I see the FDIC wants to revise how it calculates the assessment fees it charges banks; the new calculation will be based on its analysis of the financials of the banks that failed during the Great Bank Crackup of 2008-2012. Makes sense to me. Better to underwrite risk based on real-world historical data, rather than some out-of-thin-air theoretical model. (If only the rating agencies had tried that.) And good, too, that the FDIC will more closely tie a given institution’s assessment to its specific perceived risk. The agency expects that, post changes, 60% of banks will pay lower annual premiums, 20% will pay the same, and 20% will pay higher. As I say, all very sensible.
There’s only one problem. The fee changes the FDIC has in mind will only apply to banks with assets of less than $10 billion. Why stop there? If a bank, any bank, is engaging in the sort of risky behavior that the FDIC now knows puts the bank’s solvency—and deposits—at material risk, the bank’s FDIC assessment should be priced to reflect that fact, no matter the bank’s size. Likewise if a bank, any bank, is being run exceptionally prudently, its FDIC assessment ought to reflect that fact, as well. But the FDIC’s arbitrary $10 billion cutoff will prevent that from happening. Rather, for the last several years the large banks have effectively subsidized the small banks, by paying more to the FDIC each year than they ought to be from a strict actuarial standpoint. Result: certain banks are paying artificially low FDIC premiums, and as a result are perhaps being insufficiently vigilant about the risks they are taking. Not only is that not fair, it’s bad regulatory policy. As it is, smaller banks are overwhelming more at risk of failure during a recession or financial crisis. They tend to be less well diversified, both geographically and by business mix. And during the crackup, it showed: from 2008 through 2012, fully 99% of institutions that failed had less than $10 billion in assets. And now 60% of the smallest, riskiest banks are set to see their FDIC premiums drop?
This isn’t dispassionate risk-underwriting. It’s politics. By all means, the FDIC should fine-tune and improve how it assesses the risk of the deposits it covers. But in the process, it ought to treat all the institutions it covers equally.
What do you think? Let me know!