Large US lenders are set to bear the majority of the cost to replenish a deposit insurance fund that was depleted by the collapse of Silicon Valley Bank and two other financial institutions.
The Federal Deposit Insurance Corporation (FDIC) has proposed a "special assessment" fee on uninsured deposits exceeding $5 billion, with the aim of covering the substantial costs incurred following the failure of these banks.
The FDIC board has approved the proposal, with differing opinions among its members based on the perceived beneficiaries of the fund. This article provides an overview of the situation and discusses the implications for the banking industry.:
The FDIC has announced a special levy of 0.125% on uninsured deposits held by banks that exceed $5 billion. The fee will be calculated based on the amount of uninsured deposits a bank held at the end of 2022. Typically, banks pay quarterly fees to finance the fund, but the sudden need for replenishment has necessitated this additional measure.
The deposit insurance fund needs to be replenished due to the collapse of Silicon Valley Bank and Signature Bank in March. These banks experienced a significant outflow of deposits as concerned depositors sought safer alternatives. Since these banks had high levels of uninsured deposits, their failure strained the fund, leading to the need for a substantial replenishment.
The FDIC board's approval of the proposal was divided along partisan lines. The three Democratic board members supported the measure, arguing that the larger banks, which would pay the most, were the primary beneficiaries of the flight to safety following Silicon Valley Bank's collapse.
On the other hand, the two Republican members voted against the proposal, expressing concerns that the burden should be distributed more evenly among banks.
With the proposal approved, the FDIC will now seek feedback from the banking industry and the public. This feedback will be considered before finalizing the new fee. It is essential for the FDIC to strike a balance between ensuring the fund's stability and addressing the concerns of banks, which will bear the financial burden.
The proposed fee will have significant implications for big US banks, as they will be responsible for the bulk of replenishing the failure fund. While the exact amount each bank will contribute is yet to be determined, it is expected to run into billions of dollars.
The additional financial burden may impact the profitability and operations of these banks, potentially leading to adjustments in their business strategies and lending practices.
The FDIC's proposal to impose a special assessment fee on big US banks to replenish the depleted failure fund underscores the challenges faced by the banking industry following the collapse of Silicon Valley Bank and other lenders.
The proposal, approved by the FDIC board, has generated partisan disagreements. The industry's feedback will play a crucial role in shaping the final fee structure. As the process unfolds, it remains to be seen how this significant financial burden will impact the banking sector and its stakeholders.