WASHINGTON — The Federal Deposit Insurance Corp.'s board voted to issue a proposed rule on Thursday that would levy a 0.125% special assessment fee on banks' uninsured deposits over $5 billion. The special assessment was issued pursuant to the systemic risk exception that the agency invoked in its closures of Silicon Valley Bank and later Signature Bank, in March.
Institutions with uninsured deposits below $5 billion will pay nothing under the proposal, and those with uninsured deposits in excess of $5 billion will be assessed on their uninsured deposits above that threshold. The special assessment would apply to the first quarterly assessment period of 2024, and the first payment is due at the end of Q2 2024 and will be collected over a total of eight quarters.
"The [rule] would apply an annual special assessment rate of approximately 12.5 basis points to an assessment base that would equal an insured depository institution's estimated uninsured deposits reported as of December 31, 2022," said Chairman Gruenberg at the board meeting regarding the rule. "For insured depository institutions that are not part of a holding company, the first $5 billion in estimated uninsured deposits would be excluded from the assessment base. For insured depository institutions that are part of a holding company, the first $5 billion of the combined banking organizations' estimated uninsured deposits would be excluded."
FDIC says the overwhelming majority of the industry will not be subject to the higher assessments and larger institutions will shoulder the lion's share of the total cost.
"Based on data reported as of December 31, 2022, staff estimate that 113 banking organizations would be subject to the special assessment," they said. "Banking organizations with total assets over $50 billion would pay more than 95% of the special assessment."
Under the proposed rule, a bank with $10 billion in uninsured deposits would pay an additional $6,250,000 per year.
At the board meeting considering the rule, FDIC staff reiterated that under the Federal Deposit Insurance Act, the agency is required to recover recent losses to the Deposit Insurance Fund, incurred after the agency tapped the fund to protect uninsured deposits via a systemic risk exception.
"On March 10, 2023, Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation, followed by the closure of Signature Bank by the New York State Department of Financial Services on March 12, 2023," said an agency official. "The same day, the Secretary of the Treasury acting on the recommendation of the FDIC and the Federal Reserve, and after consultation with the president, invoked the statutory systemic risk exception to protect all depositors in connection with each of the two failures."
Of the $18.5 billion and estimated losses at the two banks, they say, the estimated loss attributable to the protection of uninsured depositors currently stands at $15.8 billion.
FDIC says the rate was calculated by dividing the current loss estimate attributable to the protection of uninsured depositors by the proposed assessment base calculated for all insured depository institutions subject to the special assessment as of December 31, 2022. The resulting rate is then divided by two, to reflect the two-year collection period.
FDIC staff said the rule is targeted to ensure those who largely benefited from systemic risk exception pay commensurately. They say banks that hold greater amounts of uninsured deposits should be paying a higher proportion of the special assessment because they are recipients of greater implicit benefits due to their size, something community bankers
Chairman Gruenberg made clear that, though estimates should be a good guideline, the FDIC retains the ability to make changes to adequately replenish the DIF, as required by law.
"Because the estimated loss to these receiverships will be periodically adjusted, the FDIC would retain the ability to cease collection early, extend the special assessment collection period for one or more quarters beyond the initial eight quarter collection period, or impose a final shortfall special assessment on a one time basis after the receiverships for Silicon Valley Bank and Signature Bank are terminated," Gruenberg said.
Another agency official noted that no banking organizations are expected to fall below the minimum capital requirement — a 4% tier-one capital-to-assets ratio — as a result of this proposal. The agency estimates that applicable firms will see an average one quarter reduction in income of 17.5% and a decline in the dollar amount of tier-one capital of less than 1%.
"Applicable banking organizations may recognize an expense for the special assessment immediately," an official said, meaning "the effects on capital and income of the entire amount of the special assessment to be collected over eight quarters would occur in one quarter only."
The rule was passed by the board despite both Republican-nominated board members voting against it. FDIC Vice Chair Travis Hill chose not to support the proposal because he says banks that would pay the most — both in absolute terms and relative to their regular quarterly assessments — were the same institutions which experienced deposit inflows immediately after the SVB failure.
FDIC board member Jonathan McKernan said while he voted for the systemic risk exception to stave off contagion, he was not in full support of higher costs to banks and would have preferred to have sold the failing banks whole to private buyers, rather than the piecemeal transactions that ultimately ensued.
"My vote on March 12 was intended to mitigate these serious adverse effects by exempting the resolution of SVB and Signature from the least cost resolution requirements so as to facilitate subsequent sales of the failed banks that hopefully would preserve their operations and franchise value," McKernan said. "As I have said before, going forward any decision to use the FDIC emergency powers should be approached skeptically, taking into account the unique facts and circumstances at the time and with careful attention to the implications for the future."
While the Republican members balked at the idea of big banks paying more for the outsize benefits they receive from the systemic risk exception, acting Comptroller of the Currency Michael Hsu supported the rule for the very same reason. He also expressed satisfaction that smaller banks will be spared from additional assessments.
"The more uninsured deposits a bank had, the more of a beneficiary it was of the government action, and the more of the cost of the special assessment you should bear," Hsu said. "Rather than simply defaulting to assessing all banks — as is done for the Deposit Insurance Fund generally — the board is heeding the FDIC act, by considering who benefited from the systemic risk perception and adjusting the special assessment accordingly … the recommended approach supports a diverse banking system by minimizing costs on community banks, which are critical to local economies across the country."
Consumer Financial Protection Bureau Director Rohit Chopra said he was glad to see so-called too-big-to-fail institutions pay a bit more for their
"Ninety-five percent of the assessment will be paid by banks with $50 billion dollars or more in assets [including] a $9.5 billion charge on the largest too-big-to-fail banks," said Chopra. "[These banks] saw a surge in new accounts since many uninsured depositors assumed that the biggest of the big banks essentially get free unlimited deposit insurance because they will always find a way to get bailed out, and we do need to change that.
"The core assumption that we could relax the oversight and the rules on large domestic systemically important banks, without posing risks to the financial system, turned out to be a really bad bet," Chopra concluded.
