FDIC EXPECTED TO EXTEND DEPOSIT-INSURANCE PROGRAM / THE WALL STREET JOURNAL ( RECOMMENDED READING )

BUSINESS


APRIL 13, 2010.


FDIC Expected to Extend Deposit-Insurance Program


By DAMIAN PALETTA


WASHINGTON— The Federal Deposit Insurance Corp.'s board is expected to vote on Tuesday to extend for at least six months its program offering unlimited deposit insurance for business accounts, people familiar with the matter said.

The program was set to expire June 30 and the extension is expected to be for at least six months, though the FDIC's board could extend it through mid-2011.

The vote is a sign the government isn't ready to withdraw all of the temporary measures it set up during the financial crisis to prop up the banking system. It also reflects ongoing concern about the state of hundreds of community banks, many of which are weighed down by bad loans and are struggling to raise capital. Industry officials have warned that ending the program could lead to more bank failures, as businesses might pull money from any bank they feel is in trouble.

The Transaction Account Guarantee program was created in late 2008 as a way to prevent businesses and other large depositors from hastily pulling funds from smaller banks and moving the money to big banks. This was prompted by fears small banks were vulnerable to collapse and that government wouldn't step in and prevent their failure.

With the June 30 deadline approaching, the FDIC has faced a flood of pressure from community banks and state regulators to extend the program. Banks must pay extra for the unlimited deposit insurance, and it only applies to certain accounts that either pay no interest rates or very low interest rates. Most other depositors are covered up to $250,000.

"As long as small businesses and commercial businesses know that there are certain banks in this nation that the government won't allow to fail, then there has to be some sort of parity for community banks in transaction accounts," said Camden Fine, chief executive of the Independent Community Bankers of America trade group.

Mr. Fine's group is one of several that is pushing for the program to be extended, and community bankers have lobbied Congress to write a law that would push the FDIC to extend the program through at least 2013.

More than 200 banks have failed since January 2008 and just eight of them have had more than $10 billion of assets. The rest have all been smaller banks, and more than 70 of the failed banks have had just one or two branches. FDIC officials project more than 140 banks will fail in 2010, with many still facing heavy losses from speculative commercial real-estate loans.

It is unclear how much money the unlimited deposit-insurance program has cost the FDIC. The FDIC has been able to sell almost all of the deposits at failed banks recently to other banks, meaning the FDIC has rarely had to reimburse insured depositors.

In March, FDIC Chairman Sheila Bair said more than 6,900 of the country's roughly 8,000 U.S. banks used the unlimited deposit-insurance program.

"It has been highly effective in offering an extra margin of protection to small businesses and other holders of payment-processing accounts at small and mid-sized institutions," Ms. Bair said in the March speech to Florida bankers.

The FDIC's move reflects ongoing concern among many regulators about the condition of hundreds of small banks, many of which could see a flight of deposits if federal deposit insurance was withdrawn.

The FDIC had 702 banks on its problem list at the end of 2009. It doesn't publish the names of banks on that list, but there are scores of banks that regulators have publicly disciplined for being in weak condition.

The Conference of State Bank Supervisors wrote a letter to FDIC officials on April 6 asking the program to be extended until 2012.

"While the worst of the crisis appears to be behind us, this program is still needed to provide assurance to consumers and small businesses and ensure a stable source of funds for community and regional banks," said the letter. "Any recovery in the economy is occurring slowly and is not being realized in all areas of the country. In addition, the steady pace of bank failures still has many communities on edge."

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