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FDIC Will Charge Big Banks More to Replenish Insurance Fund

Source: AP

Posted on 26 May 2009

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Bigger banks will pay more to help restore the Federal Deposit Insurance Corp.'s deposit insurance fund in the future, after the agency's board voted 4-1 on Friday to adopt a new system of special fees that will shift more of the burden onto those banks.

"There will be some shifting of the burden [to major banks]," said FDIC chairwoman Sheila Bair told the Associated Press.

“The shift is not huge to them. We’re asking them to pay more.”

The sole dissenting vote on the proposal came from John Duggan, the comptroller of the currency.

In February, the FDIC proposed a special emergency assessment to help replenish the deposit insurance fund, to meet its obligations for the growing number of failed banks.

The original proposal was a fee of 20 cents for every $100 of insured deposits.

The new emergency fee approved today will be 5 cents for every $100 of a bank’s assets minus its Tier 1, or regulatory, capital as of June 30.

Tier 1 capital includes common and preferred stock as well as intangible assets such as tax losses.

Larger institutions rely more on funding other than deposits, so bigger banks will likely pay a larger portion of the special assessment.

The new fee schedule is expected to bring in $5.6 billion for the fund.

As of May 21, 34 banks have failed, compared with 25 that failed in all of 2008.

The FDIC estimated that bank failure costs will exceed $70 billion over the five-year period ending 2013.

Not surprisingly, the measure was applauded by the Independent Community Bankers of America, a Washington-based association representing smaller banks.

“This is a major policy shift advocated by the ICBA that lowers the special assessment for our nation’s more than 8,000 community banks that didn’t participate in the practices that led to this economic crisis, yet were originally asked to pay for the sins of those who did,” the organization’s chairman, R. Michael Menzies, said in a statement. He is president and chief executive of Easton (Md.) Bank and Trust Co.

The Washington-based American Bankers Association said that the decision was a “dramatic improvement” over the original special assessment.

“Even though the special assessment is considerably lower than originally proposed, it still means that significant resources are being pulled out of communities across the nation at the very time they are needed to facilitate an economic recovery,” Edward L. Yingling, president and chief executive of the American Bankers Association said in a statement.

However, he said, “absorbing such a cost all at once will make it more difficult to lend and harder to build capital through retained earnings. We had hoped that the FDIC would use a creative approach to find an alternative that would have avoided a special assessment altogether, as they had with other programs intended to build capital and encourage lending.”

About two-thirds of the nation’s 20 largest banks would pay more using this new fee schedule.

Community banks are defined as those with $1 billion or less in assets where decision making is maintained at a local level.

There were 8,305 banks in the U.S. as of Dec. 31, according to the American Bankers Association.