WASHINGTON -- Defying heavy pressure from both the Bush administration and the industry, federal regulators voted yesterday to raise the premiums that banks and savings associations pay to their insolvent insurance funds and to make fundamental changes in the way those premiums are assessed.
The 3-2 decision by the Federal Deposit Insurance Corp. would raise premiums an average of 22 percent starting in January. And, for the first time since 1934, when the initial fund was set up in the wake of the bank collapses of the Depression, weaker institutions would pay a bigger increase than stronger ones.
In an effort last year to encourage prudent banking practices, Congress gave the regulators until 1994 to end the 58-year-old system of having all banks pay the same rate.
The increase, which the administration had hoped until the last minute to be able to block, would have a broad economic impact, making banking more expensive for customers, who could have to pay more for loans and receive lower yields on deposits.
It would also hurt the stockholders of about 14,500 banks and savings associations, reducing the industry's after-tax earnings by more than 4 percent. Some of the premium costs are also borne by taxpayers, because institutions are permitted to write off a percentage of their premium payments on their corporate taxes.
Supporters of the increase say it is intended to protect confidence in the economy by strengthening the insurance fund, which is deeply in the red and at its lowest level since its creation during the Depression.
William Taylor, the chairman of the insurance corporation, said the bank insurance fund lost about $11 billion last year, giving it a deficit of about $7 billion, an amount it has had to borrow from the Treasury.
He said that even greater annual losses might be posted in the next two years. The proposed changes would raise an additional $1.25 billion annually.
The increase, to an average of 28 cents for every $100 in deposits from the current 23 cents, is expected to be approved after a 60-day comment period. The weakest banks, those with the least capital and the most problem loans, would pay an additional 3 cents for every $100 in deposits, and the strongest would pay 3 cents less.
Regulators said the new risk-based system might take longer to put into effect but that any delay would not postpone the premium increase.
The bank insurance fund, which stood at $18.3 billion six years ago, has been battered by the failures of 885 banks since then, costing more than $26 billion.
While assessments have nearly tripled, from 8.3 cents per $100 just three years ago to the current 23 cents, they have failed to keep pace with the devastation of the industry.
The dissenting votes on the premium increase were cast by the Treasury Department's representatives on the board, T. Timothy Ryan Jr., head of the Office of Thrift Supervision, and Stephen R. Steinbrink, acting comptroller of the currency.
Mr. Steinbrink said in an interview afterward that he supported a 4-cent increase but that the board's approval of a 5-cent boost, bringing in an additional $250 million, "was not justified."
After the board appeared to be moving toward a 4-cent increase, Mr. Taylor said that would not be enough, and two other members, C. C. Hope Jr. and Andrew C. Hove Jr., joined him to support the 5-cent raise.
Mr. Taylor's term expires in February, and the premium increase, one of the most important regulatory decisions this year, had put him squarely between Congress and the Treasury.
Yesterday's decision was in clear defiance of the industry and the Bush administration, which appointed Mr. Taylor less than a year ago.
Mr. Taylor, who has told associates the increase was the most difficult political fight he has fought, said that in recent months the industry had shown some signs of improvement, primarily because of favorable interest rates, but that it was too soon to conclude that troubled banks had worked out their problems with real estate loans.
"I would prefer to be here lowering the premium," he said at the packed board meeting yesterday. "But if we were to overestimate the problem and take in too much money, it would be the first time in a long time. The information in front of us is overwhelming, and it's responsible for us to do what's right and increase the premium."
A report by the FDIC staff stated that "as bad as the past five years have been in terms of insurance losses, the next two years could be even worse."
It said a rate of about 50 cents would be needed to prevent the fund from deteriorating further. The agency has said it expects 200 banks holding $80 billion in assets to fail this year, at a cost to the fund of about $14 billion.
Industry groups had complained that the increase was unnecessary and harmful, and had pressed the five board members in the last few days to postpone a decision until after Election Day. They have also said the FDIC projections are too pessimistic, noting that the government has seized only 51 banks holding $16.1 billion in assets so far this year.
"Raising premiums will do more harm than good at a time when the banking industry and the economy are beginning to show signs of strength," said Alan R. Tubbs, president of the American Bankers Association and head of Maquoketa State Bank in Maquoketa, Iowa.
Officials at the American Bankers Association said the premium increase would have a small impact on customers at some institutions and a much larger impact at others, depending on the market and financial condition of each bank.