Recession Reversal: FDIC Borrowing from Banks?

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WASHINGTON (TheStreet) -- The Federal Deposit Insurance Corp. seems poised to hurt small, healthy banks in an effort to keep small, sickly ones alive.

The FDIC's deposit insurance fund is in trouble, with reserves having sunk to a mere $10.4 billion at the end of last quarter. At the same time, the list of "problem" banks has climbed by more than one-third to 416, as dozens of banks have crumbled and others were acquired by stronger competitors.

To replenish its coffers, the FDIC can ask Congress for more money, tap into a $100 billion credit line from the Treasury Department or continue to assess higher fees to the industry, as it did last quarter. The New York Times reported on Tuesday that Chairwoman Sheila Bair is leaning toward the last option and also may borrow funds from healthy banks on a short-term basis to rescue weaker counterparts.

While boosting insurance-fund fees has crimped the profits of big banks like Bank of America (Stock Quote: BAC), JPMorgan Chase (Stock Quote: JPM), Citigroup (Stock Quote: C) and Wells Fargo (Stock Quote: WFC) most prominently, the move has arguably had a bigger impact on their regional brethren. Bigger banks pay the most in absolute terms because the fees are based on the size of insured deposits, yet the fees can have more of an impact on smaller banks that don't have as many other businesses to offset the fees, or larger ones that are heavily reliant on deposits.

For instance, BofA and JPMorgan didn't break out the FDIC fees specifically. But BofA, which earned $3.2 billion, said the assessment fee was part of $17 billion in noninterest expenses, which included heavy costs from the mergers of Merrill Lynch and Countrywide. JPMorgan, which has a comparable deposit base and earned $2.7 billion, said its noninterest expenses were $4.1 billion, including costs for its integration of Washington Mutual.

Wells Fargo earned nearly the same amount as BofA but has fewer deposits and paid a special assessment of $565 million. Citi, which has fewer deposits than all three big competitors, earned $4.3 billion during the quarter, and paid just $333 million in FDIC special assessments.

When it comes to smaller regional competitors that are still struggling through commercial real-estate losses, the relative hit can be more dramatic. For instance, Regions Financial lost $244 million in the second quarter, and paid a $64 million special assessment fee.

While those banks have received bailout funds and are struggling through problem loans, others like UMB Financial -- which didn't accept dollars from the Troubled Asset Relief Program -- also are paying relatively large amounts that cut into their bottom lines.

UMB blamed its earnings drop to $19 million on $8.4 million in various regulatory fees during the second quarter, as well as a $4.8 million reserve for fees in the next quarter. Chairman and CEO Mariner Kemper, a harsh critic of the government bank bailouts, noted that 86% of UMB's profit decline from the year-ago period was due to regulatory fees.

"It's unfortunate that banks like UMB that did not contribute to the financial crisis must share in this burden," Kemper added, "but we understand our responsibility to the industry."

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