Our deposit insurance fund is facing a problem that could force all bankers to pay dearly.

Extremely rapid growth in insured deposits at just a few banks owned by major securities firms threatens the reserve ratio. For example, Merrill Lynch has shifted more than $50 billion into its banks insured by the Bank Insurance Fund since last year, effectively reducing the BIF reserve ratio by more than 3 basis points.

These big institutions are free-riding on the backs of all the banks that have paid into the insurance funds. Basic fairness dictates that since we’ve paid our own way, the big houses should too.

Excessive growth could cause the BIF reserve ratio to fall below 1.25%, especially if there are unexpected failures. Under current law, if the fund falls below that ratio and is not recapitalized within a year, the Federal Deposit Insurance Corp. would charge all banks a 23-basis-point premium. A bank with $100 million in deposits would have a $230,000 assessment. We all remember how painful that premium level was in the 1990s.

America’s Community Bankers supports the risk-based approach to pricing insurance. But we strongly oppose dividing the 1A category into three units, with the imposition of premiums ranging from 1 basis point to 6 basis points on the highest-rated institutions. As long as the funds’ reserves are above the designated reserve ratio, there is no valid reason why these well-capitalized, well-managed banks should pay a premium to a well-funded insurance fund.

The FDIC’s recommended approach offers no immediate resolution to the problem of the free riders. Its plan to deal with this issue bets on a rising reserve ratio to trigger rebates, thanks to higher premiums paid by banks.

A more straightforward way of attacking the problem of uninsured deposits flooding the insurance funds and lowering reserve ratios would be to immediately impose a fee on the high-growth banks.

That’s why America’s Community Bankers is supporting the Deposit Insurance Stabilization Act, sponsored by Reps. Bob Ney, R-Ohio, and Stephanie Tubbs Jones, D-Ohio. The bill would give the FDIC the authority to immediately impose a fee on the banks causing the excessive growth. The bill also would protect all banks from an automatic 23-basis-point surcharge if the fund drops below the designated reserve ratio, and would merge the funds into one stronger fund.

Resolving the free-rider problem with a special fee for excessive growth would eliminate the need for the FDIC’s plan to impose deposit insurance premiums on 1A-rated banks.

Tackling this problem today will establish the foundation for extended debate on other important issues, such as risk-based premiums, rebates, and coverage levels. We can all agree on increased coverage levels, for example, but the debate will be over how high and at what cost.

In the meantime, the free riders have already started the clock ticking toward the day when all banks could receive a massive premium bill from the FDIC. Banks need to fight back now.

Mr. Bochnowski, the chairman and chief executive officer of Peoples Bank in Munster, Ind., is chairman of America's Community Bankers.

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