WASHINGTON — Next month banks will enter a new world when it comes to how their balance sheet determines deposit insurance fees.
The Federal Deposit Insurance Corp. will no longer apply a rate just to an institution's domestic deposits, instead capturing the entire funding base. The switch, mandated by the Dodd-Frank Act and meant to incorporate nondeposit liabilities, will be seismic at the nation's largest banks, which in some cases will see their assessment base more than double. For example, the base for Citigroup Inc. could increase roughly 240%. JPMorgan Chase & Co.'s base could rise nearly 140%.
While the fees themselves will not go up as drastically (because of changes for other assessment factors), and though most institutions will actually pay less under the new base, FDIC costs are sure to weigh heavily at the top of the industry.
"It's going to cause the industry to reassess how it operates," said Dennis Santiago, the chief executive of Institutional Risk Analytics.
The impact on specific institutions is expected to vary. The FDIC is not trying to increase the overall amount of premiums, but to redistribute the costs according to banks' liability structures. Generally, regardless of institution size, fees will be lower for institutions with a high proportion of domestic deposits, while costs will rise at those with few deposits compared with other instruments.
But as money-center banks have gained more access to a wide variety of funding sources, the new fees are expected to hit them hardest. The FDIC estimates that banks with more than $10 billion of assets will pay 79% of the industry's assessment, compared with 70% under the old system. In the aggregate, large institutions could pay as much as 12% more. Banks with assets of more than $100 billion will pay 57% of the assessment, up from 49%. As a result, many observers expect the largest institutions to adjust the structure of their funding base and shy away from wholesale funding in favor of more traditional deposits.
"Where the balance ends up I don't know, but clearly there will be a bigger fight for deposits," said Douglas Elliott, a Brookings Institution fellow and a former investment banker with JPMorgan Chase. "With this change, it means wholesale funding becomes more expensive relative to deposits than it was before. There will be a tendency to want deposits more and to want wholesale funding less."
Last month the FDIC finalized rules implementing the new base, as well as adding risk-based pricing factors — unrelated to Dodd-Frank — that attempt to pinpoint a large bank's overall risk more precisely in its insurance rate. (A premium is calculated by multiplying that rate by an institution's assessment base.)
As required by the regulatory reform law, the base reflects a bank's total assets minus its Tier 1 capital, an amount roughly equal to total liabilities. The overall changes will go into effect with banks' second-quarter call reports, and the first insurance bills under the new system will be due in September.
Though many of the factors used to calculate an institution's rate are confidential, some analysts have attempted to estimate the impact. Santiago's firm recently unveiled an "assessments analyzer" that allows clients to compare a bank's old base with its new base, and see an estimated premium under the new system.
For example, Citi's assessment, based on 2010 call reports and averaged out over four quarters, was estimated at $621 million. JPMorgan Chase's fee would be $1.4 billion. Bank of America Corp., with a 48% higher base, would pay $1.3 billion. Wells Fargo & Co. would pay $620 million (on a 25% higher base). Meanwhile, the assessment base for Goldman Sachs Bank USA would rise about 120% to $70.9 billion, and the bank would pay almost $30 million.
In a report it released March 15, the IRA Advisory Service unit of Institutional Risk Analytics highlighted the impact on Goldman.
Observers said large banks may not only shift more of their funding to deposits, but could also opt to move liabilities out of their FDIC-insured subsidiaries and into the holding company.
"Goldman Sachs will rethink as we go forward … their decision to form as a bank holding company and have a bank subsidiary," said Scott Hein, a professor at Texas Tech University.
"They did it in a crisis situation, and what they were primarily interested in was really access to the discount window. … Now, to have that access they see that the marginal cost is going to be a little bit higher than they initially thought, with this deposit insurance change. I wouldn't be surprised in the future if … they just return to a more traditional investment banking unit."
While comparing the overall impact on specific institutions is difficult, since FDIC rates are confidential, some firms have alluded to the change in their own communications. For example, in Wells Fargo's fourth-quarter earnings report, the bank estimated its per-quarter FDIC costs would be $40 million higher. Holding ample domestic deposits, Wells noted that its impact was "substantially less than wholesale-funded banks."
To be sure, the vast majority of the industry will likely pay less under the new system, with community banks shouldering less of the deposit insurance burden. The FDIC has said that small institutions in all will pay 30% less than before. Moreover, exceptions go both directions, with several larger institutions paying less while a few smaller ones paying more.
Munsell St. Clair, an official in the FDIC's insurance division, said assessments will be higher at fewer than 100 banks with assets below $10 billion.
"While the overall share of the pie held by large banks is getting bigger, the distribution within that share is going to change quite a bit," he said. "Most large banks will see an actual decrease in their overall assessment."
But industry representatives said the effect could be felt more widely. In the past, "nondeposit liabilities [were] a relatively cheaper funding source," but with "that differential gone now, it suggests that to the extent some large banks were funding outside of deposits, it may mean that they will be more aggressive in seeking deposits now," said James Chessen, chief economist at the American Bankers Association. "That has the potential of raising deposit interest rates in certain markets."
Others say the impact is being overblown.
"That's a specious argument," said Camden Fine, president and CEO of the Independent Community Bankers of America. "Gathering local deposits is extremely expensive, and it's labor-intensive. … Why would you change your funding strategy to … impose on yourself a higher cost of funding than you can get from other places?
"These banks still have to make an internal rate of return."