Regional banks are pushing back on the Federal Deposit Insurance Corp.'s proposed special assessment, urging the regulator to make only the largest banks pay.
To replenish the Deposit Insurance Fund following the recent regional bank failures, the FDIC proposed on May 11 an annual special assessment at a rate of 12.5 basis points based on a bank's estimated uninsured deposits as of Dec. 31, 2022, with the first $5 billion excluded.
During the comment period that ended July 21, a number of regional banks subject to the assessment pushed back against various aspects of the proposal, asking the agency to subject only "too big to fail" banks to the assessment, exclude various deposits like intercompany and collateralized and take more factors into consideration than just uninsured deposits.
Target largest banks
Several banks asked the FDIC to raise the bar for whom should be subject to the special assessment. Hundreds of community banks wrote comment letters thanking the FDIC for excluding them via the $5 billion threshold, but several regional banks think it should be higher.
New York Community Bancorp Inc. asked the agency to raise the minimum amount of uninsured deposits to $10 billion, since that is the current perceived threshold for "indications of complexity or having expanded business activities," the company's general counsel and corporate secretary R. Patrick Quinn wrote. Separately, the company also asked to receive "proportional credit" for the role its subsidiary Flagstar Bank NA played in acquiring assets of Signature Bridge Bank NA and helping "to resolve a banking crisis and lower cost to the FDIC."
"We support the FDIC's actions," Quinn wrote. "We also propose an approach that would exclude Signature Bank's year-end uninsured deposits from the special assessment calculation as applied to NYCB and Flagstar."
BOK Financial Corp. supports raising the threshold even higher to $100 billion because those banks "pose systemic risk" and are perceived by the market as banks whose entire deposit bases will be covered using the systemic risk determination in the event of a failure, CFO Martin Grunst wrote. More specifically, the largest banks benefit the most from that perception, he added.
"The too-big-to-fail banks have benefitted for years from market perception of full deposit insurance, without actually paying for full deposit insurance, and now even more benefit was gained during this period of systemic risk. We believe this benefit should be factored into the special assessment calculation," Grunst wrote.
Similarly, East West Bancorp Inc. also argued that "too big to fail" banks should be responsible for the special assessment because the ones which "benefited from how the bank seizures were managed were the systemically important banks and so in fairness they are the ones who should pay the special assessment," Chief Corporate Officer Douglas Krause wrote.
Zions Bancorp. NA also believes the proposed assessment does not "appropriately identify the banks which benefited" following the use of the system risk determination, CFO Paul Burdiss wrote. Following the failures, there was an "immediate and pronounced shift" of deposits to the "too big to fail" banks from community and regional banks, he added.
Several banks also advocated for making the as-of date for the special assessment more recent because the proposed Dec. 31, 2022, date fails to capture deposit shifts and those that benefited from inflows, East West Bancorp, Zions Bancorp., UMB Financial Corp., Fifth Third Bancorp, Huntington Bancshares Inc. and KeyCorp all argued in their letters.
"Significant changes have occurred since December 31, 2022, and using a historical metric is not representative of [the] current state. It does not consider proactive measures implemented by banks to provide insurance or other protection to depositors, nor does it consider deposits that migrated to large banks or to money markets immediately following the bank failures," UMB Financial's Chairman, President and CEO Mariner Kemper wrote.
Excluding collateralized, intercompany deposits
Several banks asked the FDIC to exclude collateralized, preferred and intercompany deposits from the uninsured deposits totals.
In its letter, BOK Financial argued that intercompany deposits are stable sources of funding and collateralized deposits "are effectively insured due to the high-quality collateral required, and their behavior has little in common with uninsured deposits," Grunst wrote.
Home BancShares Inc. CFO Brian Davis asked that preferred deposits be excluded since those would "not result in a loss to the FDIC in a receiver situation," he wrote. "Our concern is that if preferred deposits are not excluded from the assessment calculation, banks may not be able to adequately serve state and political subdivision depositors which could potentially limit options for these depositors."
In a joint letter, Fifth Third, Huntington and KeyCorp asked that affiliate deposits, which are those held by the holding company, an affiliate company or a subsidiary of the bank, should be excluded because it is unlikely they would be withdrawn in the event of a run.
"Except in unusual circumstances, a bank controls its subsidiaries and therefore has the ability to prevent the subsidiaries from withdrawing funds from accounts at the bank," they wrote. "More fundamentally, deposits held by subsidiaries of banks are effectively the bank's operating cash, rather than deposits held by third parties."
The three banks had a similar argument for excluding collateralized government deposits: They are not withdrawn in times of stress.
Changing the calculation
Several banks believe basing the payment solely on uninsured deposit totals is not enough.
In a joint letter, Capital One Financial Corp., PNC Financial Services Group Inc. and Truist Financial Corp. argued that the assessment calculation should be more complex than just a bank's amount of uninsured deposits. Instead, it should be based on the bank's reliance on those deposits.
"This approach, while modestly more complicated, would better align the costs of the special assessment to the banks that received the largest benefits, as reflected by their relative reliance on uninsured deposits," their letter read.
BOK Financial also argued that more factors should be taken into consideration beyond just uninsured deposit totals, including interest rate risk and tangible common equity (TCE).
The company believes interest rate risk and its impact on capital should be included because it was "a fundamental cause of Silicon Valley Bank's failure," BOK Financial's CFO wrote. Additionally, banks who took on additional interest rate risk in the last few years earned more money than those who did not, Grunst wrote.
TCE should also be taken into account because, though it is not a regulatory ratio, it was a focus point following the failures as markets looked for signs of weakness at banks, Grunst wrote. TCE, which is tangible common equity divided by tangible assets, captures accumulated other comprehensive income and therefore includes the impact of underwater bond books.
Others argued that the FDIC should not base the special assessment on uninsured deposits at all.
UMB Financial believes the proposal is "erroneously focused" on uninsured deposits even though they were not the primary reason for the bank failures, the company's CEO wrote. Instead, the payment should be based on total deposits with a threshold of $10 billion and exclude collateralized, municipal and affiliate deposits, Kemper wrote.
East West Bancorp believes the assessment should be based on total assets, such as the FDIC currently charges its general assessments.
Zions Bancorp. argued that the FDIC should not base the assessment on uninsured deposits because that call report data is unreliable and inconsistent as more guidance and standards are needed for what should or should not be included in those totals.
"It is also our understanding that some large banks have already begun to amend their year-end Call Reports to reduce their reported uninsured deposits," Burdiss wrote.