Big Banks to Pay More to Insure Deposits

Posted on Tuesday, February 8, 2011

Big financial institutions will pick up a greater portion of the cost to protect deposits when banks fail, under a plan adopted Monday by federal regulators.
The new fee structure, which takes effect in April, will result in about 110 large banks covering about 80 percent of the premiums paid into the government’s deposit insurance fund each year, up from 70 percent. The fund, administered by the Federal Deposit Insurance Corporation, is expected to collect $14 billion in premiums this year.
The change, approved unanimously by the five-member board of the agency, was a result of the Dodd-Frank financial regulations that passed last year. Addressing complaints by small banks that they were taking on too much of the financial burden to save failing banks, the law directed the F.D.I.C. to re-evaluate the fees according to the value of assets held by each bank, instead of the level of deposits.
Even before the collapse of hundreds of small and midsize banks caused the agency’s fund to slip into the red in the fall of 2009, lawmakers and federal regulators had proposed overhauling the way deposit insurance fees were assessed.
A year earlier, taxpayers had led a broad rescue of the nation’s biggest banks, as the Treasury Department spent billions of dollars on a series of bailouts and the Federal Reserve took on billions more in potential liabilities to stabilize the financial system.
Although the Obama administration and Democratic lawmakers had raised the idea of recouping some of that money with a new tax on banks’ deposits and other liabilities, the proposal stalled and was later withdrawn after it appeared likely that the Treasury would turn a profit from its bank investments. The final Dodd-Frank Act called for retooling the F.D.I.C.’s fee system.
The new fee rules will not raise any additional money for the fund, which continues to insure depositors for up to $250,000 per account. But they aim to shift more of the insurance burden onto banks with more than $10 billion in assets.
Today, in the aftermath of the bailouts, those institutions have amassed an even greater share of the nation’s deposits, holding nearly 80 percent of domestic deposits, compared with about 75 percent before the crisis.
Regulators hope the new fee structure will also discourage the excessive leverage and speculative trading that contributed to the financial crisis by forcing large banks to pay higher assessments as they take on more risk, rather than paying higher fees to prop up the fund after conditions deteriorate.
As a group, big banks will pay about 12 percent more in fees. Because of formula change, about half of them will see an increase in fees and half will see a decrease. Trusts like Bank of New York Mellon and State Street won an exemption that will probably lower their premiums, since low-risk securities they manage for large customers will not be included in the assessments.
Premiums on smaller institutions are expected to be reduced, on average, by about 30 percent. Fees will be increased on only about 84 of the nation’s 7,661 smaller banks.
Paul Salzman, the president of the Clearing House Association which represents the largest banks, called the F.D.I.C. action disappointing. “It has approved an exceedingly complex deposit insurance fund assessment methodology that will increase — not decrease — risk to the fund and all its stakeholders — large and small banks alike,” he said.
The F.D.I.C. board also voted on Monday to propose new rules that would permit senior executives at big banks to take up to half of their bonuses right away. They would be required to defer the rest over the course of three years or longer.
Boards of large banks would also be required to identify employees whose activities pose significant risks to the firm and to certify that the employees’ compensation did not promote excessive risk-taking. Small banks, with assets under $1 billion, would be exempted.
“This proposed rule will help address a key safety and soundness issue which contributed to the recent financial crisis — that poorly designed compensation structures can misalign incentives and induce excessive risk-taking,” said Sheila C. Bair, the F.D.I.C. chairwoman.
Several other federal regulators, including the Federal Reserve and the Securities and Exchange Commission, are expected to approve similar proposals.

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