FDIC screws community banks

fdiclogoThe Federal Deposit Insurance Corporation (FDIC), the very organization created to guarantee deposits against bank runs and failures, is instead about to guarantee that their services are in greater demand. They’re doing this by requiring all banks, large and small, to pay a one time charge of 20 cents per $100 of deposits (aka 20 “basis points”). In the process, this unbudgeted expense will likely cause some otherwise stable and profitable smaller banks to fail while larger banks, with the assistance of federal TARP funds, will likely be able to survive.

The FDIC is a federally-chartered insurance company, and as such they charge their member banks a fee to provide deposit insurance. In the 2007-2008 federal fiscal year, the insurance charges ranged from five to 43 basis points, with an industry average of 6.3 basis points. As of April 1, however, the FDIC not only increased their rates to between seven and 77.5 basis points, but they also significantly changed the method by which banks are categorized according to risk. The rates paid by banks increased dramatically for nearly all risk categories, with some increasing over 100%. The worst increase was from 10 basis points to a maximum of 43, an increase of 330%.

But as bad as those increases were, the proposed new rates and the new rate calculation method were both published October 7, 2008. This amount of advance notice should have permitted banks to plan for an significant increase in their rates even though the final rates were not known until March 4, 2009.

The bigger deal is that the FDIC has chosen to implement a 20 basis point “special assessment” charge specifically to increase their own monetary reserves and to ensure that the public has confidence in the FDIC. In addition, the FDIC Board has given themselves the option to add an additional 10 basis points atop the first 20 if they feel that additional confidence-building measures are required. These special assessments were not in the proposed rule published in October of 2008, and as such the banks would not have been able to prepare and budget for the increased costs of keeping the FDIC financially solvent.

The Federal Reserve publishes a list of the largest commercial banks in the country – essentially every bank with over $300 million in combined assets – in order from largest to smallest as determined by the banks’ total assets. From this data, it’s clear that the top five banks hold 40.6% of total assets and 57.8% of all domestic assets held by banks. The top 25 banks hold 60.4% and 91.7% of total and domestic assets respectively. For comparison, the top five banks also recieved 35.1% of the TARP bailout money committed to date, or $152.5 billion.

In other words, the largest banks hold the most assets and have needed the most federal help.

The 1722 “large” banks identified by the Federal Reserve will need to pay a combined total of $19.9 billion to the FDIC by September to accomodate the 20 basis point special assessment. If the FDIC Board boosts the special assessment to 30 basis points, then the combined total will be $29.8 billion instead. Put another way, that represents a $2-3 million reduction in operating revenue for a bank with $1 billion in total (domestic) assets.

According to the Federal Reserve, Cashmere Valley Bank of Cashmere, Washington is just such a bank – it has nearly exactly $1 billion in total assets, all of which are domestic assets. It has a total of eight locations (nine according to their website). According to the bank’s unaudited financial statement for 2008, the bank had a total income of $12.216 million. Cashmere Valley Bank will have to pay a $2-3 million in September, or 16.7% to 25% of their entire 2008 income. This will make the bank less profitable and may hurt the perception of its stability in the Washington communities it serves.

Furthermore, if the bank’s shareholders demand that Cashmere Valley Bank keep their stock value up, then the bank might choose to cut staff and close branches instead of taking a hit to profits. According to the 2008 financial statement, Cashmere spent $19.845 million on building leases, office equipment, salaries and benefits, etc., of which just over half was salaries and benefits. Cutting this number by $2-3 million could require Cashmere to close an entire branch and its staff, possibly hurting the community where the branch is located. Or Cashmere could cut staff by 20-30% across all branches instead.

What’s perhaps the most devastating, however, is that the entire amount is due by the end of September and the final rule was only announced in March, giving banks only two full quarters in which to make enough money to cover their special assessment charge. Cashmere Valley Bank made about $4 million after taxes in the first quarter of 2009, so they may well be able to pay the charge. But a $2-3 million charge all at once will cut total income by 50-75%, depending on the economy of the communities that Cashmere Valley Bank serves.

Bank of America will have to pay $2.75 or $4.13 billion in special assessment charges. In 2008, their total income was only about $4 billion, so this is a comparably much larger percentage of income than Cashmere will have to pay. But Cashmere doesn’t appear to have been given TARP funds (or if so, not enough to hit the ProPublica bailout tracking radar) while BofA has received $52.5 billion in bailout money to date. Only AIG has received more bailout money.

So what does this all mean? It means that the largest banks in the industry, banks like JPMorgan Chase and Bank of America, banks that are “too big to fail,” will feel little pain from the FDIC special assessment. The Treasury has already decided that these large banks will not collapse, and so the banks will be given (or have already been given) the billions of dollars needed to pay their portion of the FDIC special assessment. And so money will leave the Treasury, go trough the bank, and then come back to another part of the Treasury Department, the FDIC. Smaller banks, on the other hand, will be forced to take lower profits, cut staff, and close branches in order to afford the special assessment. In extreme cases, the special assessment designed to help keep banks alive may even force some to close their doors.

While the biggest banks will be propped up, smaller banks that are more financially sound will become less so. Added to the fact that these very same banks were were forced to take TARP money order to spread out expected Treasury losses from the bailout and we have a situation that will ultimately result in the failure of more small community banks that could have survived before the FDIC’s special assessment.

And this is less damaging to the country and economy than nationalizing huge banks and then gradually deconstructing them how, exactly?

13 replies »

  1. Oh hell. And if memory serves me correctly, a portion of Geithner’s plan is to borrow from the FDIC to bail out the big banks.

    Bizarro Robin Hood strikes again…

  2. We are still living in the upside down world the neo-cons and ths buSh adminisrtation has created!

  3. I totaly agree libhomo. They are holdovers from the buSh world orginazation. I am hoping that Obama is keeping his freinds close and his enemy’s closer. I feel that he left them there to apease the righ tfor the short term and then he is just going to clean house. Kind of like the frog in the boiling water deal. I hope he is letting them hang themselves as he implements his and the majority of the population’s agenda.

  4. Well, Masi, i hope that you’re right. But it’s rather discouraging that to explain the administration’s behavior requires developing near-conspiracy theories.

    I’m not sure how much closer one can keep one’s enemies than appointing them as Secretary of the Treasury or giving them the lead spot on the economic team. The more likely problem is that either Obama does not see the likes of Geithner as enemies or his supporters have misjudged who his real friends are.

  5. Oh, what a tangled web we weave when, for the eight hundred and forty sevnth time, we practice to deceive.

  6. Actually, FDIC has been out of control and needs to be investigated. Here are more examples of reckless actions smaller community banks by Sheila Bair…

    If some of our financial regulators actually focus their resources on proper supervision and receivership management of troubled banks instead of power grabbing, maybe our tax dollars, jobs, and projects would have been saved and not wasted.


    “First Bank of Idaho Board Member Takes Case to D.C.

    ‘The FDIC says they will lose $191 million because of what has happened, but if they’d waited a few weeks it never had to happen,’ said Schauer. ‘That’s 191 million reasons why this takeover should be undone. Now the losses are incalculable,’ she said. ‘A $35 million loss to our shareholders, the loss of more than 60 local jobs, which is a huge number of jobs for this area, the payroll that won’t be spent here, the taxes that won’t be collected here, the home foreclosures. People here know how much this bank has done for the community, and it’s a calamity for many small businesses.’ ”

    “[L]ocal newspapers learned of the Cease and Desist order and announced it to the community (the bank did not release this information, which means that government agencies probably “leaked” the news of their own actions). The only possible result of leaking this information would be to prevent the bank from saving itself.”

    Of course there was the leak that led to Wamu seizure on a Thursday instead of the normal Friday. Why doesn’t FBI investigate that and all these cases and subpoena officials to find out who gave out insider information?

    “FDIC faulted in four bank failures in ’08… The Federal Deposit Insurance Corp. fell short in correcting deficiencies at four U.S. banks before they were seized last year at a cost of almost $1 billion to the deposit insurance fund, the agency’s inspector general said.” I am shocked at the absence of reprimand as well as the little media coverage on such costly mistakes.

    Taxpayers are getting screwed over big time too.

    Banks such as Goldman Sachs and JP Morgan can raise money via FDIC’s TLGP to avoid TARP restrictions such as those on executive pay and bonuses.

    They can also sell their junk soon with FDIC financing up to $500 billion for PPIP.

    I don’t understand why nobody is regulating FDIC. Is it that hard to see Sheila Bair is completely out of control?

    Let me again summarize how corrupt this regulator has been:

    -FDIC has $19 billion
    -FDIC is using that $19 billion to guarantee over $4 trillion in deposits (our hard earned CASH)
    -FDIC’s TLGP has so far allowed banks to raise over $300 billion without TARP restrictions
    -Sheila Bair said FDIC may be insolvent this year and she said on Bloomberg she would not use our tax dollar to help solve this problem. Well, she lied. Two days later instead of raising FDIC bank fees, she said she would reduce those charges if Congress were to increase her borrowing power to $100 billion
    -The Depositor Protection Act of 2009 will now give her $500 billion, requiring approval pretty much from only Bernanke, Geithner, and Obama; even before she gets this money she already said FDIC would finance up to $500 billion for PPIP. Wait, isn’t this bill called the “Depositor Protection Act?” Where is she going to get $500 billion for PPIP and who gave her the authority to committ so much money for Geithner’ plan?
    -No, she does not care about homeowners. Google and you will find plenty of stories about FDIC just seizing banks but ignoring people and projects negatively affected by the demise of their banks; FDIC has failed to focus its resources on protecting deposits and MANAGING PROPER RECEIVERSHIP. As to her loan modification program, what does FDIC have to do with that? Besides it is unfair to taxpayers because it does not differentiate between those who are responsible but default (due to current hard times) and those who can’t afford these homes in the first place.
    -Bair advocated the bad bank idea.
    -Bair found stricter regulaton of derivatives unnecessary when she was the head of CFTC
    -Bair tried to sell Wachovia to Citigroup, the recipient of a $300 billion bailout just one month later
    -Bair failed to coordinate with SEC and WB investors lost millions that morning because of this horrible deal
    -Bair seizd Wamu on a Thursday evening because of a leak; she should be subpoenaed and reveal the person responsible for this leak that wiped out, again, millions of investments; by the way, check the OTS report etc… Wamu did not fail
    -Also with Wamu, Bair destroyed the bond market
    -Also with Wamu, Bair made derivative holders superior to bondholders… remember AIG?
    -Also with Wamu, Bair practically wiped out all liquidity and lending worldwide; for example, European Central Bank’s daily deposit increased from $0.9 billion to an ASTONISHING $169 billion… There is NO MONEY to lend!!! (see Fed paper; link below)
    -Sheila Bair misled taxpayers when she said toxic asset program may in fact be profitable and benefit the public; check FDIC’s website and you will see that in their own auction they were getting about $0.5 on the dollar
    -Bair said big banks are bad; she lied again. She was the one who rejected Wachovia’s plea to stay independent and sold Wamu to make JP Morgan too big to fail.
    -FDIC voided contracts with Wamu landlords who now will lose their buildings because there is no rent income
    -FDIC was sued by former Wamu employees (I dont believe these are the corrupt managment, just regular workers) for breaching their severance contracts

    Yes, thanks to Sheila Bair and FDIC, we now must fight for our deposits against bank bondholders and legacy asset participants.

    Thanks to Sheila Bair and FDIC, over 10,000 Wamu employees lost their jobs and savings while JP Morgan buys 2 private jets and builds a premier hangar.

    All Sheila Bair cares about is power grabbing. FDIC did not have enough funds for Wamu so it seized a bank that did not fail but FDIC thought might fail and destroyed jobs and savings across the United States.

    You can all google and uncover her inconsistent statements and actions.

    I am personally fed up and disgusted with Sheila Bair and how she has destroyed FDIC’s main mission to protect our savings.

    Click to access interbank_market_HHH_jan09.pdf


  7. I believe that a bank’s assets are its loans out, while its liabilities are its deposits, and the thrust of this FDIC assessment is that the banks have to pay basis points on their deposits held (the insured monies), not on the loans which they have underwritten.

  8. Brian – Here is the response I got from my bank, a small local bank, here in Seattle.

    “The issue regarding the possible special 20 basis point one-time assessment by the FDIC of all insured banks is in a state of flux. On Wednesday of this week, The US Senate passed Senate Bill 896, which may significantly reduce the one-time assessment of banks by the FDIC. It is nearly certain the Senate bill will be approved in the House of Representatives and sent to the President for his signature. The bill also features an extension of the $250,000 FDIC insurance limit through 2013.”

    “You can tell your customer we are very supportive of the Senate bill and believe that the higher FDIC insurance limits are critical to the success of any bank in this difficult environment.”

    SB 896 has passed the Senate and its companion bill HR 1106 in the House is awaiting action.

    Sec. 204 of HR 1106 references FDIC but I can’t tell if that is the mitigating language that would lessen the impact of the special assessment on banks. I’d appreciate your take on this.

    Links to the two pieces of legislation:|/bss/111search.html|/bss/111search.html