The nation's smallest banks will likely be shielded from impending special assessments to replenish the Deposit Insurance Fund.
Resolving Silicon Valley Bank — estimated to carry a record cost to the FDIC — and Signature Bank will cost the Federal Deposit Insurance Corp. a combined $22.5 billion, taking a chunk out of the Deposit Insurance Fund (DIF), which stood at $128 billion at year-end 2022, or 1.27% of insured deposits. To replenish the fund, which Wells Fargo analysts expect to fall to about 1% of insured deposits after the Silicon Valley Bank and Signature Bank losses, the FDIC will impose special assessments, Chairman Martin Gruenberg said this week.
The FDIC also recently raised the deposit assessment rate, effective Jan. 1 of this year, to restore the fund to 1.35% of insured deposits, much to the dismay of community banks. Smaller banks are already pushing back on the impending special assessments, and the FDIC will likely listen to those concerns by either reducing the assessments for those banks or excluding them from the assessments altogether, industry experts told S&P Global Market Intelligence.
"Taking into account both the political pressure and a sense of fairness, we expect the FDIC will either reduce or eliminate the assessment for small banks," Ian Katz, managing director of Capital Alpha Partners, wrote in a March 29 note.
Community banks likely covered
The FDIC has the discretion to tailor the special assessment how it sees fit, though detailed specifics won't be available until the agency proposes the rule in May. However, speaking at Capitol Hill hearings this week, Gruenberg said the FDIC is "keenly sensitive to potential impact on community banks."
The issue was in the spotlight at hearings of the Senate Banking Committee on March 28 and the House Financial Services Committee on March 29, where numerous lawmakers said community banks in their districts are worried that the special assessments will hit them particularly hard, and argued that these financial institutions should not have to shoulder the bill for problems at larger banks.
Industry experts told S&P Global Market Intelligence that community banks will likely avoid the special assessments, but larger banks might have to pay more.
"The FDIC appears to have substantial leeway, as telegraphed by Chairman Gruenberg in his remarks, to tailor the assessment to take account of factors, including economic conditions and the effects on the industry, which might lead to lenient assessments for the smaller banks and comparatively higher charges for the larger and more complex banks," said Todd Baker, a senior fellow at the Richman Center for Business, Law and Public Policy at Columbia Business School and Columbia Law School.
"There is always political support to treat community banks gently, and I see no reason why the FDIC wouldn't follow that path here, especially as there would likely be no opposition on either side of the aisle," Baker added.
The FDIC is reportedly leaning toward wanting the largest US banks to pay a larger portion of the $22.5 billion loss, Bloomberg News reported on March 29, citing people with knowledge of the matter.
Different approaches
However, the decision as to who should bear the burden will be tough, and the FDIC could take more unique approaches rather than just base the special assessment payment on bank size. One such approach is tailoring the special assessment toward banks with riskier profiles.
"There does seem to be some political push to maybe evaluate the risk profiles of different banks, which would be a much heavier lift," Paul Aguggia, a partner in the financial services practice at law firm Holland & Knight, said in an interview. "How do you know what tests you would use to evaluate the different profiles of different banks?"
Conversely, the FDIC could move to simply impose the special assessment on all banks, a move that would make the increase "relatively small" because it is spread over thousands of banks, said Chip MacDonald, managing director of MacDonald & Partners LLP.
Pushback has already begun
Still, community banks will push back on any increase to what they already pay toward the DIF.
"The one-size-fits-all approach is not the solution here," said Anne Balcer, Independent Community Bankers of America's chief of government relations and public policy.
"What we don't want is for the payment of premiums to be imposed on the backs of those who present the least risk," she added, emphasizing that small banks are generally well-capitalized, well-run, and don't present a risk to the banking system.
But no matter which banks find themselves subject to paying the special assessment, the FDIC will ensure it does not put a financial strain on those institutions.
"I believe that special assessment rulemaking will seek to rebuild the [Deposit Insurance] Fund over time, due to losses related to the failures, while in a way designed to not overly strain the banking system," said James Stevens, co-leader of the financial services industry group at Troutman Pepper.