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Moving FDIC Insurance to an Asset-Based System: Evidence from the Special Assessment of 2009
Abstract
In the second quarter of 2009, the FDIC imposed a special assessment on insured banks to replenish the deposit insurance fund. While the traditional assessment base for regular deposit insurance premiums was all insured deposits, the special assessment was applied to a bank’s total assets minus Tier 1 capital (total liabilities), with the maximum ‘capped’ at 10 basis points of insured deposits. We find that the cap yielded the greatest savings for banks with assets above $10 billion and that the FDIC would have raised a substantially greater amount of funds using holding company adjusted assets or could have applied a lower assessment rate to collect the same amount of proceeds.
... With a more stable funding strategy, the need for precautionary reserves declines (Hein et al., 2012). ...
... One of the model's assumptions is that the expansion of the FDIC assessment base affected banks' liquidity costs. Hein et al. (2012) found that the new policy increased insurance premiums for large banks that rely extensively on non-deposit funding sources. Kreicher et al. (2014) studied the effect of the policy on bank balance sheets. ...
The paper presents an equilibrium model in the framework of Bianchi and Bigio (2022) to include two types of bank branches instead of one; domestic banks must hold deposit insurance, while U.S. branches of foreign banks cannot. Deposit insurance allows for a more stable funding source but attaches a higher balance-sheet cost. Calibration finds consistent predictions that explain the higher excess reserves and the sequential credit supply of foreign branches. Moreover, findings suggest that foreign branches are more responsive to monetary policy tools, such as interest on reserves, because their funding source is associated with higher volatility in deposit withdrawals.
... But lost in much of the thinking has been the reform of the deposit insurance system risk assessment measure that was also part of the DFA. An implicit aim of the reform would appear to have been to effectively lower the cost of deposit insurance for community banks and shift more of that 5 Hein at al. [45] provide evidence that the special assessment of 2009 expanded the assessment base disparate impacts were felt by large versus small federally insured banks. The special assessment imposed more of a burden on large banks, but Hein et al. [45] document that the increased burden was capped by the FDIC at the time. ...
... An implicit aim of the reform would appear to have been to effectively lower the cost of deposit insurance for community banks and shift more of that 5 Hein at al. [45] provide evidence that the special assessment of 2009 expanded the assessment base disparate impacts were felt by large versus small federally insured banks. The special assessment imposed more of a burden on large banks, but Hein et al. [45] document that the increased burden was capped by the FDIC at the time. Interestingly, the DFA shift in expense increase on large banks was not capped. ...
A seldom discussed part of the 2010 Dodd–Frank Act (DFA) is how the deposit insurance assessment alteration impacted different types of banks. We provide details of the reform and investigate the effects on the banking industry. The DFA called for an expansion of the assessment base used to determine deposit insurance fees, along with a simultaneous reduction in assessment rates, so as to not raise additional fees paid. This reform did not affect all banks the same as a result of very different business models. The reform was aimed to benefit community banks at the expense of non-community banks. We estimate that community banks in the aggregate benefitted by more than $3.7 billion in deposit insurance fee reductions since the reform’s implementation in 2011. While non-community banks initially experienced increased fees, offsetting the benefits to community banks, we find evidence that non-community banks in the aggregate adjusted their funding behavior so that all but the largest banks also enjoyed benefits from the reform during our sample period.
... The Dodd-Frank Act 12 made the move to the aggregate liability assessment base permanent and the FDIC instituted this change in April 2011. Hein, Koch and Nounamo (2012) document that the one-time special assessment rate on a depository institution's total liabilities was 5 basis points in 2009. ...
... s a reasonable proxy for GSE lending in the overnight funds market. approximately $24.2 million per month, for a total of about $1.4 billion since the inception of interest being paid on reserves through the end of our sample period.In deriving our estimate of the flow that goes to the FDIC, we assume a set FDIC assessment rate for the full period.Hein, Koch and Nounamo (2012) note a 5 basis points assessment rate applied in 2009, whileKreicher, McCauley and McGuire (2013) report estimated assessment rates of around 8 basis points in 2011 for a few selected large banks. Based on the observed spreads, these two assessment rates appear to be approximately ⅓ and ½ of the spread hence, or between $495 million and ...
Since December 18, 2008 when the Federal Reserve began paying 25 basis points (bps) on depository institution’s reserves, the effective federal funds rate has stayed well below 25 bps, on occasion by as much as fifteen bps. This suggests the possibility of an arbitrage opportunity. The purpose of this paper is to offer an explanation of this ongoing situation. Part of the explanation starts with the recognition that certain financial participants in the federal funds market cannot earn the 25 bps. This paper further explains other limits to arbitrage arguing that the anomaly persists, in part, due to costs associated with the Federal Deposit Insurance Corporation (FDIC) assessment on the liabilities of depository institutions and capital charges. The difference in these two interest rates also is found to increase with the Federal Reserve’s bank reserve creation associated with the quantitative easing programs.
... The FDICIA also allowed the FDIC to issue deposit insurance based on risk-based pricing. As a result, the FDIC was able to bail out organizations that had sizable debt by providing liquidity facilities to keep large financial interest institutions solvent, as well as providing capital through the Troubled Asset Relief Program (Hein, Koch, & Nounamo, 2012). ...
The principal objective of this research study was to investigate the impact of the Great Economic Recession of 2008 on national banks’ equity investment valuations and create an empirical model for predicting national banks’ financial failure in the United States. The focal period of the study was from 2009 to 2012, and public data sources used. It is not known to what extent national banks’ stock value investments are based on the return on equity. This causal-comparative study explores the degree to which national banks’ value investment in terms of the price to earnings ratio impacts their return on equity and the extent to which these banks’ stock value investment in terms of dividend yield impacts their return on equity. We used statistical modeling and the machine learning model to find hidden patterns in the input data. The principal finding of this research is that the median earnings per share in 2012 and the dividend yield in 2009 were significantly larger than the median return on equity in 2009 and 2012. Additionally, the dividend yield in 2012 was significantly smaller than the median return on equity in 2012. These findings can contribute to improving our understanding of how banks can predict financial failure using the new machine learning features of artificial intelligence to build an early warning system with the innovative risk measurement tool.
In the spring of 2012, JPMorgan Chase and Co. (JP Morgan), one of the largest and most profitable banks in the United States, made a 6 billion mistake. The issues all began in London, with a division of JP Morgan known as the Chief Investment Office (CIO). While the CIO's stated purpose was to use excess deposits to hedge against interest rate risk, it had in fact been responsible for earning approximately 4 billion in profits for JP Morgan over the three previous years. This all came to a screeching halt when Bruno Iksil, now known as the "London Whale," took a series of high-risk positions in derivatives and credit default swaps (CDS). To date the incident has cost JP Morgan billions of dollars in losses and fines and resulted in the criminal prosecution of several individuals involved in the incident. Politicians and commentators have held the London Whale incident up as another example of large complex financial institutions behaving badly, and have accordingly pushed for stronger measures to eliminate the implicit subsidies that make such entities and their bad behavior possible. Lacking from this debate has been any meaningful discussion of the impact that explicit subsidies, like deposit insurance, have on the financial system in the United States. This is despite the fact that the funds the CIO used to make such fantastic profits for JP Morgan were federally sponsored deposits. This Note describes how the explicit federal safety net, specifically federally sponsored deposit insurance, contributes to the creation of financial instability and, potentially, financial crisis. This Note then analyzes several proposed reforms that could alleviate these problems, and, while continually advocating for increased attention to this issue, ultimately suggests a system of narrow depository institutions to solve it.
One of the most feared events in banking is the cry of systemic risk. It matches the fear of a cry of fire in a crowded theater or other gatherings. But unlike "fire," the term "systemic risk" is less clearly defined. Moreover, unlike fire fighters, who are rarely accused of sparking or spreading rather than extinguishing fires, bank regulators have at times been accused of, albeit unintentionally, contributing to rather than retarding systemic risk. This paper discusses the alternative definitions and sources of systemic risk, reviews briefly the historical evidence of systemic risk in banking, describes how financial markets have traditionally protected themselves from systemic risk, evaluates the regulations adopted by bank regulators to reduce both the probability of systemic risk and the damage caused by it if and when it may occur, and makes recommendations for efficiently curtailing systemic risk in banking. I Systemic Risk
Current discussions about deposit insurance reform center on issues such as the size of insurance premiums, the size of the fund, and the size of the coverage limits-all issues that reflect a concern with how to allocate the losses arising from bank failures. The authors of this article argue that such issues, while important, do not affect the performance of the deposit insurance system nor should they be the focus of deposit insurance reform. They suggest that reform efforts should be directed toward strengthening the incentives to enforce the least cost resolution provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). ; The authors make the case that the large losses the FDIC has borne with some bank failures were due to supervisory forbearance. They suggest that a useful step forward would be to carry out FDICIA's mandate to develop and implement market value-type disclosures of the value of banks' assets and liabilities. Increasing the transparency of bank risk taking, as academics have long argued, would improve regulators' ability to monitor bank risk exposure. These reforms, combined with a different approach to risk-based premiums and measures to strengthen market discipline, such as expanded use of subordinated debt, merit further consideration as potential partial solutions to the problem of implementing FDICIA.
Big Banks to Pay Larger Share of FDIC Levy; Fees to Replenish Fund Altered After Protest by Small Institutions
- Binyamin Appelbaum
Appelbaum, Binyamin, "Big Banks to Pay Larger Share of FDIC Levy; Fees to Replenish Fund
Altered After Protest by Small Institutions," Washington Post, May 23, 2009.
Assessment to Penalize Large Banks; FDIC Proposes New Method Based on Assets, Not Deposits
- Joe Adler
Adler, Joe, "Assessment to Penalize Large Banks; FDIC Proposes New Method Based on Assets,
Not Deposits," American Banker, May 20, 2009.
Memorandum to the Board of Directors on the subject of Special Assessment, Restoration Plan and Proposal for Maintaining Fund Liquidity FDIC Proposes Banks Prepay Deposit Fees Through 2012
- Arthur Murton
Murton, Arthur, " Memorandum to the Board of Directors on the subject of Special Assessment,
Restoration Plan and Proposal for Maintaining Fund Liquidity ", FDIC, September 28, 2009.
" FDIC Proposes Banks Prepay Deposit Fees Through 2012, " www.bloomberg.com, by Alison
Vekshin, September 29, 2009.
What Is Systemic Risk and Do Bank Regulators Retard or Contribute to It? The Independent Review FDIC Adopts Final Rule Imposing a Special Assessment on Insured Depository Institutions
- George G Kaufman
- Kenneth E Scott
Kaufman, George G. and Kenneth E. Scott, " What Is Systemic Risk and Do Bank Regulators
Retard or Contribute to It? " The Independent Review, Winter 2003.
" FDIC Adopts Final Rule Imposing a Special Assessment on Insured Depository Institutions, "
Press release, May 22, 2009, www.fdic.gov/news/news/press/2009/pr09074.html.
The FDIC"s Special Assessment: Basing Deposit Insurance on Assets Instead of Deposits
- Peter Kim
Kim, Peter, "The FDIC"s Special Assessment: Basing Deposit Insurance on Assets Instead of
Deposits," North Carolina Banking Institute, February 10, 2010.
Federal Reserve Bank of Atlanta, Economic Review, First Quarter
- Robert A Eisenbeis
- Larry D Wall
Eisenbeis, Robert A. and Larry D. Wall, "Reforming Deposit Insurance and FDICIA," Federal
Reserve Bank of Atlanta, Economic Review, First Quarter 2002.
Memorandum to the Board of Directors on the subject of Special Assessment, Restoration Plan and Proposal for Maintaining Fund Liquidity
- Arthur Murton
Murton, Arthur, "Memorandum to the Board of Directors on the subject of Special Assessment,
Restoration Plan and Proposal for Maintaining Fund Liquidity", FDIC, September 28, 2009.
"FDIC Proposes Banks Prepay Deposit Fees Through 2012," www.bloomberg.com, by Alison
Vekshin, September 29, 2009.
State Street
$70,410,803
$21,083,648
$49,327,155
s Guide for the Uniform Bank Performance Report, Federal Financial Institutions Examination Council, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency
- A User
A User"s Guide for the Uniform Bank Performance Report, Federal Financial Institutions
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Insurance Corporation, Office of the Comptroller of the Currency, December 2009.