FDIC Proposal Pushes, Pulls on Bank Capital

Officials at the Federal Deposit Insurance Corp. are certainly keeping busy throughout the current financial crisis — and with the independent investment bank model quickly turned into a dinosaur, much of the nation’s financial system sits directly in the government agency’s lap. On Tuesday, the FDIC proposed more than doubling its deposit insurance premiums assessed to banks, in an effort to ensure that the agency can manage through an expected spate of bank failures over the course of the next few years; the key federal banking regulator also tentatively approved a rule reducing capital requirements for banks holding Fannie Mae (FNM) and Freddie Mac (FRE) debt and associated MBS. “The U.S. banking industry has the willingness and capacity to provide the necessary backing to the insurance fund,” said FDIC chairman Sheila Bair, in a press statement. “The entire capital of the banking industry stands behind the fund, as does the full faith and credit of the United States Government.” Currently, banks pay anywhere from five basis points to 43 basis points for deposit insurance. Under the proposal, the assessment rate schedule would be raised uniformly by 7 basis points beginning next year. Beginning with the second quarter of 2009, further changes would be made to the deposit insurance assessment system to make the increase in assessments fairer by requiring riskier institutions to pay a larger share. Looking to free up capital, as well The FDIC proposal also will cut so-called risk weighting for banks on Fannie and Freddie’s credit claims to 10 percent from 20 percent, a move that various financial press suggested would potentially stimulate sagging demand for agency MBS and stimulate much-needed lending activity from strapped financial institutions. With assistance from the U.S. Treasury, government regulators and the Federal Housing Finance Agency placed both Fannie and Freddie into conservatorship last month. The move to cut capital requirements was an attempt to signal that both mortgage finance giants are seeing by regulators as one step closer to U.S. Treasury notes, but a Bloomberg story suggested it may have little effect. “Are financials willing to take on more risk just because they have additional capacity?” Ira Jersey, a strategist at Credit Suisse (CS), was quoted as saying in the Bloomberg story. “In this environment, they’re unwilling to take on much additional risk. They don’t want to spend capital, they want to preserve capital.” Key HW sources, however, suggested that while the move may only free up limited amounts of capital — no more than $30 billion in the aggregate, by most estimates we’ve seen — it may effectively serve to offset any burden associated with increased deposit insurance premiums. “[The FDIC is] trying to create capital on one hand, because they know they’ll be taking more of it as well on the other,” said one source, an ABS/MBS analyst that asked not to be named in this story. Disclosure: The author held no relevant positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.