Magazine article American Banker

OMB, FDIC Far Apart on Costs Tied to Failures

Magazine article American Banker

OMB, FDIC Far Apart on Costs Tied to Failures

Article excerpt

Byline: Joe Adler

WASHINGTON - The White House is projecting a massive increase in costs to the Federal Deposit Insurance Corp. from bank failures over the next two years, but experts disagree over the reliability of the administration's numbers.

The Office of Management and Budget released details on the proposed 2010 budget last week that estimated failure-related expenses would total a whopping $91 billion through the 2010 fiscal year.

The estimate contrasts sharply with that of the FDIC, which has projected net losses of $65 billion through 2013. Industry representatives wasted

little time in arguing the figures were exaggerated.

"These numbers are crazy," said James Chessen, the chief economist of the American Bankers Association. "There's no relationship between these numbers and the reality of the health of the banking industry."

Differences between FDIC and OMB projections are not new, and previous administrations have had a poor track record when predicting failures. Several Bush administration budgets predicted failures - and a corresponding increase in premiums -that did not materialize. For example, in the 2004 fiscal-year budget, OMB projected $1.1 billion in losses. Actual failure costs were less than $200 million. "They've always been on the pessimistic side of the world," Chessen said.

Observers attributed the discrepancy this year to the administration's more conservative view of the industry's recovery, the OMB's focus on a fiscal-year cycle (the FDIC uses calendar years) and the White House's use of factors preferred by private insurers in their estimates.

George Pennacchi, a University of Illinois at Urbana-Champaign finance professor and a former consultant to the OMB, said the administration weights more heavily than the FDIC a certain risk calculation - known as "systematic" risk - that deems large banks more likely to fail in a recession. …

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