FDIC Scrutiny to Lengthen Recession

FDIC Scrutiny to Lengthen Recession

Even healthy banks are being swept up into the regulatory crackdown.

By Renuka Rayasam, Associate Editor, The Kiplinger Letter

Banks are starting to chafe on a federal regulatory leash that is getting even shorter. As the Federal Deposit Insurance Corporation (FDIC) takes a less sanguine view of lending previously seen as safe, even healthy banks are being ordered by their primary regulator to slash credit and raise reserves.

Regulators were too lenient for far too long, argues Gary Findley, a California banking attorney who heads The Findley Group, a banking consultancy. “I think the regulators are saying, ‘I’m going to show you,’ ” says Findley. “Now, the spigot is wide open.”
For example, federal watchdogs are no longer turning a blind eye to brokered deposits, in which out of state brokers delivered bulk deposits to a bank in exchange for higher than usual interest rate returns. These deposits were moved quickly in and out of banks in many instances and have been blamed for bank failures, such as in Georgia.

It’s “a business practice that gives regulators some concern,” says Kathleen Khirallah, lead retail banking analyst at the TowerGroup research firm. These days, even working capital loans are considered riskier. The same goes for land development and commercial real estate loans, which are being threatened by eroding property values.

Few institutions successfully contest bank regulatory orders with administrative appeals or lawsuits. The regulators are generally presumed to be in the right. “It’s very hard to defeat your regulator in court,” says Jaret Seiberg, a senior vice president covering financial services policy for the Washington Research Group consulting firm.

The upshot will be a further restriction of credit for businesses, which will be one more reason that the economy’s climb back from the recession will take longer than usual. “We don’t think this is healthy for the industry,” says Findley. “If we have a vast majority of banking under regulatory scrutiny, lending is going to pull back.”

The FDIC is trying to give banks some help. Look for Uncle Sam to make higher deposit insurance ceilings permanent when the temporary hike from $100,000 to $250,000 per depositor ends in 2013.

And it will also extend temporary insurance on non-interest-bearing deposits, while increasing the fees charged for it. Banks now pay $1 per $1,000 on deposits of more than $250,000. Given the continuing worries about bank failures, there are good odds that the FDIC won’t let the program die on Dec. 31, but will extend it by six months.

But the FDIC will up the fee to $2.50 per $1,000. “The biggest demand for this program will be in areas where there have been a lot of bank failures,” says Chris Cole, regulatory counsel at the Independent Community Bankers of America. “That is where customers are more concerned about stability.”


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