WASHINGTON — Even before the Federal Deposit Insurance Corp. unveils details of its plans to assess a special premium on all institutions, large banks are criticizing the proposal as unjustifiable, punitive, and unfair.
According to sources, the agency wants to base the premium on a bank's assets, not its deposits — a major break from long-standing practice. As a result, several of the largest institutions that rely heavily on alternative forms of funding, including Citigroup Inc. and JPMorgan Chase & Co., would face much higher premiums.
The plan, which the FDIC board is scheduled to vote on Friday and could still change, has widened the rift between large and small banks over who is to blame for the current financial crisis. Community bankers argue that the plan is justified, saying "too big to fail" institutions played a leading role in the economic decline.
"We think it would be fairer overall to the industry to assess total assets … which then would adjust the total assessment base more toward the systemic risk banks, rather than the community banks, where it belongs," said Camden Fine, the president and chief executive officer of the Independent Community Bankers of America. "Right now community banks are paying a disproportionate share."
But the largest institutions counter that the failure of small banks — not big ones — has depleted the Deposit Insurance Fund's reserves. Even though the $307 billion-asset Washington Mutual Inc. collapsed last year, the failure did not cost the fund anything after JPMorgan Chase acquired Wamu's banking operations.
Among the 58 other institutions that have failed since the beginning of last year, only two — IndyMac Bancorp. and Downey Savings and Loan — had more than $10 billion of assets.
Big-bank representatives also argue that the largest institutions have stepped up to purchase or take over several ailing large companies, potentially saving the insurance fund from being wiped out.
"It was basically IndyMac and a series of small banks" that have cost the FDIC, according to one large-bank lobbyist, who would not speak on the record.
"Why are big banks being asked to pay for that? In fact, it was actions by Bank of America," JPMorgan Chase and Wells Fargo & Co. "that saved the Deposit Insurance Fund from taking even more severe hits by acquiring Countrywide, Wamu, Wachovia and Merrill Lynch," the lobbyist said. "What would the cumulative hit to the fund have been if those had gone the way of IndyMac?"
According to sources, the FDIC plans to charge institutions roughly 5 to 7 basis points, with the premium based on asset size minus Tier 1 capital.
Under such a plan, Citigroup's main banking unit, Citibank would face a premium ranging from $578 million to $809 million. That is significantly higher than it would be if the FDIC based the premium on Citibank's domestic deposits — its traditional measurement. Such a charge for Citibank would range from $120 million to $168 million.
Though the FDIC would not comment for this story, observers said such an approach may better represent the risk that a giant banking company would pose to the fund if it should fail. The plan would also address other institutions that rely heavily on non-core funding, such as Federal Home Loan Bank advances.
"It seems that what the FDIC may be doing is to propose a kind of proxy for a risk-based assessment," said Henry Fields, a partner at Morrison & Foerster LLP in Los Angeles. "By using an asset test, the FDIC is in effect imposing a heavier premium on those banks that chose to grow other than through deposits."
But the FDIC also appears prepared to blunt the impact on Citibank and similar institutions by imposing a ceiling on the amount paid.
According to sources, an institution's premium would be capped at a level equal to a 10-basis-point charge on its domestic deposits. Such a cap would mean that Citi would pay about $240 million — or less than half an assessment based on assets minus Tier 1 capital.
The proposed cap would also benefit JPMorgan Chase. Under the asset-based charge, its main banking unit would face a premium of at least $822 million, but the deposit cap would lower that to $695 million.
The cap would not help Bank of America Corp., which holds the most domestic deposits, or Wells Fargo. Under the proposed asset charge, B of A's banking unit would face a premium of at least $691 million, and Wells would face a premium of at least $253 million. B of A's domestic deposit cap is $755 million, and Wells' is $308 million.
Even with the cap, large institutions oppose the plan. At least part of their objection is procedural.
In February the FDIC proposed a special assessment based on domestic deposits and never indicated it planned to change how assessments were calculated. (The FDIC did seek comment on whether it should charge according to total assets, but it was not clear whether the agency was considering such an approach.)
If the FDIC approved the plan Friday, it would be a final rule, and bankers would have no formal process to convince the agency it is making a mistake.
They also question why the FDIC is making the switch, since it insures the deposits — not the assets — of a bank.
"It's not clear to us what the policy rationale is that justifies changing the assessment base from deposits to assets," the lobbyist said. "It seems brazenly political."
The FDIC is also pushing legislative language in Congress that would assess large banking companies separately for their systemic risk. Under draft language, the FDIC would create a separate fund that all systemically important companies would have to pay into — a concept that was embraced last week by Treasury Secretary Tim Geithner. If that bill passed, large-bank representatives argue, they would effectively pay twice, once for their banking units and another time for their holding company.
Even under an asset-based calculation, the premium would be far less than what the FDIC first proposed. It originally said it planned to charge all banks a 20-basis-point premium based on domestic deposits. That plan sparked an outcry from large and small banks.
Since then the agency has said it would lower the premium if Congress approved a bill that raises its line of credit with the Treasury Department to $100 billion. The House and Senate passed the bill Tuesday and it is expected to be signed by President Obama soon.
Still, observers said that is cold comfort for large banks, many of which will pay more relative to community institutions.
The FDIC is "throwing fuel on the fire," said Bert Ely, an independent banking consultant based in Alexandria, Va. Community banks are "blaming all of the big banks, but if one looks at the figures … some of these expensive failures were of relatively small banks."
Fine said that an asset-based calculation would make more sense. He said banks with less then $10 billion of assets hold 17% of the industry's total assets, yet those institutions pay roughly 35% of the insurance fund.
"If you shift the formula to assets minus capital, that makes it about 80/20, which is more reflective of what the community bank segment represents," he said.
Others said using assets is more in line with where the industry's core problems have been. There has not been significant worry about the stability of core deposits, while institutions' loans and other assets have taken a beating from the real estate crisis.
"You could argue — in terms of fairness — that assessing the assets is a fairer way of going about this, because when the FDIC takes over a bank, its losses are based on the value of the assets," said Ron Glancz, a partner at Venable LLP.
