The Federal Deposit Insurance Corp. appears to have caught its own strain of "March Madness."
The emergency "special" deposit insurance assessment announced recently calls to mind a comment about the National Collegiate Athletic Association attributed to Jerry Tarkanian, a former basketball coach at the University of Nevada Las Vegas. He is said to have commented that the governing body was so angry at the University of Kentucky that it put little UNLV on probation. Kentucky is a college basketball powerhouse — sport's version of "too big to fail."
The implication was that it is easier to go after the little guys, and in the financial and economic crisis the country now faces, it seems that the FDIC has become a lot like the NCAA. The government is so mad at the Lehmans, Citigroups, and AIGs of the world that it is punishing America's smaller banks for the missteps of the big investment houses and financial services conglomerates that crashed under the weight of their far-flung operations and too-risky deals.
America's community banks are positioned to help restart the economy by lending to individuals and small businesses — exactly what President Obama wants. Why would the FDIC undermine community banks' ability to lend by proposing a 20-basis-point special assessment to recapitalize the Deposit Insurance Fund on top of the staggeringly high FDIC premium increases already scheduled?
Rolling the assessment back to 10 basis points and permanently increasing, to $100 billion, the FDIC's Treasury borrowing authority, as proposed legislation would do, is not enough. Even a 10-basis-point special assessment could have a devastating impact on bank earnings.
One worried CEO estimated that his additional cost would be $7 million, at 10 basis points. This on top of $11.4 million in regular FDIC premiums and special insurance for demand deposit and NOW accounts he already must pay in 2009. Any special assessment at this point in the crisis will smother the only bit of fresh air left in the economy: the still-strong, largely stable community banking system that is capable of making responsible loans.
Why does the government not get this?
I suspect it is because Wall Street is in the process of moving to Washington. Several recent nominees to vacant senior posts in the Treasury Department came from investment banks or broker-dealer firms. One appointee currently being vetted spent many years at the now-defunct Lehman Brothers. There is not one honest-to-goodness community banker who has been asked to help lead the recovery.
The FDIC has alternatives for replenishing the DIF without putting a disproportionate share of the burden on community banks. Promising proposals include basing the premium assessments on a bank's assets, not just on domestic deposits; changing the premium accounting rules and levying a systemic-risk premium on the too-big-to-fail banks. Other potential positive steps include reinstating a cap on deposits to keep banks from growing too dangerously large and differentiating community banks from the mega-institutions when reforming the bank regulatory system.
Most immediately, the FDIC should back away from the special assessment before it is too late to keep community banks in the game they play better than anyone else.