Oct. 7 (Bloomberg) -- The Federal Deposit Insurance Corp. proposed doubling the fees it charges banks to insure their deposits, a step to replenish agency reserves as the government seizes banks at the fastest pace in 15 years.

The agency, which protects $4.5 trillion in U.S. deposits, today proposed increases that will add $10 billion annually to its insurance fund, which had $45.2 billion at the end of the second quarter. The increases take effect Jan. 1, with changes in April that will set higher fees for riskier institutions.

``The industry understands the need to do this, and understands the need from a public-confidence perspective that the public understand the banking industry stands behind the fund,'' FDIC Chairman Sheila Bair said at a meeting at the agency's Washington headquarters.

The collapse of 13 banks this year, including IndyMac Bancorp Inc., has drained the deposit insurance fund the FDIC uses to reimburse customers for any losses in a bank failure. The insurance reserve fell 14 percent during the second quarter.

The FDIC proposed raising premiums to an industry average of 13.5 basis points of total domestic deposits from 6.3 basis points the industry now pays, on average. One basis point on all FDIC-insured banks brings in $700 million annually to the fund.

The agency will release the proposal for 30 days of public comment. The FDIC board plans to issue the final rules in December.

Rising Premiums

Premiums will increase by 7 basis points in the first quarter of 2009, to rates of 12 basis points to 14 basis points of deposits, for about 90 percent of banks. In the second quarter, adjustments that take into account risk levels will set rates from 8 basis points to 21 basis points. Higher risk institutions will pay premiums as high as 77.5 basis points, and banks with long-term unsecured debt will pay lower rates.

The FDIC will impose higher rates on institutions that rely on secured liabilities and brokered deposits for growth. Secured liabilities raise the FDIC's loss when a bank fails without offering additional revenue to the fund. Brokered deposits accompanied by rapid asset growth ``played a role in a number of costly failures, including some recent ones,'' the FDIC said.

The FDIC board ``should be working on a methodology over the long term that doesn't impose the highest assessments on the industry when the industry can least afford it,'' said board member John Reich, director of the Office of Thrift Supervision, the Washington-based regulator of savings and loans.

`Boom Periods'

The agency should assess higher premiums on the banking industry ``during boom periods,'' while lowering them during periods of stress, Reich said.

The agency classified 117 banks as ``problem'' institutions as of June 30, an increase from 90 banks in the first quarter and the highest total in five years. Bair has said she expects more banks to fail, especially among smaller institutions.

The deposit insurance fund had $45.2 billion at the end of the second quarter, and the July failure of California-based mortgage lender IndyMac will cost the fund about $8.9 billion, the agency said.

The fund balance is ``likely to experience further declines before recovering as the current problems confronting the banking industry abate,'' the Washington-based FDIC said in releasing the proposal.

The FDIC is required by law to come up with a plan to replenish the fund when the reserve ratio, or fund balance divided by insured deposits, falls below 1.15 percent. It stood at 1.01 percent on June 30, the lowest level since 1995.

Loss Reserves Increase

The ratio will continue to fall through early 2009 to 0.65 percent to 0.70 percent ``as the fund's loss reserves for anticipated failures increase,'' the FDIC projected.

The proposal would build up the ratio to 1.26 percent by 2013, according to the agency.

Bank failures could cost the insurance fund about $40 billion from 2008 to 2013, including $13 billion for actual and projected failures this year, according to the FDIC.

``The premium increases announced today by the FDIC are significant and even though they pose an extra burden on every bank, the industry is quite capable of meeting this obligation,'' American Bankers Association President Edward Yingling said in a statement.

All U.S. banks are paying for a share of the insurance fund under a 2006 law that required the FDIC to charge all banks premiums for the first time in 11 years. The new policy took effect last year, and fees charged banks averaged 5.4 cents per $100 of insured deposits, according to the agency. Prior to that, more than 90 percent of banks didn't pay for insurance.

Rescue Package

Last week, Congress enacted a $700 billion financial-rescue package that increases to $250,000 from $100,000 the amount of bank deposits the agency can insure through the end of 2009.

The change ``will give a greater degree of assurance to depositors at a time when public confidence in the safety of their money is critically important,'' Bair said in a speech yesterday.

The FDIC regulates banks and insures deposits at 8,451 institutions with $13.3 trillion in assets, according to second- quarter data.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

Last Updated: October 7, 2008 13:25 EDT