FDIC Faces $23 Billion in Costs From Bank Failures. It Wants Big Lenders to Pay

(Bloomberg) — The Federal Deposit Insurance Corp., facing almost $23 billion in costs from recent bank failures, is considering steering a larger-than-usual portion of that burden to the nation’s biggest banks, according to people with knowledge of the matter.

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The agency has said it plans to propose a so-called special assessment on the industry in May to shore up a $128 billion deposit insurance fund that’s set to take hits after the recent collapses of Silicon Valley Bank and Signature Bank. The regulator — under political pressure to spare small banks — has noted it has latitude in how it sets those fees.

Behind the scenes, officials are looking to limit the strain on community lenders by shifting an outsize portion of the expense toward much larger institutions, according to people with knowledge of the discussions. That would add to what already may be multibillion-dollar tabs, apiece, for the likes of JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co.

The KBW Regional Banking Index of 50 lenders reversed losses and rose 0.6% on Wednesday in New York after Bloomberg reported the FDIC’s internal deliberations. Shares of large banks pared gains but recovered by the close of trading amid a broader market rally.

Talks for setting the size and timing of the assessment are in early stages. Leaning heavily on big banks is seen as the most politically palatable solution, some of the people said, asking not to be named describing private deliberations.

Representatives for the FDIC, JPMorgan, Bank of America and Wells Fargo declined to comment.

The question of how to spread the cost of SVB’s and Signature’s failures is already a hot topic in Washington, where lawmakers have pressed FDIC Chairman Martin Gruenberg, Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell over who will shoulder the burden — especially after an unusual decision to backstop all of those banks’ deposits. The extraordinary measure saved legions of tech startups and wealthy customers whose balances far exceeded the FDIC’s typical $250,000 limit on coverage.

‘Keenly Sensitive’

“I’m concerned that Arkansans will have to subsidize Silicon Valley Bank and Signature Banks deposits, and maybe others that come forward,” Republican Senator John Boozman told Yellen at a hearing last week. “Will the community banks get charged that special assessment?”

She assured him the FDIC has leeway in deciding which banks will pay.

“We’re going to be keenly sensitive to the impact,” Gruenberg added at a hearing on Wednesday, when asked about the strain on community banks. “We have the discretion to tailor that assessment to the institutions that most directly benefited.”

The mess that toppled SVB and Signature Bank was, in at least one way, a boon to the nation’s largest banks. Both of those lenders had soaked up billions in uninsured deposits that proved fickle, forcing the firms to incur losses in hasty asset sales. In the fallout, customers at small banks across the country moved cash to giant banks, showering those lenders with cheap funding.

Banks pay into the FDIC’s insurance fund every quarter as they soak up deposits qualifying for the agency’s protection. As long as the banks find ways to earn even more by lending out or investing the cash, they earn a profit.

The FDIC’s fees vary widely. The 2010 Dodd-Frank regulatory overhaul required the agency to consider a bank’s size when setting individual rates. A firm’s complexity and confidential regulatory ratings can play roles too. That means a big bank not only pays more because it houses more deposits, but also because its rate is steeper.

When the FDIC’s main fund suffers a blow, the agency can impose a special assessment to speed up the process of refilling its coffers — and it can tailor how it sets those rates.

In addition to looking at which firms may have benefited, officials may consider “economic conditions, the effects on the industry, and such other factors as the FDIC deems appropriate and relevant,” Gruenberg told the Senate in written testimony this week.

Once the agency is ready to propose a formula in May, it will seek input “from all stakeholders,” he said.

Political Pressure

On Capitol Hill, lawmakers have been publicly demanding regulators spare small banks from having to shell out for the extraordinary intervention at SVB — rescuing what Senator Patty Murray called its “very wealthy depositors.”

“You’re creating the need for a special assessment that’s going to be imposed on those well-managed community banks that didn’t take those risks,” the Washington Democrat told Yellen at a hearing. Many small banks, Murray noted, cater to people with much less money.

Leaning on big banks can add up fast.

When the FDIC set out to raise $5.5 billion with a special assessment in 2009, JPMorgan said the surcharge extracted $675 million from its second-quarter earnings.

The impact from SVB and Signature could easily go far beyond that. The agency estimated Sunday that SVB’s failure will cost $20 billion, on top of the $2.5 billion bite it expects from Signature. Unclear is how quickly the FDIC wants to collect the assessment.

Recently, some large banks have also faced pressure to shore up the balance sheet of another troubled lender, First Republic Bank. For now, regulators are giving that bank more time to reach a deal to bolster its balance sheet, people with knowledge of the situation said late last week.

But after conversations with government officials, some Wall Street executives have surmised that even if their firms don’t inject more equity into First Republic, they could still be left on the hook another way: Paying into a special FDIC assessment if the agency intervenes.

–With assistance from Steven T. Dennis.

(Updates stock reaction in fourth paragraph.)