March 6 (Bloomberg) -- The Federal Deposit Insurance Corp. may reduce an emergency fee on banks to bolster reserves if Congress expands the agency’s borrowing authority with the Treasury Department to $100 billion, Chairman Sheila Bair said.

The existing $30 billion credit line “provides a thin margin of error” to cover losses from bank failures, Bair wrote yesterday in a letter to U.S. Senate Banking Committee Chairman Christopher Dodd. Dodd, a Connecticut Democrat, plans to introduce legislation to raise the borrowing authority to a permanent level of $100 billion and temporarily increase it to $500 billion through Dec. 31, 2010.

Expanding the agency’s ability to tap the Treasury “would give the FDIC flexibility to reduce the size of the recent special assessment, while still maintaining assessments at a level that supports the deposit insurance fund,” Bair wrote. The U.S. House of Representatives yesterday approved legislation to boost the credit line to $100 billion.

Bair’s request emerged after banking industry outcry over the assessment of 20 cents per $100 of insured deposits the FDIC board approved on Feb. 27. Camden Fine, president of the Independent Community Bankers of America, said on March 3 he’s received more than 1,000 messages from executives complaining that the one-time fee could significantly reduce 2009 earnings.

The assessment was aimed at rebuilding a fund the FDIC uses to repay customers for deposits of as much as $250,000 when a bank fails. The fund, drained by 25 bank shutdowns last year, fell to $18.9 billion in the fourth quarter from $34.6 billion in the preceding three-month period, the agency said.

House Vote

“My understanding is that if the FDIC has that $100 billion in a line of credit to Treasury, it gives them more flexibility in managing the fund balance and allows them to cut the special assessment in half,” American Bankers Association Chief Economist James Chessen said yesterday in an interview.

The House approved a measure yesterday increasing the borrowing authority to $100 billion and making permanent the $250,000 deposit-insurance limit in the financial bailout measure enacted in October.

The increase “will be an important step toward reducing the assessments on the community banks,” Representative Barney Frank, the Massachusetts Democrat who leads the House Financial Services Committee, said before the vote.

“A lower special assessment would mitigate the impact on banks at a time when they need to serve their communities and revitalize the economy,” Bair wrote to Dodd.

Questions about the FDIC’s borrowing authority “are issues of mechanics,” FDIC spokesman Andrew Gray said yesterday in a telephone interview.

“Insured depositors need to know they are fully protected,” Gray said. “We’re backed by the full faith and credit of the U.S. government. We can, and always will be able to, meet our obligations to insured depositors.”

To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.net; Margaret Chadbourn in Washington at mchadbourn@bloomberg.net.

Last Updated: March 6, 2009 03:29 EST