FDIC should reduce the price of deposit insurance for community banks

Community bankers have repeatedly told the Federal Deposit Insurance Corp. that it shouldn't uniformly increase the rates banks pay to fund the nation's deposit insurance system because reductions in banking industry deposits make the rate hike unnecessary, but the FDIC proceeded with the rate hike. With the Federal Reserve's interest rate hikes hastening the normalization of deposits to such an extent that many banks are now raising their deposit rates to compete with higher-yield instruments, the FDIC should respond by quickly drawing down its assessment rate increase to avoid needlessly elevating bank costs at a time of economic uncertainty.

Bloomberg News

Due to economic stimulus measures enacted in response to the pandemic, deposit growth outpaced Deposit Insurance Fund growth in recent years, shrinking the ratio of DIF funds to total insured deposits slightly below the required 1.35% minimum. The FDIC's final rule — which amends its DIF Restoration Plan by uniformly increasing deposit insurance assessment rates by 2 basis points on all insured depository institutions — is designed to increase the likelihood that the DIF reserve not only reaches the statutory minimum by the September 2028 deadline, but that the fund also eventually reaches the FDIC's goal of a 2% minimum.

However, banking groups have noted the agency's assessment rate hike is based on a faulty assumption that the DIF will not meet its minimum level by as late as 2034. In fact, the FDIC's second- and third-quarter Quarterly Banking Profiles of industry data suggest the statutory minimum is likely to be satisfied as soon as the first quarter of 2023, obviating the need to raise assessments by more than 50% for many community banks.

The rate increase is not a minor policy change — it has a substantial real-world impact on community banks and those they serve. The final rule will increase deposit insurance assessments by 50% or higher for many community banks, particularly well-capitalized institutions with excellent Camels ratings. And raising the cost of deposit insurance will inevitably drive up the prices consumers pay for banking products and services while restricting community bank lending, limiting access to capital in local communities amid high inflation and economic instability.

Moreover, by tying these increases to the FDIC's aspirational goal of reaching a designated reserve ratio of 2%, the FDIC has, in effect, levied a permanent increase to assessment rates on the nation's smallest banks. The DIF has never reached a 2% ratio, and the FDIC can't definitively predict when, if ever, it will.

The FDIC's rule also disproportionately affects community banks by failing to sufficiently collect enough assessments from the large and complex institutions that pose the greatest risk to the DIF. Many community banks will have to pay up to 25% of pretax income for insurance assessments, while not a single bank over $10 billion in assets will experience the same impact. This disproportionate burden doesn't fit with other FDIC rules tiered to institutions' size and risk profile, such as its new proposal to implement stricter capital rules on regional banks to reflect the growing risk they pose to the banking system.

Regulation and compliance

FDIC finalizes rule requiring banks to pay more for deposit insurance

October 18, 2022 1:43 PM

With the FDIC's unnecessary and harmful assessment increase going into effect at a time of rising interest rates and slowing deposit totals, the agency can and should reduce deposit insurance assessments for community banks when the DIF reaches its 1.35% statutory minimum. Even though the DIF ratio dipped slightly during the pandemic, the DIF's capital levels are at historic highs, suggesting the DIF is well funded and the FDIC can continue to protect consumers without the need for community banks to pay a premium for deposit insurance. 

Further, the agency should do everything possible to ensure the large and complex institutions that pose the greatest risk to the DIF are paying more for deposit insurance. Any approach to restoring the DIF should be risk-weighted and tailored to asset size, with too-big-to-fail institutions paying a systemic risk premium that reflects the outsize costs the FDIC would have to fund from the DIF if one of these institutions required resolution. Community banks should not have to subsidize the systemic risk posed by the nation's largest banks.

The FDIC is a diligent steward of the DIF and its critical role in ensuring no one has ever lost a penny of insured deposits. But the agency should not require community banks to pay more than their fair share.