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Larger Banks to Pay Bigger Share in FDIC Levy

The Federal Deposit Insurance Corp. has approved a new policy that requires big US banks to pay a larger share of the insurance bill. Recent bank failures have been draining the funds from FDIC forcing the institution to ask for larger contributions from the banks even at the time when a significant number of them can barely keep afloat.

The FDIC board, composed of five members, will collect an extra $5.6 billion for these banks to a total of $17.6 billion. The new assessment can decrease the amount of loans available to customers and businesses. Bigger banks will feel the brunt of this change. Those with at least $100 billion in assets will foot an estimated $500 million more than was previously forecasted.

Forcing larger banks to shoulder a larger share of the levy is a good move because the bailout funds have been disproportionately given to the largest banks in the country. This leaves smaller community institutions at a big disadvantage. Sheila C. Bair, the FDIC Chairman, is particularly aware of these problems. According to her, collecting more money from major banks will contribute to equity. In addition, it was the big banks that played a major role in the financial crisis.

There are some dissents over this structure though. For example, the Controller of Currency has mentioned that asking larger amounts from big banks was unsuitable because majority of the insurance funds are being used by smaller banks. However, Bair doesn’t agree with this because she said that because of government intervention in not letting larger banks fail, smaller banks are hurting as the government guarantee takes away business from community institutions.

Traditionally, the FDIC has collected its percentage from each institution based on its deposits and adjusted for its overall health. Under Bair’s leadership, the assessment now includes the likelihood of failure based on the bank’s business structure. The shift to asking bigger banks to pay its appropriate share is a big step away from the previous deposit model.

Now, the FDIC will collect 0.05 percent of bank asset, the amount invested, loaned, or committed to clients in any way. Smaller banks have the tendency to lend out the same amount they receive from deposits. Meanwhile, larger banks tend to lend from different sources. Thus, the larger assessments asked from them.

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