Banks to Prepay FDIC Fees, Agency Mulls ‘Safe Harbor’ for Securitized Loans

It's no longer just a proposal â€" the ""FDIC"":http://www.fdic.gov decided Thursday to implement a new payment structure for banks that requires them to prepay three years of insurance premiums. The agency also signaled that it is putting together new rules that would provide ""safe harbor"" protection for loans bundled in securities, essentially putting these assets out of the FDIC's reach if the selling institution goes under.

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The FDIC board said in a statement that insured institutions will pay upfront ""slightly over three years"" of estimated insurance assessments, which will be due on December 30, along with banks' regular quarterly fees.

The agency expects to rake in $45 billion from this unprecedented billing arrangement to build up its deposit insurance fund, which has shrunk to under $10 billion. That's a mere 20 percent of its balance at the end of 2008, thanks to the relentless stream of ""bank failures this year"":http://www.fdic.gov/bank/individual/failed/banklist.html, and agency officials expect the hits to keep on coming.

FDIC Chairman Sheila Bair stated recently that the cost of bank failures between 2009 and 2013 will reach about $100 billion.

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According to Bair, the banking industry strongly supports the three-year prepayment plan. She said the agency has received numerous letters from insured institutions over the past month showing that ""the FDIC and the industry are of the same mind: we will do whatever it takes to maintain the public's confidence in insured institutions and we remain committed to maintaining the independence of the deposit insurance fund through direct industry funding.""

The FDIC board also discussed rule changes at its Thursday meeting that would ""extend the agency's safe harbor code"":http://www.fdic.gov/news/board/2009nov12no6.pdf to include loans that have been securitized and sold to investors in the secondary market.

In 2000, the FDIC clarified the scope of its authority as receiver to repudiate securitization contracts of collapsed institutions it seized. The new rule amendment would mean the FDIC would not use this authority to reclaim or recover a bank's securitized financial assets to help cover the cost of its failure â€" most likely a move that the agency is hoping will help jumpstart the stagnant private secondary market for asset- and mortgage-backed securities.

""These conditions will allow insured banks and thrifts to profitably securitize loans in a way that aligns incentives to support sustainable lending,"" Bair said. ""They will also support a structured-finance process that does not create landmines for banks, investors and our financial system.""

Agency officials plan to submit a proposal for the rule change to the board in December and then open the topic up for public comment.