Senate bill: Banks won’t pay for higher FDIC coverage

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The Senate version of the financial-system bailout bill would temporarily raise the basic federal insurance coverage of bank deposits to $250,000 from $100,000.

And it would do so without cost to the nation’s banks: The language in the Senate bill specifically says that the Federal Deposit Insurance Corp. must not consider the boost in coverage when setting premiums that banks pay to the $45-billion FDIC fund.

Instead, the FDIC would get an unlimited credit line with the Treasury that could be tapped if the fund ran short of money to cover bank failures. In other words -- taxpayers would be on the hook.

The terms for the increase in insurance coverage also would apply to the National Credit Union Administration, which insures credit union deposits.

FDIC Chairwoman Sheila Bair said Tuesday that the agency would ask Congress to raise the insurance coverage limit to damp ‘an increasing crisis of confidence that is feeding unnecessary fear’ in the banking system.

With bank failures on the rise, consumers and businesses naturally are more sensitive to the risk of having uninsured deposits in the financial system. One fear of small and mid-size banks is that customers will shift funds to the biggest banks, such as Bank of America, figuring the government could never let the titans fail.

A higher insurance coverage limit could help calm many depositors’ fears and forestall outflows from smaller banks. If that, in turn, prevents arguably unnecessary bank failures, so much the better for the FDIC.

The Senate bill would maintain the $250,000 limit only until Dec. 31, 2009. But practically speaking, it’s hard to imagine the government lowering insurance coverage back to $100,000 after consumers and businesses get used to the higher amount.

Although banks won’t, for now, pay higher premiums for the expanded coverage, their premiums will be going up anyway: The FDIC is supposed to maintain the insurance fund at 1.15% to 1.25% of total insured deposits. At the moment the fund is at 1.01% of those deposits.

So the FDIC board will meet Oct. 7 to propose new premiums to get the fund back above 1.15% of the total -- not including the expanded deposit coverage if the bailout bill becomes law.