Vermont’s community banks hit by FDIC as big banks fail

first_imgBy James Dwinell. Vermont Business Magazine. May 20, 2010 -When the widows and orphans of Vermont opened the annual report from their home town bank, they may have read something similar to the letter to shareholders of the Randolph National Bank, a $160,000,000 bank founded in 1875 and headquartered in that town. Chairman John Osha wrote, To help fund the massive losses and risks throughout the nation, the FDIC dramatically increased (our) deposit insurance premium ¦from $14,000 in 2008 to more than $330,000 in 2009. Given the interest rate environment and the difficult economy, we would have been reasonably pleased with our earnings if they were not significantly diminished by the FDIC assessment (and thereby reducing our earnings by 54 percent).To ensure that this was not an aberration, we called Mark Young, President of the First National Bank Orwell, a $40,000,000 bank founded in 1832.Young said, It was not a happy day. Vermont banks are prudent and are not in trouble. Our FDIC premium which had been $8,585 jumped to $70,038. Not just that, they took three more years of premiums from us, totaling $230,077.The most troubling part of this is that it was not necessary for the FDIC to take our money. The bank bailout legislation included a provision allowing the FDIC to borrow money from the United States Treasury to protect deposits up to the temporary new limit of $250,000.The Director of Public Affairs for the FDIC, Andrew Gray, defended its decision, saying, Yes, we could have borrowed the money from the United States Treasury, but we did not think that it was proper to rely on the taxpayers to protect the depositors. After analysis, we thought that the losses could be absorbed by the industry to meet our obligations.How bad is the situation? In 2005 and 2006 there were no bank failures, in 2007 there were three. Then came the financial crisis: 2008-25 failures, 2009-140 failures and so far this year, 72 failures.Why do banks fail? Gray said, We use the Camels rating system: capital, assets, management, earnings, liquidity, and sensitivity to risk. On a 1-5 system, banks with ratings in the 4-5 range are in trouble in many of those areas.Gray said, We asked the banks and they gave us the cash for the increased premium.Young said, The FDIC did not ask us, they notified us, and we did not give them the money, they just took the money out of our bank. In a slight of hand according to Gray, the FDIC allows the banks to continue to show the now-absent prepaid cash on their balance sheet until the year in which the expense is recognized.Steve Marsh, President of the Community National Bank, a $510,000,000 founded in 1851 and headquartered in Derby, said, Vermont banks have done really well in this environment. Though Vermonters are socially liberal, they are fiscally conservative. The FDIC special assessment was a good outcome which could have been much worse. The losses from failed banks were wholly funded without any government money. We did however reduce our dividend by 29 percent.Ken Gibbons, president of the $450,000,000 Union Bank, founded in 1891 and headquartered in Morrisville said, Yes, we too paid up, a total of $2,491,085, and this was the straw which caused us to lower our dividend 11 percent. While I do appreciate the FDIC s Chair Shelia Bair, and her work, my issue with this decision is that the community banks did not create the problem, yet it is the community banks which have to solve the problem. Congress is trying to address this problem retroactively by changing how the FDIC assesses banks. Because big banks raise most of their money through bonding and other devices, not deposits as do community banks, the new banking law has proposed that the FDIC assessment will include this money as well as deposits. Nonetheless, $45 billion (according to the FDIC) was taken from the community banks. My big gripe is that we had all that money taken from small towns all over the United States and we can no longer lend that money to our customers.David Carle, spokesman for Senator Patrick Leahy (D-VT), said the Senate indeed addressed the issue Gibbons mentioned. “On May 6, the Senate adopted the Tester Amendment by a vote of 98-0 (Leahy voted aye) to change the assessments to be based on a bank s liabilities essentially any insured deposits plus other borrowings by the bank. That would result in the biggest banks, which raise less of their capital from insured depositors, paying higher amounts into the insurance fund than they currently do. (Connecticut Democrat Senator Christopher Dodd) said this on the amendment: ‘The change will help to ease the burden of FDIC assessments on our community banks by requiring the largest banks in the country to shoulder a little more of the responsibility to rebuild and maintain a sound deposit insurance fund’.The United States Treasury did come to the aid of the nation’s reckless big banks with almost three quarters of a trillion of stabilization money, but when it came to the prudent community bank, they took $45 billion, and left a hole for those depending on those banks for dividends and small business loans. FROM THE AMERICAN BANKERS ASSOCIATION. September 29, 2009FDIC Proposes Banks Prepay Three Years of PremiumsThe FDIC Board this morning proposed a Deposit Insurance Fund restoration plan that requires banks to prepay, on Dec. 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. Under the plan — which would apply to all banks except those with liquidity problems — banks would be assessed through 2010 according to the risk-based premium schedule adopted earlier this year. However, beginning Jan. 1, 2011, the base rate would increase by 3 basis points. (See chart below. Banks would prepay the base rate only and would true up their premiums each quarter.)The proposal is expected to provide FDIC with $45 billion in cash that the agency needs to resolve the increasing number of bank failures, which are expected to cost $100 billion between 2009 and 2013. It does so without hitting bank earnings as hard as a second special assessment would since prepaying allows banks to keep the premiums on their books as an asset until the payments are booked by the FDIC on a quarterly basis.ABA has worked with the FDIC for several months to suggest realistic alternatives to another special assessment, which FDIC agreed would put too much burden on bank earnings. FDIC also agreed prepayment was preferable to tapping the agency s Treasury line of credit. In choosing this path, it should be clear to the public that the industry will not simply tap the shoulder of the increasingly weary taxpayer, said FDIC Chairman Sheila Bair. This proposal is a vote of confidence for the banking industry’s resilience and will continue to recover its strength as we work through the significant challenges ahead.”ABA echoed FDIC s concerns. The proposal ¦ reinforces the fact that it is the banking industry that is fully responsible for the financial security of the agency, ABA Chief Economist Jim Chessen said. At this critical time, when the economy is just beginning its recovery, looking to options that are less pro-cyclical and that spread the cost over time is the right policy.A bank would be permitted to transfer any portion of its prepaid assessment to another institution, after filing notification requirements. The plan also extends the DIF restoration period from seven to eight years. A 30-day comment period will follow the proposal s publication in the Federal Register. Read more.  Read the FDIC memo outlining the plan.last_img

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