WASHINGTON — With the Federal Deposit Insurance Corp. poised to complete a rule Friday that would charge a special assessment based on an institution's assets, not its deposits, winners and losers are becoming clearer.
Though it was immediately clear that the largest banks would be at a disadvantage under the change, observers also noted Wednesday that some smaller institutions — including those that rely heavily on Federal Home Loan Bank advances — will also take a hit. The plan would also hurt the remaining big investment banks, which typically hold a significant amount of assets in their banking units but do not hold many deposits.
"Not every small bank benefits, and not every large bank is penalized," said Diane Casey-Landry, the chief operating officer of the American Bankers Association.
For example, State Street Bank and Trust in Boston, the $171 billion-asset institution that serves Wall Street firms and has only $37 billion in domestic deposits, could pay as much as $45 million under the new rule, or $10 million more than if the FDIC assessed banks only on their deposits. (The calculation is based on fourth-quarter data.)
Similarly, Goldman Sachs Group Inc., which only recently converted to a bank holding company, could pay $5 million more — a total of $23 million — on its $162 billion-asset Utah banking unit. The bank has $45 billion in domestic deposits.
The FDIC, according to sources, plans to charge banks and thrifts 5 basis points on every $100 of assets minus Tier 1 capital. Banks whose premiums would balloon as a result, including Goldman and State Street, could benefit from a cap limiting the special premium to 10 basis points of domestic deposits.
The agency had said in February it would charge 20 basis points per $100 of second-quarter domestic deposits at all institutions in order to raise as much as $15 billion for its shrinking Deposit Insurance Fund. Officials have signaled they will scale back those plans because Congress passed a bill this week that would more than triple the agency's line of credit with the Treasury Department, to $100 billion. President Obama signed the bill into law on Wednesday.
The FDIC's board is expected to vote on the rule Friday, and could still make significant changes. Even with the cap, many institutions would pay more than if the FDIC had continued to merely assess deposits.
The agency's special assessment is expected to total roughly $6 billion industrywide. By some estimates, to reach that total, charging solely on domestic deposits, the FDIC would need to levy a roughly 8-basis-point premium.
"For those specialty banks, … they're really disadvantaged if they use the asset basis," said Michael Bleier, a former Federal Reserve Board lawyer who is now a lawyer at Reed Smith.
John Douglas, a former FDIC general counsel and now a partner in Paul, Hastings, Janofsky & Walker LLP, agreed. "There is clearly danger here that those institutions with a lot of assets and relatively small deposit bases are going to begin to consider how important it is to have a banking institution because of costs," he said.
But not every large institution would be put at a disadvantage by the plan. Depending on an institution's balance sheet, some large banks could pay less under a formula based on assets minus capital. For example, Toronto-Dominion Bank, whose banking subsidiaries hold $123 billion of assets and $95 billion in deposits, would pay about $58 million using the FDIC's asset formula and $74 million under an 8-basis-point assessment on deposits.
And just as some large institutions could face lower bills, some community banks could pay more because an assets-minus-capital calculation captures an institution's Federal Home Loan Bank advances. "The reality is, it really depends on the individual institution and how they structure their balance sheet," said Casey-Landry. "If you're a heavy user of secured liabilities, you're going to find yourself disadvantaged... The pain is going to be shared across the industry."
The FDIC has been looking for ways to price the risk of institutions using nondeposit liabilities, such as the FHLB borrowings. "There are household names that don't have a lot of deposits — Goldman and State Street — so that's one issue," said Kip Weissman, a partner at Luse Gorman Pomerenk & Schick. "But more than that, there is a perception… that a lot of the bank risk was developed from nondeposit financing and that the FDIC has needed to and will need in the future to shell out a lot of bucks to cover companies that financed in large part resources other than deposits and, therefore, it's more equitable to assess based on assets."