Following the wake of several major bank failures, the Federal Deposit Insurance Corporation (FDIC) has issued a proposal that would require banks to pay a special fee of 0.125% on their uninsured deposits in excess of $5 billion. This fee would be used to replenish the FDIC’s deposit insurance fund, which was sapped of an estimated $22.5 billion following the failures of Silicon Valley Bank and Signature Bank.
FDIC Chairman Martin Gruenberg acknowledged that larger banks disproportionately benefited from this deposit backstop and “too big to fail” mentality when he stated, “In general, large banks with large amounts of uninsured deposits benefited the most from the systemic risk determination."
Given community banks tend to be more risk-averse than their larger counterparts, the FDIC’s announcement particularly resonated with this segment of the banking industry. Case and point, Signature allowed deposits that backed cryptocurrencies, which has proven to be a risky practice that was not pursued across the community bank ecosystem.
Since community banks focus on investing in local communities, and hold a smaller share of uninsured deposits, the FDIC’s decision to exclude community banks from the assessment echoed the sentiment of many key leaders.
Rebeca Romero Raine, CEO of Independent Community Bankers of America highlighted in her letter to the FDIC last month, “Community banks and their customers shouldn’t have to pay for the miscalculations and speculative practices of large financial institutions like SVB and Signature.”
While this is refreshing news for community banks, what does that mean for the much larger players? For impacted banks, the FDIC estimated that there will be an average one-quarter reduction of income by 17.5%. And while the FDIC predicts that 113 banks will be subject to this assessment, banks with total assets over $50 billion are expected to pay more than 95% of the $15.8 billion fee, which will be spread out quarterly over the next two years beginning in 2024.
While mega-banks will pay the lion’s share, this assessment will undoubtedly affect the profitability of the 113 impacted banks. Following publication of the proposed rule to the Federal Register, the FDIC will accept comments for 60 days.