The Federal Deposit Insurance Corp. proposed shifting the burden for protecting depositors against bank failures toward larger lenders whose reliance on riskier funding sources may pose a greater threat to the financial system.
The FDIC board today approved two proposals for overhauling assessments for its deposit insurance fund, including one that would base the fees on banks’ liabilities rather than their domestic deposits. The fee proposal, a response to the Dodd- Frank financial-regulation law, would increase assessments on banks with more than $10 billion in assets.
“This proposal achieves the goals of the Dodd-Frank Act to change the assessment base to better reflect risks to the deposit insurance fund,” said FDIC Chairman Sheila Bair. The measure is subject to a 45-day comment period.
FDIC-member banks pay quarterly assessments for the insurance fund, which guarantees deposits of as much as $250,000 per account when lenders are shut down. The fund, which fell into deficit as bank closings soared in the wake of the 2008 credit crisis, had a negative $15.2 billion balance in the second quarter.
Banks such as Bank of America Corp. and Citigroup Inc., which received billions of dollars in taxpayer aid to weather the worst recession since the 1930s, would take a hit under the assessment-increase proposal, said James Chessen, chief economist at the American Bankers Association.
“The shift of this burden is so significant, it will cause them to shift their funding strategy in order to manage it,” Chessen told reporters after the FDIC meeting.
The measure would increase the largest banks’ share of overall assessments to 80 percent from the present 70 percent, the FDIC said. The assessment increase would be in place by the second quarter of next year, according to the proposal.
“It’s a sea change in that it breaks the link between deposit insurance and deposits for the first time,” Acting Comptroller of the Currency John Walsh said today. “It is significant.”
Custodial banks and so-called bankers’ banks would have an exemption under the FDIC proposal.
Bankers’ banks, which rely heavily on short-term funding in providing services to other lenders, would get exclusions for some of their assets. Custodial institutions including Bank of New York Mellon Corp. or State Street Corp. would get exclusions for their lower-risk, short-term assets, the FDIC said.
Overall assessment fees collected would increase under the proposal, requiring the FDIC to lower rates to make it revenue- neutral, the agency said. Assessment rates will be lowered to five to 35 basis points from the current 12 to 45 basis points, the FDIC said.
The proposal would increase assessment rates on banks that hold unsecured debt of other lenders. That step was proposed to address risk that is retained in the system even as it is removed from one bank’s holdings.
In a separate vote, the FDIC provided temporary unlimited coverage for noninterest-bearing transaction counts through December of 2012.
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