Advance premiums for FDIC are worth banking on

Times are tough. Brethren are falling all around. Then the insurance company demands three years' worth of premiums -- in advance.

So why aren't banks up in arms now that just such a call has come from the Federal Deposit Insurance Corp.?

Federal deposit insurance, even paid for years in advance, remains a pretty good deal for banks. Besides, the call could have been much worse, and bankers generally know it.

Deposit insurance has been a godsend for consumers. It also has been a funding subsidy for banks.

Without it, depositors would demand much higher interest rates on deposits and wouldn't do business with those that began to teeter.

Besides, the cost to banks isn't heavy even if it is going up.

It wasn't that long ago when banks were getting deposit insurance for free. Congress capped how big the FDIC's deposit insurance fund could grow, and it topped out in the 1990s. Premiums disappeared.

Heck, at one point in the mid-1990s, roughly 8,700 banks each got a $506 refund check from the FDIC.

But that was then.

Now the FDIC's coffers have been laid low by 124 bank failures in two years.

The first call the FDIC made to banks was to pony up an extra premium for deposit insurance, a special assessment to shore up the FDIC's deposit insurance fund.

FDIC also got a $500 billion line of credit with Uncle Sam. In a real pinch, it could borrow what it needed.

And it's in a real pinch.

In asking for advance premiums from banks, the FDIC estimated that its insurance fund will absorb $100 billion in losses from banks that have failed this year and that it expects will fail through 2013.

Though the FDIC has set aside funds to cover much of those expected losses, it needs the $45 billion from banks' advance premiums.

Accounting-wise, the advance payments won't hurt banks earnings directly. They'll lose the cash but gain an asset -- prepaid insurance coverage for three years.

That wasn't true with the special assessment. It drained straight from bankers' bottom lines. The American Bankers Association claims it worked with the FDIC to find alternatives to another special assessment.

Even if the FDIC borrowed from Uncle Sam, bank premiums would eventually have to pay it back. It makes three years of advance insurance premiums seem not so bad.

That's true for bankers and bank customers alike.