Big Banks to Pay Larger Share of FDIC Levy

By Binyamin Appelbaum
Washington Post Staff Writer
Saturday, May 23, 2009

The Federal Deposit Insurance Corp., which guarantees bank deposits against loss, yesterday approved a controversial change requiring big banks to pay a larger share of the bill for that insurance.

Bank failures are draining the FDIC's insurance fund, forcing it to collect larger assessments from banks, which foot the bill, at a time when many institutions can barely find the money to stay in business.

The five-member FDIC board voted yesterday to collect an additional $5.6 billion from the industry, raising the total annual bill to $17.6 billion. That amounts to a 5 percent tax on industry profits, the FDIC estimated.

The assessment could decrease the money available for lending to consumers and businesses.

The board also voted to charge the largest banks -- those with at least $100 billion in assets -- about $500 million more of the assessment than it previously planned.

The decision is a victory for community banks, which have argued that federal rescue programs disproportionately benefit the largest banks, leaving smaller companies at a growing disadvantage.

FDIC Chairman Sheila C. Bair said collecting more money from the largest banks was a step back toward equity, and she said it was particularly appropriate because of the role large banks had played in causing the financial crisis.

"Over the past 18 months, large banks, as a group, have posed much greater risks to the banking system than small banks have," Bair said.

Comptroller of the Currency John C. Dugan argued in a solitary dissent that dunning larger banks was "frankly perverse" because the insurance fund is being drained mostly by the failures of dozens of smaller banks. He also rejected the argument that smaller banks were sinking in a tempest brewed by larger firms, noting a pattern of failures related to excessive lending on commercial real estate.

Bair, in response, said that the government was preventing large banks from failing, and that this was hurting smaller banks because the various government guarantees were steering private investment to the larger companies.

The unusually heated exchange also highlighted the way the FDIC has shifted under Bair's leadership toward using the assessment process to pursue policy objectives.

The agency traditionally collected a percentage of the deposits held by each bank, adjusted for the health of the institution. It now further adjusts to reflect the likely cost of a bank's failure, based on its business model.

The latest assessment goes one step further, moving away from the deposit model. Instead, the FDIC will collect 0.05 percent of each bank's assets, the amount of money loaned, invested or otherwise committed to customers. Smaller banks tend to have roughly the same amount of assets and deposits, because they lend to borrowers what they collect from depositors. But larger banks also lend money from other sources, such as borrowed money -- and as a result they now face larger assessments.

To limit the impact, the FDIC charged only the bare minimum required to keep the fund from dwindling to nothing, based on its projections of future bank failures. It backed away from a plan to collect a larger amount now, but officials said a second special assessment was likely at the end of the year.

The agency is able to shave its margin for error because a law passed this week allows it to borrow up to $100 billion from the Treasury Department, an increase over the previous limit of $30 billion. Any loan must be eventually repaid by assessments on banks.

Dugan, in his dissent, said that the agency should borrow from the Treasury rather than imposing additional special assessments. He said that would benefit the economy by leaving banks with more money for lending. The Treasury could then be repaid as the economy -- and banks -- return to health.

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