NOVEMBER 9, 2010
Largest Banks to See Higher Fees for FDIC Deposit Fund
By VICTORIA MCGRANE, Wall Street Journal
WASHINGTON—A provision in Congress's financial-overhaul bill is set to deliver a costly hit to the largest U.S. banks when it goes into effect next year.
Congress directed regulators to shift the burden of paying for the Federal Deposit Insurance Corp.'s deposit-insurance fund to the U.S.'s biggest banks from its smaller ones. Under the Dodd-Frank financial-overhaul law, the FDIC must base fees on a measure of a bank's assets. Currently, the FDIC calculates premiums solely on a bank's domestic deposits.
The FDIC's five-member board voted to take initial steps to implement the new fee structure Tuesday. The proposal is slated to go into effect April 1. Spokesman for J.P. Morgan, Bank of America and Citigroup declined to comment. As a result, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc. alone will collectively hand over an estimated $1 billion in additional government fees each year under the measure, according to an industry analysis.
The new formula favors smaller banks because they largely rely on deposits to provide money for lending. Larger banks, by contrast, have access to other sources of funding, such as the commercial-paper market, which would for the first time count under the new formula.
FDIC officials said that large banks' share of deposit-insurance premiums would rise to 80% from 70% under the new system, and that most of the increase would be paid by the largest banks, with $100 billion of assets or more. There are 19 institutions of that size covered by the FDIC's insurance fund.
"Now, the community banks in this nation will not be paying outsized insurance premiums for their coverage," said Cam Fine, chief executive of the Independent Community Bankers of America trade group. Mr. Fine's group estimates that the new system could save community banks $4.5 billion over three years.
Mr. Fine's group pushed for the measure to be included in the Dodd-Frank legislation. The community banks argued that the existing deposits-only system didn't accurately account for the risk large banks pose to the deposit-insurance fund and that, as a result, smaller banks were shouldering an unfair portion of the fund's cost.
"It's not deposits that fail, its assets that fail," said Mr. Fine.
Critics of the Dodd-Frank provision said it is bad policy because it divorces premiums from the deposits that are being protected. Also, over time, the failure of community banks has cost the FDIC's insurance fund far more than problems at their larger counterparts.
"The big banks have always paid more into the deposit-insurance fund then what they cost the fund," said Bert Ely, a financial-industry consultant in Alexandria, Va., whose tally shows that only eight of more than 300 bank failures since 2007 have been institutions with more than $10 billion in assets. He doesn't include Washington Mutual Inc., whose collapse didn't cost the FDIC anything.
With anti-Wall Street fervor running high on Capitol Hill, big banks had no luck arguing against the provision. Besides, their lobbyists had their hands full with other efforts to rein in the biggest financial institutions, such as the Volcker rule and the White House's bank-tax proposal.
"The shift of that burden is so significant it will cause [large banks] to re-evaluate their funding strategy," said Jim Chessen, chief economist at the American Bankers Association, a trade group
Large banks could seek to increase their domestic deposits, because this funding source would be relatively cheaper under the new system, analysts said. That could be bad news for community banks, because the larger banks' economies of scale could allow them to offer retail customers a better deal, according to some analysts.
"It's a sea change," acting Comptroller of the Currency John Walsh observed during the FDIC board meeting Tuesday. "It breaks the link between deposit insurance and deposits for the first time. This is quite significant."
The FDIC sought to keep the total amount of money it is bringing into the fund the same, which means the rates all banks pay will drop, FDIC officials said. But the base on which those rates are applied will expand for big banks, meaning many will see total fees increase.
Exactly how much each large bank pays will depend on a new risk-based score card the FDIC is developing. It seeks to measure with greater precision a bank's risk of failure and the impact its demise would have on the financial system.
Separately, the FDIC sought to soften the impact of the new plan on custodial banks such as State Street Corp. and Bank of New York Mellon Corp., which act as agents in securities sales and transactions for institutional investors and brokerage house. The FDIC plan would exempt certain highly liquid, short-term assets held by these banks, FDIC officials said.