it is not “an issue.”

Extending the insurance program would in fact only become an issue
if the insurance was to become permanent, the official said.

This is not an option that has been considered by Congress so far,
and not even by the banking industry.

Instead, the FDIC is more focused on risks posed by developments in
Europe and the potential fiscal shock that could plunge the U.S. economy
into recession next year in the absence of Congress action.

Noting the consensus forecast of a U.S. real GDP growth of 2% to
2.5% in 2012, the FDIC staff said even this “slow” pace “should be
sufficient to support the continuing gradual improvement of the
condition of FDIC-insured depository institutions.”

However, it cited “continuing uncertainty in Europe” and the
“fiscal cliff” as two “key risks” that are still weighing on the
outlook.

As a result, the FDIC will remain “attentive to these
uncertainties,” Gruenberg said during a Board meeting.

Overall, however, “even if a slowdown in the economic recovery
results in higher fund losses than projected, the existing statutory
framework should provide sufficient time to evaluate the effect on the
fund’s recovery before considering future adjustments to the Restoration
Plan and assessment levels,” the FDIC staff commented.

The FDIC Board also addressed two final rules which it unanimously
voted in favor of: large bank annual stress tests and large bank
assessment pricing.

The final versions of those rules brought little changes from the
previous proposals.

Regarding the company-run annual stress tests, the three core
elements remain the same: banks have to run annual stress tests, report
the results and make public disclosures.

The final rule was more specific on when the FDIC would provide the
stress-test scenarios each year, which is by November 15.

It also delays the implementation for banks with total consolidated
assets of $10 billion to $50 billion until October 2013.

The larger banks will still have to start this year based on data
as of September 30, with the FDIC expected to provide stress-testing
scenarios in November. The staff provided no specific date. Results of
the stress tests are due in January 2013.

While voting in favor of the final rule on stress testing, Director
Jeremiah Norton expressed concern that investors become “too reliant on
supervisors” and maybe too reliant on stress testing.

“So I hope that we don’t send a signal that because the firm passes
the stress test that investors — again mainly creditors and
counterparties — don’t need to worry.”

“I hope the marketplace continues to impose its discipline on the
entities in which it is investing,” he cautioned.

The final rule on large bank assessments refined definitions used
to identify concentrations in higher-risk assets “to better reflect the
risk posed to institutions and the FDIC.”

The vote was also unanimous on that rule, with no major concerns
expressed by Board members.

** MNI Washington Bureau: 202-371-2121 **

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