FDIC

Next year, the nation’s commercial banks will cease to pay premiums for deposit insurance — a gift of at least $5.5 billion to the industry courtesy of some monumentally bad decision making at the Federal Deposit Insurance Corporation.

Free insurance for multi-billion dollar banks may be the ultimate in corporate welfare. And under FDIC’s decision, the free insurance will remain an entitlement for the banks so long as the Bank Insurance Fund (BIF) maintains a thin reserve representing just 1.25 percent of the two trillion dollars of deposits now insured by the fund.

FDIC’s decision is made all the worse by the fact that banks have been enjoying record profits quarter after quarter. Instead of maintaining premium income and building reserves while the sun is shining on the industry, FDIC decides to give the insurance away and put the taxpayers on the line for anything the current reserves can’t handle.

The action proves once again that there is no memory in Washington. Not even a short-term one. Four years ago this month, the bank insurance fund was $7 billion in deficit. The savings and loan insurance fund was already dead and headed for a $200 billion bailout by the taxpayers.

The future holds even greater potential for high-risk investments and regulatory missteps as interstate branching, mergers and new powers create giant financial conglomerates stretching across the nation and world. This is not the time to cut premiums and give away deposit insurance.

The banking industry will take its $5.5 billion gift and run. Consumers are unlikely to see any of it in the form of lower fees or better return on savings. What might have been reserves for the insurance fund will now be siphoned off to stockholders and used to finance expansions, mergers and acquisitions and put more heft in the pay and bonus envelopes of top executives. And some it may ultimately find its way into bigger and better Political Action Committees designed to keep official Washington feeling good about the industry.

At a minimum, FDIC Chairperson Ricki Tigert Helfer and her fellow regulators who voted for the free insurance should take steps to jawbone the industry into using some of the $5.5 billion gift to reduce fees on low and moderate balance customers. The regulators may not have the power to dictate the reduction, but they can issue strongly worded advisories and use the bully pulpit of public opinion to get the job done.

The Congress which has encouraged the excesses at FDIC should weigh in with some demands for consumer justice vis a vis fees and no-premium insurance. It wouldn’t hurt if the President — who appointed Ms. Helfer — made a similar public demand. And the bank trade associations, which have so shamelessly lobbied for the free insurance, have an opportunity to display a little leadership by encouraging their members to cut fees — and stop adding new ones every Monday morning.

At the moment, the FDIC decision stands as one more dreary reminder of how often public policy is based on special interest desires and demands. With the powerful forces behind the free insurance — and with the editorial pages remaining silent — it is highly unlikely that Ms. Helfer’s handiwork will be overturned.

But, some of the stench could be reduced, if significant portions of the gift to the industry were passed on in the form of lower charges to consumers and taxpayers who will be called on to clean up whatever mess the industry and its regulators create.