Word: banks
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Normally, the FDIC would assess a special onetime fee to banks to raise the money it needs for its fund. But bank executives have been saying that any additional payments they have to make to the FDIC above their normal quarterly bill would force them to cut lending. Special assessments have to be recorded as a cost when they are paid to the FDIC, which reduce bank earnings and capital. It was a capital crunch that caused the financial crisis in the first place. (See pictures of the global financial crisis...
...well within the rules of the FDIC. The agency has a credit line with the Treasury to tap as much as $500 billion in emergency capital through the end of next year. But the FDIC is worried that if the agency, which has always been privately funded through bank assessments, borrowed money from the Treasury, it would look like a new bank bailout, eroding the sliver of confidence the public has regained in our nation's banking system in the past few months...
This week the FDIC came up with another solution, which it says will simultaneously boost the fund and not hurt bank earnings or deplete lending. How is it possible that the FDIC's gain will not be a loss to the banking system? It's all thanks to an accounting quirk that allows companies to spend money on something but not actually tell their shareholders about the cost until the asset is gone. For you and me, it would be like shoplifting at the supermarket and then dropping off cash every time you decided to eat something...
Here's how it will work in the FDIC's case: Later this year, along with their scheduled 2009 fee, banks will pay the FDIC all of the fees that they believe they will owe the agency through the end of 2012. But even though the banks will make those payments this year, they won't show up on 2009 income statements. Instead, each bank will add an asset, a big one, to its balance sheet, right below where the cash they just handed over to the FDIC used to be. It will be called something like prepaid FDIC premiums...
...case of big banks like Bank of America or Citigroup, the upfront payments could run to a few billions. But the FDIC and analysts say banks will be more than able to cover it. Cash flow is not their problem. Capital is. And because the prepayments won't hit earnings, at least not initially, those capital ratios we have been worried about to show if banks are solvent won't change. Banks, all too familiar with accounting tricks, seem overjoyed by the FDIC's solution...