Martha’s Vineyard’s two community banks face hundreds of thousands of dollars in extra costs as a result of increased demands from the federal agency charged with protecting customer deposits.

The two local banks, the Martha’s Vineyard Savings Bank and Edgartown National Bank, neither of which was complicit in the reckless financial practices which precipitated the banking crisis, will nonetheless have to pay increased fees to help bail out customers of banks which go bust.

In the case of the Martha’s Vineyard Savings Bank, this could amount to an extra $365,000 to $730,000, depending on the size of the assessment the Federal Deposit Insurance Corporation (FDIC) ultimately levies against them. In the case of the Edgartown bank, it could be between $100,000 and $200,000.

The problem is that the fund the FDIC uses to protect customer deposits is in danger of drying up because of an expected increase in the number of bank failures elsewhere in the country.

In a letter to banks earlier this month the FDIC warned the insurance fund could become insolvent this year as a result of an anticipated “large number” of bank failures.

So it approved a one-off “emergency” fee and assessment increase on the industry so it could continue to repay clients for losses of up to $250,000 in their deposits resulting from a bank failure.

The levy was initially set at 20 basis points – or 0.2 per cent – of total deposits held by each bank, although it subsequently said this might be cut in half if Congress agreed to extend its line of credit.

As it now stands, said Chris Wells, the President and CEO of the Martha’s Vineyard Savings Bank, the call on the banks represented a 700 per cent increase on what they previously had to pay.

“The FDIC special assessment is based on what deposit levels will be on June 30, 2009, payable to the FDIC on Sept. 30, 2009,” he said.

“We have $367 million in deposits now, so it works out to $730,000, probably, in extra FDIC expense for us. And the FDIC assessment last year for our bank had already increased from about $80,000 to $450,000, so we’d already had about a 450 per cent increase.”

That first increase, he said, could be traced back to the last crisis in American banking in the 1990s.

“There was a special assessment then, too,” he said. “But the FDIC didn’t end up using that money — they didn’t close as many banks as anticipated — so the reserves went back to the banks in the form of premium credits.

“So the banks had enjoyed an unusually low FDIC assessment for a good period of years.

In essence we’re paying now for what we didn’t pay for during 10 years. Those credits ran out for most banks in 2008.”

But the special levy “came out of the blue.”

“And going forward, there’s not a lot of businesses that can take a 700 per cent increase in fees and continue without making some changes in the way they do business,” Mr. Wells said.

Thus, the search was on for ways to cut costs. He said, however, he did not foresee it affecting bank customers. He also denied there was any connection between the new levy and his banks decision to close its branch on Main street in Vineyard Haven.

That decision was taken prior to the FDIC move.

“We don’t want anyone to think the bank’s financial footing relates to our closing of a branch in Vineyard Haven. That closure is strictly related to the fact that not many of our customers bank there,” he said.

The president of the Edgartown National Bank, Fielding Moore, said the 20 basis point fee increase would cost his institution about $200,000.

He said it was unfortunate that community banks which had pursued sound lending practices now were finding themselves forced “to pay for the sins of others.”

“There was a failure of the regulatory system to prevent damaging practices,” he said.

As a result, his bank also would be looking for ways to cut costs.

“But there are 9,000 banks in this country; it’s a competitive market, and you can’t just pass the costs on to customers.”

Mr. Moore said he still had hopes the special assessment would ultimately be halved to 10 basis points, and pointed out also that the levy was assessed pre-tax, and so would effectively be about 40 per cent lower than it appeared.

Community banks everywhere, he said, were “up in arms” at the added cost, and he was unimpressed with having to carry the can for the poor management of others, as was Mr. Wells.

Said Mr. Wells: “Does it disappoint me that Bank of America and Citigroup keep getting federal money when community banks in the same situation would just get closed and sold?

“Yes. Community banks didn’t get us into this mess, but it’s the strength of community banks which, hopefully, will help get us out of it.

“All we can do is grin and bear it and hope this crisis brings more awareness to people about what community banking does and leads the FDIC and government to evaluate the protocols for banks of a certain scale, so they don’t get into this situation again.”