Bank of America, Major Banks’ FDIC Premiums May Top $10 Billion

By David Mildenberg

Sept. 30 (Bloomberg) -- The Federal Deposit Insurance Corp.’s plan to rebuild its reserves may cost Bank of America Corp. and three of the largest U.S. banks more than $10 billion.

Bank of America, the biggest U.S. lender by deposits, may owe $3.5 billion under an FDIC proposal that banks prepay three years of premiums, based on the lowest assessment rate multiplied by the bank’s $900 billion in June 30 U.S. deposits.

“This seems like a very hefty amount,” said Tim Yeager, a finance professor at the University of Arkansas and former economist at the Federal Reserve Bank of St. Louis. “The FDIC’s projections of future losses are pretty severe, and they are trying everything they can to avoid tapping the Treasury.”

U.S. bank premiums range from 12 cents per $100 in deposits for the safest lenders to 45 cents for banks the U.S. considers risky, said Chris Cole, senior regulatory counsel for the Independent Community Bankers of America. The FDIC yesterday proposed asking banks to pay premiums for the fourth quarter and next three years on Dec. 30. The fees will raise $45 billion.

The FDIC is required by law to rebuild the fund when the reserve ratio, or the balance divided by insured deposits, falls below 1.15 percent. It was 0.22 percent on June 30 and sank to a deficit in the third quarter. The fund, drained by 95 bank failures this year, had $10.4 billion on the second quarter. The fund will erase its deficit by 2012, the FDIC said yesterday.

Based on the current assessment and each bank’s deposits, Wells Fargo & Co.’s fee may be $3.2 billion based on its $814 billion in deposits, JPMorgan Chase & Co. may pay $2.4 billion and Citigroup Inc. $1.2 billion. The estimates exclude the FDIC’s plan to boost the assessment rate by 3 cents per $100 in deposits in 2011 or the agency’s assumption that bank deposits will increase by 5 percent annually.

Deferred Expenses

Banks won’t record the premiums as an expense on Dec. 30, making the prepayments more palatable, Gary Townsend, chief executive officer of Hill-Townsend Capital LLC, said in a Bloomberg TV interview.

The expense for prepaying will be recorded during the next three years, lessening the impact on earnings, said Brad Milsaps, an analyst at Sandler O’Neill and Partners LLP in Atlanta. “I don’t think it’s going to be a problem overall, though for the stressed banks that need cash, it could be,” he said. Banks will record a cost when the payments would be due.

Bank of America reported $140 billion in cash as of June 30, while JPMorgan, Wells Fargo and Citigroup each had more than $20 billion, according to regulatory filings.

Spokesmen for the four banks declined to estimate their costs. “It’s obviously going to be big because we are a big bank,” JPMorgan spokesman Tom Kelly said.

Fund Deficit

Regulators shut 120 banks in the past two years and the FDIC said the insurance fund to run at a deficit until at least 2012. Banks failures through 2013 may cost $100 billion, an increase from $70 billion estimated in May, with half the expenses already incurred, the FDIC said.

The four banks paid a combined $2.28 billion in a special assessment for the FDIC earlier this year, according to regulatory filings. The agency raised $5.6 billion from that fee, which was based on assets rather than deposits, Cole said.

Bank of America cited the FDIC’s special assessment as a contributing to its 5.5 percent decline in net income during the second quarter.

The agency rejected options for a second special fee or borrowing from the Treasury Department.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net