Inside Financial Services

The Community Banks’ Nutty Break On FDIC Premiums

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From last Thursday’s American Banker:

The Federal Deposit Insurance Corp. is set to vote Thursday morning on a proposal that would force big banks to bear the assessment burden of growing the agency’s federal reserves to a new minimum.

The agency projects that the Deposit Insurance Fund will reach a 1.15% ratio of reserves to insured deposits by early next year, at which point the agency will revamp what institutions pay in assessments.

Under the plan, banks with less than $10 billion of assets will see their premium reduced by around 30%. Banks over that asset threshold will see their base assessment rate similarly decline, but must pay a 4.5 basis point surcharge over the following two years to help grow the fund to 1.35%. As a result, roughly two-thirds of large banks will pay more in assessments, the FDIC said.

So under the new FDIC rule, small banks will see their annual insurance assessment fall, while large banks will see theirs rise. The increases will cost large banks around an extra $3 billion annually, American Banker reports, and bring their total annual premiums to $10 billion per year for the two years the surcharge is in effect. That seems like a lot of money.

This pricing scheme of course makes no sense, and is a minor travesty. Small banks tend to be less well-diversified by product and geography than large banks, and so tend to make up the overwhelming portion of the bank failures the FDIC’s bank insurance fund is set up to backstop. Yet their premiums are going down under the new plan, even as the big banks are hit with a surcharge. In a sane world (and in the private sector) insurance premiums would be set on a case-by-case basis and would reflect the risks posed by each institution. And given small banks’ track record, their premiums per deposit would be higher than large banks’. But no. My pal Cam Fine, head of the ICBA, the community banks’ main lobbying group, never tires of complaining about how his banks are put upon by greedy, predatory, megabanks. I wonder if he’ll get on the phone this week and thank them for this new subsidy they’ll be providing.

What do you think? Let me know!

6 Responses to “The Community Banks’ Nutty Break On FDIC Premiums”

  1. Avatar Paul O'Connor

    I think you just made the argument for too big to fail didn’t you?

  2. Avatar Bill Demmin

    I am a retired community bank CEO/CFO.
    I like the idea of lower premiums for smaller banks. Big banks have major advantages in doing business but community banks have and continue provide valuable services to large number of small businesses and can meet local needs that can get glossed over by the “black box” systems used to automate lending and banking decisions. Yes, smaller banks have a higher risk of failure but the losses they represent are also disproportionate to the potential loss of larger banks. It is about time community banks get a break versus the big guys.

  3. Avatar Logan Dale

    I agree with you Tom… it doesn’t make a bit of sense. A small bit of justice though… a small price to pay for the toll that reckless big bank behavior brought to the community banking industry in terms of additional regulation, compliance burden, and reputation damage.

  4. Avatar Keith Leggett

    Tom:

    Don’t blame FDIC. Blame Congress. This provision was included in the Dodd-Frank Act.

  5. Avatar K. Sweet

    Not fair? How about Dodd Frank or the CFPB. I don’t think those two institutions were put in place because of the bad conduct of community banks .
    Yet, community banks bear a disproportionate regulatory costs of those two regulatory sanctions.

    Maybe if the annual regulatory costs associated with Dodd Frank and the CFPB were totaled for the banking industry and then allocated to all banks based upon their deposit size (just like FDIC insurance) that would be fair. I suspect my community bank would receive a LARGE rebate of all the regulatory costs we have incurred over the past several years under this type of arrangement.

  6. Avatar banker2

    In a vacuum, your article is based on sound logic. However, as several commenters posted above, the cost sharing burden vs. responsibility for problems leading to those increased costs is still weighted heavily in favor of the large banks. The mortgage abuses that led to all of the mortgage regulatory burden (which burden has also driven many smaller institutions out of the mortgage origination business) were big bank problems. The waterfall of cost associated with these abuses (admittedly a typical overreaction by politicians) has hit small institutions as well. The compliance burden that is causing a lot of smaller institutions to sell out is a direct cause of downhill runoff of problems caused by larger banks. As a result, the deposit assessment disparity, while itself perhaps unfair, is undoubtedly outweighed by the compliance cost vs. responsibility disparity suffered by community banks.

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