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Senate Approves Increase to the FDIC’s Borrowing Authority

Posted by Wendell Brock on Thu, May 07, 2009

On May 6, the Senate passed S. 896, Helping Families Save Their Homes Act of 2009. The legislation contains various mortgage and loan modification initiatives, as well as a few measures to improve the FDIC’s and NCUA’s capacity to maintain stability in the banking system. The latter include:

•    Sizeable increases to the borrowing authorities of both the FDIC and NCUA

•    An extension of the deadline for restoring the Deposit Insurance Fund (DIF); the   original allowable restoration period of five years will be increased to eight years

•    Revisions to the systemic risk special assessment

•    A four-year extension of the FDIC’s $250,000 deposit insurance limit

•    An amendment that calls for the establishment of a National Credit Union Share Insurance Fund Restoration Plan if the National Credit Union Share Insurance Fund (NCUSIF) is projected to dip below a designated equity ratio

Promises, promises

The Senate bill clearly contains perks for both banks and their depositors. The higher deposit insurance limit is largely a goodwill measure, but it does provide flexibility to high net worth individuals. A hotter topic, though, is the increase to the FDIC’s borrowing authority.

Here’s the background. In February, the FDIC announced a special assessment of 20 basis points to be applied to all domestic deposits as of June 30, 2009 — an action deemed necessary to recapitalize the DIF.

In early-March, the FDIC then indicated that it could reduce that special assessment by as much as 10 basis points, if Congress passed legislation to increase the insurer’s borrowing power to $100 million.

Special assessments cut into banks’ earnings and capital levels, and generally get passed on to bank customers over time. If S. 896 becomes law and the FDIC keeps its promise, banks and their customers will be spared half of that extra expense for the time being.

In a news release, American Bankers Association (ABA) Executive Director Floyd E. Stoner had this to say about the Senate’s passage of the bill:
“During this time of economic uncertainty, bankers recognize the importance of maintaining public confidence in the Federal Deposit Insurance Corporation (FDIC).  We also believe that it is important to strike the right balance between maintaining a strong deposit insurance fund without unnecessarily taking money out of the system. S. 896, the Helping Families Save Their Homes Act, helps achieve this delicate balance.”

Incidentally, the Senate’s approved version of the bill did not contain the hotly contested cramdown legislation, which gives bankruptcy judges the right to modify mortgages on primary residences. The cramdown provision was, however, included in the House’s version of the bill, which was passed in March.

The Senate passed the Helping Families Save Their Homes Act of 2009 with a vote of 91-5.

Topics: FDIC’s, S. 896, mortgage and loan modification, NCUA’s, Senate, American Bankers Association

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