FDIC: Goring The Oxes Of The Big Banks

The FDIC has decided that very large banks should pay more into the agency’s fund than smaller financial firms. In other words, the payments will not be based on a percent of deposits any more.

The FDIC document which covers the matter says that small banks with assets which are primarily for lending will pay lower fees than in the past. These banks rely on deposits for capital. Large banks which can often improve asset bases because they can issue commercial paper will pay more. The Wall Street Journal estimates that America’s ten or so largest financial firms will have to make additional contributions to the fund which will total $1 billion each per year.

The paper points out that “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.”

The new fee schedule depends almost entirely on the ability to see the future, which is, of course, impossible. Almost all the burden on the fund over the last two years has been to cover depositors at small banks. More than 300 of these have been shuttered since the beginning of 2009, and many experts believe that the trend will continue into next year.

Large banks, however, have been kept open, when in trouble, by the Treasury and Fed. Part of this has been through the TARP fund. Another part has been through the Fed as a provider of short-term cash (the “window”) in exchange for questionable assets held by large financial firms. In the case of the Fed, the money is nearly “free” and the Fed takes on the burden and temporary risk of risky assets. In the case of TARP, most of that money has been repaid and the government has made a profit often on preferred shares and other instruments set to allow taxpayers large returns when big banks regain their health.

Large banks pay twice under the new rule. The first cost was repayment of TARP funds. In a future emergency, this program could be reestablished instead of charging large banks the additional FDIC fee.

Douglas A. McIntyre