FDIC Plans to Charge Only Big Banks to Fill Deposit Insurance Fund

By: Beatrice May. 05,2023
The Federal Deposit Insurance Corp. (FDIC) plans to issue a much-anticipated supplemental proposal to the deposit insurance fund, which has been largely depleted by the bankruptcies of Silicon Valley and Signature Bank.

The plan would exempt small banks with less than $10 billion in assets from the obligation to put up new money, according to people familiar with the matter. FDIC data show that more than 4,000 institutions were below that threshold as of the end of last year. Also, depending on the size of their deposit portfolios, some banks with $50 billion in assets could avoid payments, which could be spread over two years or made in a lump sum.

Larger banks will bear most of the cost, but the final payment may vary depending on the size of their balance sheets and the number of depositors; the riskiness of the deposits is not a consideration. Previously, the government took special measures to make all SVB and Signature Bank depositors eligible for compensation, including uninsured depositors, which resulted in a multibillion-dollar drain on the deposit insurance fund. Now, a fight is underway over who should bear the burden of refilling the fund. Smaller banks have lobbied hard to avoid paying special assessments, and all banks are required to make quarterly contributions to the fund as well.

It is important to note that the cost of these special assessments does not include the approximately $13 billion in losses from the collapse of First Republic Bank (FRCB.US). The replenishment of the fund will be met through the quarterly fees paid by the bank to the fund.

The Deposit Insurance Fund (DIF) is a key component of the U.S. financial system, providing up to $250,000 in coverage for most accounts. It is supplemented by a quarterly fee called an assessment paid by all insured banks. At Signature Bank and Silicon Valley Bank, many depositors have millions of dollars in their accounts, meaning their deposits are uninsured, and many are businesses in desperate need of cash. Providing coverage for uninsured depositors would cost the DIF $19.2 billion and would be paid for by special assessments, with the FDIC likely to introduce the fee plan next week, then take public comment before finalizing it in a few months.

The plan has already kicked off a debate over whether the $250,000 cap needs to be raised. the FDIC has said it supports extending coverage to businesses and has proposed three options for reforming the fund. In addition to a special assessment and broader reform considerations that could be presented next week, the FDIC is poised to announce changes to the regular quarterly fees banks must pay to the DIF, a plan that would help mitigate the First Republic's impact on the DIF fund. The FDIC is set to announce plans next week to replenish the insurance fund, and the FDIC plans to have the big Wall Street banks contribute more to fill the insurance fund.

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