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Insurance is essentially about paying for the consequences of someone else’s misfortune or poor judgment. This is highlighted by the ongoing dispute among US banks over the $15.8 billion expense incurred in containing the bank runs that occurred this year.
Struggling institutions like Silicon Valley Bank received assistance from the US Federal Deposit Insurance Corporation (FDIC) to safeguard uninsured deposits. Now, the FDIC intends to recover the funds it used for this purpose. It plans to implement a special levy of 12.5 basis points on the balance of uninsured deposits held by 113 banks.
The FDIC recently expressed concerns about certain banks using questionable methods to calculate their uninsured deposits. These banks were excluding deposits that were technically uninsured but backed by collateral. Consequently, the levy imposed on these banks would be lower.
S&P Global has observed that several banks have recently decreased their uninsured balances by the end of 2022, which is the basis for the assessment.
In May, Jefferies analysts estimated that the special assessment would reduce the annual earnings per share of banks within their coverage universe by an average of 2.5%. However, the impact varied significantly, implying that some banks would bear the burden of a crisis they had no role in creating.
The FDIC is required to maintain a deposit insurance fund equivalent to 1.35% of insured deposits. Regular assessments are based on bank liabilities, meaning that banks with higher equity capital funding pay less, assuming all other factors are equal.
A lobbying group representing major banks recently argued that its members were being treated unfairly with respect to the new special assessment. They cited strict regulations and the increased deposits they received during times of banking turmoil.
The FDIC is justified in rejecting pleas for lenient assessments. The purpose of deposit insurance is to protect a minimum amount, which in the US is set at a generous $250,000. Granting exemptions for amounts exceeding this threshold shifts the cost and risk to lenders who are less proficient at exploiting the system.
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