Large banks would be required to pay more into the government fund used to cover the cost of seizing failed banks under a proposal approved by US regulators on Tuesday. Bank of America, J.P. Morgan Chase & Co and Citigroup combined would pay about $1 billion more annually in assessments under the new system, according to industry estimates.
The change, which was mandated by the new financial regulatory reform law enacted in July, was unanimously approved by the board of the Federal Deposit Insurance Corp. The law requires the agency to base the assessments it charges for its deposit insurance fund on, essentially, a bank's total liabilities rather than on the amount of deposits held by an institution. The result is that some large banks, those that primarily rely on funding other than from deposits, will pay more.
This type of cost increase will likely cause large banks to consider what business changes they can make to lessen this cost, said Jim Chessen, chief economist at the American Bankers Association. "The costs are so large it drives business decisions," he said. Large banks could, for example, decide to rely more on domestic deposits for funding since under the new system that could bring their assessment costs down, he said.
Community banks lobbied for the change during consideration of the reform law in Congress, arguing large banks pose more of a risk to the financial system and should therefore contribute more to the fund. Under the proposal, the FDIC would not raise more money for the fund - it would simply shift who pays most of the cost.
FDIC staff said large banks, those with more than $10 billion in assets, currently make up 70 percent of the assessment base and under the proposed rule they would make up 80 percent. The proposed rule will be open for public comment for 45 days. It would go into place on April 1, meaning the change would impact what banks are charged in the second quarter of next year.
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