The FDIC appears to have caught its own viral strain of March Madness. The emergency “special” deposit insurance assessment announced this month calls to mind a famous comment about the NCAA attributed to Jerry Tarkanian, former basketball coach at the University of Nevada Las Vegas. The controversial Tarkanian, a perpetual thorn in the side of the NCAA, is said to have commented that the governing body was so mad at the University of Kentucky that it put little UNLV on probation. Kentucky is a college basketball powerhouse and is the sports version of “too big to fail.”
The implication was that it’s 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 business — exactly what the President wants. Why would the FDIC undermine community banks’ ability to make loans by proposing a 20 basis-point special assessment to recapitalize the Deposit Insurance Fund on top of the staggeringly high increases already imposed for FDIC premiums? One banker I spoke with has seen his FDIC premiums jump from $325,000 per year to more than $3,000,000 — and that was before the emergency assessment!
Rolling back to 10 basis points and permanently increasing to $100 billion the FDIC’s authority to borrow from the Treasury, as proposed legislation would do, isn’t enough. Even a 10 basis-point special assessment could have a devastating impact on bank earnings. One worried CEO estimates the additional cost to be $7,000,000 at 10 basis points. This on top of $11,400,000 in FDIC premiums and special insurance on DDA and NOW accounts he already has to pay for 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 capable of making responsible loans.
Why does the government not get this? I suspect it’s because Wall Street is in the process of moving to Washington. Several recent nominees to vacant senior positions 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. It’s just one more indicator of the lack of sensitivity to the needs of America’s 8,000-plus community banks.
The fact that the special assessment was considered in the first place should probably come as no surprise. Community bankers have already been hit with the write-down of preferred stock in Fannie Mae and Freddie Mac, investments that were deemed reliably safe for smaller banks. The SEC is still resisting calls to suspend the mark-to-market rules that force banks to write down their assets. And now that customers have been educated that their insured deposits will not evaporate like their investments have, they are moving their funds back to the too-big-to-fail institutions as extra assurance that the government will make them whole. How much more can community bankers take?
The FDIC has alternatives for recharging 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 positive steps include reinstating a cap on deposits to keep banks from growing too dangerously large and differentiating community banks from mega-institutions when reforming the bank regulatory system.
Most immediately, FDIC should back away from the special assessment now before it is too late to keep community banks in the game they play better than anyone else.