Banking organizations oppose FDIC plan to increase deposit insurance rates

A coalition of banking organizations have taken issue with the Federal Deposit Insurance Corporationʻs (FDIC) proposed increase of deposit insurance assessment rates.

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In a comment letter to the FDIC, the groups said the proposal relies on incomplete, outdated economic analysis and is not necessary.

“The overall statutory framework Congress devised with respect to assessment rates demonstrates that the proposed dramatic increase is inconsistent with legislative intent, unnecessarily punitive to banks, and could harm the economy,” the groups wrote in the letter. “The timing of the currently proposed increase … is increasingly likely to coincide with the beginning of a recession. The proposal, therefore, risks causing exactly the type of procyclical increase that Congress sought to avoid and is therefore entirely contrary to Congressional intent.”

The letter was signed by the Bank Policy Institute, American Bankers Association, the Consumer Bankers Association, the Independent Community Bankers of America (ICBA), the National Bankers Association, and the Mid-Size Bank Coalition of America.

The FDIC has proposed an increase of more than 50 percent above the current weighted-average assessment rate that banks pay for deposit insurance. Further, banks would maintain these higher rates until the Deposit Insurance Fund achieves a Designated Reserve Ratio of 2 percent of insured deposits. The FDIC said the increase is needed to meet its statutory requirements, but that assertion is based on outdated economic analysis that does not account for major recent changes in the levels of and the outlook for deposits or interest rates, the banking groups said.

Further, the banking groups said the increase would impose significant costs, particularly for the smallest banks. If the increase had been in place in 2021, many community banks’ pretax income would have fallen by more than 5 percent, and several would have fallen by more than 25 percent.

The banking groups said the FDIC’s analysis makes two key unrealistic assumptions. One, it assumes that interest earnings and capital gains on its investments will be zero over the forecast horizon. Two, it assumes deposits will grow at 3.5 or 4 percent. They say the proposed increase isn’t necessary to meet the agency’s obligations under the law.

The banking organizations are asking the FDIC to reassess the situation in six months and consider the latest economic data.

“ICBA and the nation’s community bankers are deeply concerned that the FDIC’s proposal to dramatically raise rates on the assessments banks pay to fund deposit insurance will disproportionately impact community banks in a stark departure from the agency’s past assessment practices,” ICBA President and CEO Rebeca Romero Rainey said. “Rather than penalize the community banks that have led the nation’s financial services response to the pandemic, the FDIC should ensure its plan properly recognizes that community banks should not be subject to the same assessments levied against the nation’s largest and most complex banks.”