US deposit insurance: FDIC is right to challenge the levy dodgers

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Nobody wants to pay for somebody else’s bad luck or misjudgment. But that is the essence of insurance. The problem is illustrated by wrangling between US banks over the $15.8bn cost of containing this year’s bank runs.

The US Federal Deposit Insurance Corporation stepped in at struggling institutions such as Silicon Valley Bank to backstop uninsured deposits. It now wants to recoup the cost to replenish its funds. It would do so via a 12.5 basis point special levy on the balance of uninsured deposits at 113 banks.

This week, the FDIC grumbled that some banks were relying on suspect methodology to calculate uninsured deposits. They were, it said, excluding deposits that were otherwise uninsured but backed by collateral. The likely result would be a lower levy on the bank.

S&P Global has noted that several banks recently lowered their uninsured balances for the end of 2022, the point at which the assessment will be based.

Jefferies analysts estimated in May that the special assessment would, on average, reduce annual earnings per share by 2.5 per cent within its bank coverage universe. But the range of outcomes was wide. Some institutions would pay dearly for a crisis not of their making.

The FDIC is required to maintain a deposit insurance fund equivalent to 1.35 per cent of overall insured deposits. Its regular assessment is based on bank liabilities, implying an institution with higher equity capital funding will pay less, all being equal.

A lobbying group for big banks said recently that its members were being inequitably treated by the new special assessment. They cited ironclad regulation and the deposit inflows this inspired during banking turmoil.

The FDIC is right to dismiss special pleading for lenient assessments. The essence of deposit insurance is that it protects a minimum amount — in the US set at a generous $250,000. Securing exemptions for sums above that displaces cost and risk to lenders less adept at gaming the system.