FDIC Proposes New Fee Structure Based on Banks’ Assets

The ""FDIC"":http://www.fdic.gov has approved a proposal that would change the way it determines how much banks pay for the agency's deposit insurance coverage. Since 1935, individual[IMAGE]

institutions' premiums have been based on the amount of their domestic deposits. The FDIC wants to ""amend the assessment scheme"":http://www.fdic.gov/news/board/Nov9no6.pdf so that it is based on the bank's assets instead.

The change would fulfill a provision laid out in the Dodd-Frank Reform Act, and FDIC Chairman Sheila Bair says it would better align the risks that some larger institutions pose to the agency's deposit insurance fund, which takes a hit every time a bank goes under.

Some analysts say the new structure makes sense, seeing as how bank failures are almost always tied to their failed assets â€" lately it's been nonperforming mortgages and soured real estate loans that have been the culprit of an elevated number of bank collapses.

Critics of the proposed fee structure take issue with the fact that it detaches the deposit insurance premium from the deposits it's supposed to cover. They also point out that the vast majority of bank failures over the past three years have been smaller institutions with less than $10 billion in assets. In fact, fewer than 10 have been above that threshold.

Since the new base of assets would be much larger than the current base of deposits, the FDIC is also proposing to lower its insurance rates. The agency says it's not trying to inflate the amount of revenue it collects from the industry, just bring risk and fees in line.

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The total fee assessments collected by the FDIC would remain essentially the same, but larger banks would be in for more under the new structure.

The _Wall Street Journal_ estimates that JPMorgan Chase, Bank of America, and Citigroup will collectively hand over $1 billion in additional fees each year under the measure. Smaller institutions, though, are celebrating the proposed change.

""The FDIC today took an important step in leveling the playing field for the nation's community banks,"" said Jim MacPhee, chairman of the ""Independent Community Bankers of America"":http://www.icba.org (ICBA) and CEO of Kalamazoo County State Bank in Michigan.

According to MacPhee, ""The new rate schedule proposed today will mean substantial savings for community banks and will ensure the largest Wall Street institutions pay for the risks they pose to our nation's financial system. Meanwhile, greater parity in assessments will allow community banks to reinvest their savings in their local Main Street communities to stimulate the economic recovery.""

The FDIC is ""proposing a new system"":http://www.fdic.gov/news/board/Nov9no8.pdf for assessing the fees owed by large institutions with at least $10 billion in assets.

Risk categories and debt ratings would no longer be used to calculate their premium rates. Instead, scorecards would be utilized, which include financial measures that the FDIC says are predictive of long-term asset performance over the entire credit cycle.

“Over the long term, institutions that pose higher risk would pay higher assessments when they assume these risks rather than when conditions deteriorate,” Bair said. “During the crisis, it became clear that our large bank pricing metrics were lagging indicators of financial deterioration, to a greater extent than the metrics we use for smaller institutions.""

Both proposals â€" assets vs. deposits, and the use of scorecard assessments â€" will have a 45-day comment period. The FDIC plans to implement the changes by April 1, 2011.