New Powers Mean New Questions for FDIC; Some Fear a Loss of Focus, Independence as Duties Multiply
Adler, Joe, American Banker
Byline: Joe Adler
WASHINGTON - The Federal Deposit Insurance Corp.'s growing involvement in efforts to rescue the financial system is raising concerns that its core mission may be blurred.
The agency's role has greatly expanded as the Treasury Department has turned to the FDIC to run a critical piece of a plan to remove toxic assets from bank balance sheets. Congress is also weighing whether to grant the FDIC the power to resolve systemically important nonbanks, and its borrowing authority from the Treasury is poised to more than triple, to $100 billion.
What's more, the agency has guaranteed $335 billion of debt issued by banks and holding companies, and is providing unlimited coverage for $684 billion of deposits that do not bear interest.
Some observers say all these changes pose risks, including a loss of independence and a dilution of the FDIC's focus on protecting depositors.
"They're moving away from being an insurer and really becoming a backdoor funding agency of the Treasury Department," said Kenneth Guenther, the former longtime head of the Independent Community Bankers of America.
Until now much of the focus during the financial crisis has been on the Federal Reserve Board, with critics raising the same question about independence and alleging the central bank has put its balance sheet at risk.
The Treasury announced last month that the FDIC and the Fed would split duties under the Public-Private Investment Program. The FDIC would guarantee and hold auctions for debt used to buy toxic loans through the Legacy Loans Program, while the Fed would oversee a program designed to create a market for illiquid securities.
Late last month the administration unveiled a legislative proposal for the FDIC to handle resolution duties for all systemically risky institutions, including bank holding companies and nonbanks.
Some former FDIC officials worry these new roles could make the agency too political.
"It's never been a political agency. Whether you had a Democratic or Republican administration, it's basically been full of people that have focused on doing the job that the FDIC was assigned to do, and doing it well," said John Douglas, a partner at Paul, Hastings, Janofsky & Walker LLP and a former FDIC general counsel. "There's some danger that the longer you're in the room with the Fed and the Treasury and the administration, dealing with systemically important institutions, you wind up getting pressured to do things that maybe you wouldn't do if you were just focused on banks and the insurance function."
Putting the cleanup of failed holding companies and nonbanks - now handled by the bankruptcy courts - in the FDIC's hands would be transforming, Douglas said.
"Instead of having a holding company bankruptcy at Washington Mutual, where you have creditors and bankruptcy judges, it would all be in the hands of the FDIC to resolve in accordance with its procedures," he said. "You'd have the FDIC hiring contractors and outside managers, and would be accountable to no one. That would be a huge change."
FDIC Chairman Sheila Bair is trying to distinguish between the agency's proposed new role and its traditional work. During a speech last week at an American Bankers Association meeting, she floated the idea of creating a separately named entity under the FDIC to run systemic resolutions.
Julieann Thurlow, the president of the $269 million-asset Reading Co-Operative Bank in Massachusetts, heard her speak and in an interview said she is concerned recent moves will confuse consumers.
"If consumers start seeing the FDIC dabbling in nonbank institutions, does that brand start to bleed, and does the FDIC endorsement start to spread elsewhere, where it doesn't belong?" she said.
Though all three programs are funded separately from the Deposit Insurance Fund - through special fees - some fear the fund could eventually be on the hook if there were high losses. …