FDIC Insurance Premiums Put Squeeze on Small Banks

The FDIC Insurance program must bolster it’s funds to cover further bank failures, and small banks are paying the price. The insurance fund, which covers depositors funds in case of bank failure, lost over $36 billion as it took control of over 140 failed banks in 2009. For my own small local bank, FDIC insurance premiums increased 359% over this time last year. At the end of the 3rd quarter 2009, they reported a 72.5% net income loss compared to the same period in 2008 — with the increase in FDIC insurance premiums being a major factor.

PrePaid Assessments

The increased payments – which were due in late 2009 – are a prepayment to the insurance fund -  what Banks would normally pay out over the next three years. And are in addition to yet another one-time assessment by the FDIC.  How much an individual Bank paid out depends on the amount of deposits held, and the Banks risk score.

Passing on the Cost

As a result, small Banks are forced to become more efficient, forgo bonuses, and/or charge more for services to customers – the same customers who are footing the bank bailout fiasco through taxes in the first place. And the payments represent funds the bank will not be able to loan to local business and individuals. This is adding fuel to the fire in a down economy.

Silver Lining?

It’s a significant near-term hit – but one most banks are willing to take. Prepaying is widely viewed as the best solution to the problem -  although some in the industry feel it’s unfair to have to take money from their pockets to pay the big banks involved in the sub prime debacle.  But for small banks that  can survive this tough period, things may be looking up, as they will have streamlined and will not (hopefully) need to make further assessment payments for the next few years.