The Federal Deposit Insurance Corporation has come up with a new proposal for calculating its fees. According to the proposal, banks that are bigger and riskier will have to pay more for insurance of their deposits so that they are discouraged from indulging in risky behavior.
Recently, the five member board of the FDIC approved a preliminary proposal that will change the way fees is assessed for banks that have assets worth more than $10 billion, which covers about a hundred banks. The FDIC will look at several factors to measure the risk that is being taken by the banks. These factors will include the risk management practices and underwriting standards at the bank. The earlier system of using the ratings of long-term debts of the banks would not be used for calculating the insurance fees any longer.
There would also be a separate class of ‘highly complex institutions’, which have more than $50 billion in assets in their depository bank and are owned by a company with $500 billion or more in assets. Only about ten banks would fall in this category. There would be a few additional factors that will be taken into account for these banks while calculating their fees for deposit insurance. These factors will include senior bond spreads and the parent company’s tangible common equity.
The FDIC’s proposal is in line with IMF recommendations of charging banks on the basis of their complexity and connectedness with other players. The rationale for charging higher fees from more complex banks is that such institutions pose a systemic risk to the global economy. Such fees would discourage banks from undertaking transactions that are highly complex.
These post-crisis measures clearly make a lot of sense. The FDIC insures the money kept in savings and other accounts of banks. Banks that are indulging in riskier behavior are more likely to prove costly for the FDIC and there is a need to make the banks pay for the risks they take. This would also build a buffer that can be used to make payments to depositors in case of a bank’s failure.
The FDIC will receive comments from the public for sixty days, after which the proposal will be adopted with or without changes. The proposal is important in light of the large number of bank failures last year, which resulted in a huge depletion of FDIC funds.