Bank Insurance Fee Talks Pose Complicated Challenges for FDIC

FDIC officials are openly discussing possible changes to how banks pay for deposit insurance, hoping to get the agency better prepared for economic downturns.

The discussions have picked up pace following the collapse of Silicon Valley Bank and Signature Bank, but putting those ideas into practice will be an uphill climb.

Two of Federal Deposit Insurance Corp. board members—Vice Chairman Travis Hill, a Republican, and Consumer Financial Protection Bureau Director Rohit Chopra,—said at an April 18 board meeting that the deposit insurer should look for ways to replenish the agency’s Deposit Insurance Fund (DIF) when banks are flush.

Chopra went a step further, calling for the FDIC to make bigger, more complex banks pony up more than they already do for deposit insurance coverage.

The idea of overhauling deposit insurance fees drew skeptical reactions from agency watchers, underscoring the challenges for policy makers seeking to overhaul banking rules following the biggest collapse of insured financial institutions since the 2008 financial crisis.

Any efforts to make banks pay more is likely to be met with furious lobbying from the industry, said Todd Baker, a senior fellow at Columbia University’s Richard Paul Richman Center for Business, Law, and Public Policy.

“There’s always going to be that question of whose ox gets gored, and who has the juice,” he said.

SVB, Signature Holes

Before tweaking deposit payment rules, the FDIC will first look to plug holes left by the recent bank failures.

Like any insurance provider, the FDIC collects premiums from banks, covering deposits up to $250,000 should a bank fail. The current process, updated in the 2010 Dodd-Frank Act, requires the agency to make bigger banks pay more than smaller ones. The calculations are based on asset size and other factors.

Congress mandated that the FDIC’s insurance fund have a minimum reserve ratio—the total deposits divided by the amount in the insurance fund—of 1.35%.

The reserve ratio stood at 1.27% at the end of December, prior to the SVB and Signature collapses. The banks’ failures in March cost the fund approximately $22.5 billion, the FDIC said in an April 18 report.

About $19.2 billion of that cost will be made up through a special assessment the FDIC will propose in May, with the largest banks likely paying the bulk of that total. The FDIC will have to make up the remaining $3.2 billion through continued payments from all banks.

Countercyclical Fees

Over the long haul, the FDIC is looking to increase the insurance fund ratio to 2% through a restoration plan designed to ride out a downturn and pumping in additional money in the system.

Chopra and Hill said they’d like to consider making some of the details of the changes permanent.

“There were some years where banking industry profits may have been robust but we didn’t necessarily get real increases in the reserve ratio. And there are times where the economy is contracting and we don’t want to be adding to injury,” Chopra said at the April 18 meeting.

One way to achieve that would be to set economic thresholds at which increased deposit insurance assessments kick in, said Todd Phillips, an independent financial regulatory consultant and a former FDIC official.

“What we’re talking about is not wanting to raise money at the same time they’re hurting, and the way to do that is raise money before they’re hurting,” he said.

Hill, who was a policy adviser to Trump-era FDIC Chairman Jelena McWilliams, cautioned that “building up the DIF is not free.” Any money used to fill the fund would leave banks with less to lend to communities or bolster their balance sheets, he said.

Hill’s comments highlight the problem of determining when banks should pay more for deposit insurance in a good economy.

“When do you know you’re fully in an upswing?” said Anne Balcer, the senior executive vice president and chief of government relations and public policy at the Independent Community Bankers of America.

For community banks, local conditions may differ from national ones, and banks in some parts of the country may be facing tougher economic times than the country as a whole, Balcer added.

Fee Fight?

Adjusting existing risk premiums may prove to be an even bigger challenge.

There’s already a fierce battle underway between community banks and big banks over who should pay for covering deposits at SVB and Signature. The FDIC appears to be leaning toward making the bigger banks cover the vast majority of the outstanding $19.2 billion special assessment, if not all.

Chopra said the FDIC should also increase risk premiums charged to bigger banks in the long-term, urging the agency to “pressure test whether the way we are doing assessments is adequately pricing risk.”

There are some statutory requirements that would tie the FDIC’s hands in reshaping the assessment process, although there is room to make changes, Baker said.

“They could, if they put together sufficient justification, further skew things away from the small banks because of cost,” he said.

The FDIC can expect significant pushback from banks of any size that are forced to pay more, including to bolster the insurance fund when the economy is strong.

“One implementation problem I see with this is, in order to raise the money in the good times, you’re going to have to raise the money in the good times, and industry is going to fight that,” Phillips said.