T he Q:
If anyone thought that the $700 billion financial rescue plan passed by Congress and signed by President Bush would calm the public's fears, think again. It has only generated more concerns. One part of the measure, which raises the ceiling on federally insured bank deposits to $250,000 from the current $100,000, was particularly worrisome to reader Lee Comeau.
For those who aren't aware, banks pay a premium to the Federal Deposit Insurance Corp. for deposit insurance coverage. Those premiums and earnings on investments in U.S. Treasury securities contribute to the FDIC's insurance fund.
"I have heard, from those in the banking community, that these premiums have increased dramatically," Comeau said. "Who is going to 'cover' this increased protection? Is this more cost that will be passed on to banks? If so, how much of an annual increase will those amount to for the 'average' bank?
Before we tackle this question, it's important to understand some background.
Under the current system, banks pay anywhere from 5 cents to 43 cents for every $100 deposited, based on their level of risk, according to the FDIC.
To bring in more money to strengthen the insurance fund, the FDIC began studying the idea this summer of raising that premium rate. This past Tuesday, the FDIC proposed uniformly increasing the rate by 7 cents.
"It's like car insurance," said David Barr, an FDIC spokesman. "A 16-year-old male is going to pay more for car insurance than a 43-year-old married female with four kids. Banks pay a premium based on the same concept. The higher their risk, the more they pay."
If approved, the rate increase would kick in Jan. 1, Barr said. Beginning with the second quarter of 2009, changes would also be made to the deposit insurance assessment system to make the increase fairer by requiring riskier institutions to pay a larger share.
This is a marked difference from the 1980s, when all banks paid a flat rate of 23 cents for every $100 deposited.
While there's been much worry about where banks fall on the risk meter, Barr said consumers should know that 90 percent of banks pay the lower end of premium rates. Recent nuggets culled from the FDIC rate increase proposal show that 14 banks are in the FDIC's highest-risk category, according to The Wall Street Journal.
Here's where it gets a little confusing.
It's true that those premiums go toward the FDIC insurance fund, which is used to pay depositors in the case of a bank failure. But, Barr said, "The move to raise premium rates had nothing to do with the move to increase insured deposits to $250,000. We started looking at raising rates in July."
With that said, it's likely the rate increase will be approved after a 30-day period for public comment.
What raising the premium rate will do is effectively add to the cost of doing business for banks.
As with any type of business, companies will try to recoup higher costs through higher revenues, said Greg McBride, senior financial analyst with Bankrate.com.
So Comeau is correct in deducing that the higher premium rates that banks will have to pay for deposit insurance coverage will eventually trickle down to consumers. But, how much that will cost consumers and when it will happen is difficult to determine.
"You can't assume that banks will pass that cost penny-for-penny on to the consumer," Barr said.
"It's hard to say how it will work," McBride said. "Fees have been increasing consistently for at least 10 years now. Banks will find a way to recoup their costs. They can make up that cost either through fee revenue or interest income, or very likely, a combination of both."
"Fees are going to go up either way," McBride said.