Bloomberg reported today:
The FDIC board today approved two proposals for overhauling assessments for its deposit insurance fund, including one that would base the fees on banks’ liabilities rather than their domestic deposits. The fee proposal, a response to the Dodd- Frank financial-regulation law, would increase assessments on banks with more than $10 billion in assets.
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The measure would increase the largest banks’ share of overall assessments to 80 percent from the present 70 percent, the FDIC said. The assessment increase would be in place by the second quarter of next year, according to the proposal.“It’s a sea change in that it breaks the link between deposit insurance and deposits for the first time,” Acting Comptroller of the Currency John Walsh said today. “It is significant.”
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The proposal would increase assessment rates on banks that hold unsecured debt of other lenders. That step was proposed to address risk that is retained in the system even as it is removed from one bank’s holdings.
It is this last bit that makes me happy. The Basel rules allow banks to risk-weight other banks’ paper as if was issued by the sovereign – which is simply craziness. The FDIC memorandum – which we can only hope will survive the comment period and spread to Canada, if not world-wide – is going to charge them extra deposit insurance premiums on the long-term portion of these assets:
Depositary Institution Debt Adjustment
Staff recommends adding an adjustment for those institutions that hold long-term unsecured liabilities issued by other insured depositary institutions. Institutions that hold this type of unsecured liability would be charged 50 basis points for each dollar of such long-term unsecured debt held. The issuance of unsecured debt by an IDI lesens the potential loss to the [Deposit Insurance Fund] in the event of an IDI’s failure; however, when such debt is hel by other IDIs, the overall risk in the system is not reduced. The intent of the increased assessment, therefore, is to discourage IDIs from purchasing the long-term unsecured debt of other IDIs.
There are many other adjustments and changes; I cannot comment on the specifics of the proposal because the data that would assist with the evaluation of the calibration of the adjustments is not available. The comments on this proposed rule will be most interesting!
Update, 2010-11-10: The FDIC has published the official notice.