The federal agency that insures bank deposits appears ready to cave in to immense pressure from community banks, including locally, that are angry over a massive special premium assessment imposed days ago to quickly rebuild the insurance fund in preparation for more bank failures.

Small banks in Western New York and nationwide have expressed outrage for a week over a surprise move by the Federal Deposit Insurance Corp. to charge all banks a special one-time fee.

The agency's goal is to replenish the insurance fund that has been depleted by a surge in failures over the past few months. The FDIC also sharply raised the regular annual premium paid by all banks.

As a result, small banks are looking at having to pay hundreds of thousands of dollars more, and for the largest institutions as much as $1 billion more. That's an increase of several hundred percent in many cases, at a time when banks are squeezed already.

"It's big money," said David Nasca, CEO of Evans Bancorp in Angola. "We'll be able to handle it. It's not going to send us to our demise. But it certainly is a painful, painful assessment."

And small banks feel it's particularly unfair to them. "Lake Shore Savings Bank, like most other community banks, is tired of paying for the mistakes of others," said David Mancuso, CEO of the Dunkirk-based savings bank. "We are tired of contributing our funds to try and solve the issues that others have created."

Community Bank System, which operates 33 branches and a money manager in Western New York, paid $1.7 million last year for FDIC premiums. Under the proposed new structure, it would pay $14 million, or 20 percent of its entire pretax earnings for 2008, including about $8 million just for the special assessment.

"As a banker who was disciplined and was not engaged in the kinds of wayward activity that the big banks were, I'm mad as hell," said CEO Mark Tryniski.

Cattaraugus County Bank is facing $250,000 just for the one-time assessment, which CEO Salvatore Marranca denounced as an "unbelievable, unfair and very substantial burden."

And Bank of Akron would pay a total of $467,000, or about 35 percent of last year's earnings. "You can imagine that any business would be horrified at that prospect," said Bank of Akron president E. Peter Forrestel II.

Under federal law, the FDIC's insurance fund must be maintained at a level equal to 1.15 percent of total insured deposits for the industry. At current levels, that would mean holding $55 billion.

But a rash of 25 bank failures last year and 17 already this year, as well as the unexpectedly higher cost of failures such as IndyMac Bank, have ransacked the fund. It's now down to its lowest level in 15 years: $18.9 billion at year-end, or just about 0.4 percent of deposits.

After a weeklong campaign of letter-writing and phone calls, the FDIC now says it's willing to back off from its plan, or at least reduce the amount of the special assessment, if Congress triples its $30 billion line of credit with the U.S. Treasury to $100 billion. The line has been in place since 1991, when total U.S. deposits were one-third what they are today, but it's never been tapped.

Such legislation passed the House of Representatives last week, and a version was introduced in the Senate by Sen. Christopher Dodd of Connecticut. The Senate bill also contains a provision allowing for a temporary increase to no more than $500 billion, if needed, so the two versions must still be reconciled before final passage.

"That sounds like a good first step," Thomas said. "It would avoid a negative impact on bank earnings at this time when banks are looking to assist in the economic recovery."

Regardless of the outcome, depositors are still protected, up to the current level of $250,000.

"Banks are fully ready to stand behind our fund," said Diane Casey-Landry, chief operating officer of the American Bankers Association. "We'd just like to do it in a more reasonable time frame and amount."

e-mail: jepstein@buffnews.com

Originally published by NEWS BUSINESS REPORTER.

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