Big banks in the United States will bear billions of dollars in extra fees to replenish a deposit insurance fund that was used to bail out banks in March, the Federal Deposit Insurance Corporation (FDIC) said on Thursday.
The recent collapse of Silicon Valley Bank (SVB) and Signature Bank impacted the deposit insurance fund (DIF) for a total of $15.8 billion because the government insured depositors’ money that exceeded the $250,000 insurance cap to stem the panic from these banks’ failures.
Around 113 banks are expected to pay the fee. While the fee applies to all banks, in practice lenders with more than $50 billion in assets would be responsible for over 95 percent of the replenishment, the agency said. Banks with less than $5 billion in assets would not pay any fee.
Under the law, the FDIC has discretion in designing the fee. The Federal Deposit Insurance Act requires the FDIC to “recover any losses to the DIF as a result of protecting uninsured depositors through a special assessment,” the agency said.
The agency is focusing on large banks since they benefited the most from the FDIC’s unprecedented actions in the wake of the collapse of SVB and Signature Bank.
“In general, large banks with large amounts of uninsured deposits benefited the most from the systemic risk determination,” FDIC Chairman Martin Gruenberg said in a statement.
The federal bank regulator plans to apply a “special assessment” fee of 0.125 percent each year for uninsured deposits that are above $5 billion. The payments would be made in eight quarterly periods to maintain liquidity at the banks and would start in June 2024, the agency said.
The FDIC plans to recoup a total of $15.8 billion to refill the deposit fund’s coffers, which is “approximately equal to the losses attributable to the protection of uninsured depositors at these two failed banks,” the agency said.
The top 14 U.S. lenders will need to fork out an estimated $5.8 billion a year, which could erode their earnings per share by a median 3 percent, Credit Suisse analyst Susan Roth Katzke wrote in a report.
The FDIC fund, which guarantees customers’ bank deposits of up to $250,000, stood at $128.2 billion at the end of 2022, according to the FDIC.
Banks usually pay a quarterly fee to finance the fund, but the FDIC said the special levy was necessary to cover hefty costs it incurred after Silicon Valley Bank and Signature Bank failed in March. Both banks, which had extremely high levels of uninsured deposits, abruptly failed after depositors fled amid concerns over their financial health. Regulators declared them critical to the financial system, allowing the FDIC to backstop all deposits in a bid to stop the contagion spreading.
The seizure of First Republic Bank and sale to JP Morgan Chase this month is expected to cost that fund another $13 billion.
The Independent Community Bankers of America (ICBA), Washington’s top small bank lobby group, applauded the plans.
“Community banks should not have to bear any financial responsibility for losses to the Deposit Insurance Fund caused by the miscalculations and speculative practices of large financial institutions,” ICBA CEO Rebeca Romero Rainey said in a statement.
The FDIC had initially estimated a bigger hit to the DIF after the bank failures, but it revised the losses downward after receiving “higher anticipated recoveries” from selling off the banks’ assets.
The proposed rule won’t go into effect immediately, and there will be a 60-day comment period. Following that, the FDIC expects the rule to be finalized and take effect at the beginning of next year.
