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Inside Washington (10/06/2008)

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* WASHINGTON (10/7/08)--On Tuesday, the Federal Deposit Insurance Corp. (FDIC) is expected to raise premium rates for 2009 and propose changes to its risk-based pricing system (American Banker Oct. 6). The FDIC did not release information on the new rates, but observers expect that the two-basis-point range would double and some healthy banks could pay up to 15 cents per $100. Healthy banks currently pay five to seven cents per $100. The agency must raise premium rates to replenish its reserves after several big bank failures. It has five years to raise its ratio of reserves to 1.15%--up from the current 1.01% ... * WASHINGTON (10/7/08)--Now that the $700 billion bailout bill has passed, the Treasury Department can begin purchasing $250 billion of illiquid assets immediately from banks through a no-bid process, or through an auction program (American Banker Oct. 6). Treasury Secretary Henry Paulson said the department would likely buy simpler securities first and that the Treasury can handle about $50 billion of purchases per month. Observers also expect the department to hold its first auction within one month and hire five to 10 asset managers. About two dozen lawyers, bankers and accountants could also be hired by the department, although a payscale has not yet been determined. In addition to purchasing assets, the Treasury must create an insurance program to guarantee mortgage-backed securities that are uninsured. The department also must encourage mortgage servicers to use a refinancing program that went into effect Oct. 1. Both Paulson and President Bush said that more details would come to light this week ... * WASHINGTON (10/7/08)--The Small Business Administration (SBA) reported that its loan volume dropped 13% to $18 billion, and that the number of loans decreased 29% to 78,317. The number of loans in August and September plummeted more than 50%compared with last year, according to Eric Zarnikow, SBA administrator for the office of capital access (American Banker Oct. 6). Applications are down at SBA’s lending partners, and applicants are not as creditworthy as they have been in the past, added Zarnikow. The economy, high energy and commodity prices, and tighter lending standards are also to blame for the loan drop. A Federal Reserve Board survey in July indicated that 70% of senior loan officers said their commercial and industrial credit standards had tightened ...

Fed pay on reserves starts Oct. 9

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WASHINGTON (10/7/08)—The Federal Reserve Board has announced that effective Oct. 9 it will begin to pay interest on credit unions’ and other depository institutions' required and excess reserve balances. The Financial Services Regulatory Relief Act of 2006 gave the Fed authority starting in 2011 to lower reserves to zero and/or to pay interest--not to exceed other short-term rates--on the reserve balances actually maintained. The new Emergency Economic Stabilization Act gives the Fed that authority starting now. The authority is being implemented through changes to the Fed’s Regulation D. While the action is effective immediately, the Fed will accept public comments until Nov. 21 and the proposal will soon be published in the Federal Register. The Fed said it will adjust the rule as appropriate in light of comments. Reserve balances are balances held to satisfy depository institutions’ reserve requirements and excess balances are those held in excess of required reserving balances and clearing balances. The Fed announcement said the interest rate paid on required reserve balances will be the average targeted federal funds rate established by the Federal Open Market Committee over each reserve maintenance period less 10 basis points. Paying interest on required reserve balances should essentially eliminate the opportunity cost of holding required reserves, promoting efficiency in the banking sector,” according to the Fed. The rate paid on excess balances will be set initially as the lowest targeted federal funds rate for each reserve maintenance period less 75 basis points. The formula for the interest rate on excess balances may be adjusted subsequently in light of experience and evolving market conditions. “Paying interest on excess balances should help to establish a lower bound on the federal funds rate…The payment of interest on excess reserves will permit the Federal Reserve to expand its balance sheet as necessary to provide the liquidity necessary to support financial stability while implementing the monetary policy that is appropriate in light of the System’s macroeconomic objectives of maximum employment and price stability,” the Fed notice claimed. The Fed has also made several other amendments to Reg D, including the treatment of balances maintained by pass-through correspondents and eliminating transitional adjustments for reserve requirements in the event of a merger or consolidation. The Board also published the annual adjustments for reserve requirements and reporting requirements for depository institutions. For 2009, the first $10.3 million in net transaction accounts will be exempt from the reserve requirements. This figure is the reservable liabilities exemption adjustment. Transaction account amounts over $10.3 million up to and including $44.4 million will have a three percent reserve requirement. Transaction account amounts over $44.4 million will have a 10 percent reserve requirement. This figure, $44.4 million, is known as the low reserve tranche. The Credit Union National Association (CUNA) has worked hard to achieve changes in reserve requirements. Our preference is for Reg D reserve requirements to be completely eliminated, but paying interest on reserves certainly is an improvement over holding what is referred to as ‘sterile reserve,’” said CUNA Senior Vice President of Compliance Kathy Thompson Monday.

Two CUs closed total now 13

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ALEXANDRIA, Va. (10/7/08)—The National Credit Union Administration (NCUA) has liquidated a $6 million-asset credit union in West Virginia and a $1.8 million-asset credit union in Texas, bringing the total number of federally insurance credit unions to be closed this year to 13. In Wichita Falls, Tex., Postal Family CU has purchased the assets and assumed member shares of the recently liquidated TEXDOT-WF CU, according to an NCUA announcement. The Texas CU Department made a decision to liquidate TEXDOT-WF as of Sept. 30, and discontinued its independent operation after determining the credit union was insolvent and has no prospects for restoring viable operations. At the time of liquidation, the credit union served 530 members within various select employee groups. Postal Family CU is a state-chartered, federally insured institution, chartered in 1936 to serve U.S. Postal Service employees. It is a full service, $50 million-asset credit union with more than 6,100 members located throughout the country. In Bluefield, W.V., N&W Poca Division FCU went into liquidation Oct. 3. The NCUA Asset Management and Assistance Center will issue checks to individuals once it has verified balances in share accounts.The credit union served 1,194 members before the NCUA determined it was insolvent and had no prospects of restoring viable operations. The NCUA reminded that through the National Credit Union Share Insurance Fund, credit union members’ deposits are insured to at least $250,000 on regular accounts and $250,000 on certain retirement accounts. Last week’s passage of the Emergency Economic Stabilization Act of 2008 increased share insurance protection for regulator accounts to $250,000, up from $100,000, until Dec. 31, 2009.