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To: ild who wrote (206850)	11/26/2002 2:48:57 PM
From: ild	Respond to of 436258

FDIC, Faced With Bank Woes, Considers Changes to Portfolio By DEBORAH LAGOMARSINO DOW JONES NEWSWIRES WASHINGTON -- The Federal Deposit Insurance Corp., faced with growing bank failures, is considering changes in its investment portfolio that could result in the sale of a chunk of its Treasury securities. The FDIC's search for higher returns could see the agency back in the open market, in which it hasn't traded since the early 1970s. "We are giving it careful thought," Steven O. App, the FDIC's chief financial officer, said. "Is the promise that the gain would be that much more substantial worth the trade-offs? It's clearly something to look at. There may be some happy middle ground." At issue is the FDIC's desire for more liquidity at a time when more banks are failing, the number of problem banks is rising, and amid the prospect that higher interest rates down the road could crimp revenue. Some members of the FDIC's advisory committee recently raised the issue of whether the agency could seek higher returns by making investments outside of mandated Treasury securities. The FDIC is sitting on a record $884 million in unrealized gains in the available-for-sale Treasury securities held for its Bank Insurance Fund, which insures deposits at banks. With the average coupon rate for the available-for-sale securities in the BIF around 5.5%, unrealized gains on these securities have surged as prevailing market rates have plunged. That $884 million is what the FDIC would have realized if it had decided to sell all of the fund's available-for-sale securities by the end of September. These unrealized gains have helped keep the BIF's ratio of federal reserves to insured deposits above the legal minimum of 1.25%, meaning the FDIC hasn't had to require banks to pay more into the fund. Higher interest rates could have consequences for the FDIC's income stream by whittling down these unrealized gains, an issue attracting more attention at the agency. With the average coupon rate for the FDIC's available-for-sale securities at 5.5% and the rate for short-term Treasuries around 2%, if the FDIC marked its portfolio to market, it would receive the unrealized gains, Mr. App said. Holding the securities to maturity would evaporate the unrealized gain, he said. "If interest rates happen to change and creep back up to where our coupon rates are, it would also go to zero," he added. The FDIC's investment portfolio is key as interest earned on the portfolio is responsible for 96% of the agency's revenue, with just 4% of revenue coming from assessments on FDIC-insured institutions.