A change in the way banks are assessed for federal deposit insurance means that small community banks will pay dramatically less in fees beginning next year. But customers of big banks may still be better off than clients of their smaller rivals.
The five-member board of the Federal Deposit Insurance Corp. voted Tuesday to implement a new fee structure that was mandated in the Dodd-Frank financial reform bill adopted in July.
Under the rule change, which has now gone out for 45 days of comments before being adopted, the FDIC insurance assessment will be based on a bank's total assets, not domestic deposits as in the past.
A New Formula
For small banks, whose deposits are roughly the same size as their liabilities – about 85% of assets, according to an industry analysis -- their fee base will not change, but the rate will be reduced by about 30%. But big banks like JP Morgan (JPM), Bank of America (BAC), and Citigroup (C), whose assets are much larger than their deposits, will now be paying much more.
Chris Cole, senior regulatory counsel for the Independent Community Bankers of America, a Washington, D.C.-based trade association of small banks, says his members expect to pay 30-40% less in FDIC fees when the new rule takes effect April 1.
So does that mean customers at small banks will reap a windfall not available to big bank customers? Not really.
"I think you may see some fee reductions as result of the rule, but for community banks there is not a whole lot of fee income," Cole says. Overdraft charges could come down, he says.
Most small banks earn their income on the yield spread between what they pay depositors and what they lend the money for, such as mortgages and consumer loans. So the fee reductions will mean "more money available for loans," but not much in the way of lower costs to customers.
A New Interest in Deposits
At bigger banks, the impact is less clear, according to Peter Garuccio, spokesman for the American Bankers Association. The effect of the new rule will be to change the incentive structure for large banks with over $100 billion in assets.
Under the old system, with the assessment based on deposits, it was expensive for banks to hold a lot of deposits. But if the big banks are now assessed on assets instead of liabilities, "it creates an incentive to go after deposits,"" Garuccio says. That means big banks will start paying their customers higher interest rates on their bank accounts to attract new business.
"If you're a bigger institution and you're more nimble and have multiple revenue streams vis a vis your smaller competitors, you may be able to offer interest rates to depositors at very attractive rates that smaller banks just can't do," he says.
Cole says that while this is a concern, smaller banks operate in market niches that give them a competitive advantage and tend to know their local markets better.
Another perverse outcome of the new rates may be that big banks will change the way they do business to avoid paying more.
If international business is now taken into account in assessing the FDIC insurance fees, for example, the large banks may decide simply to spin off their foreign operations and pay the local assessment fees in those markets. That way they will avoid being included in the biggest bank category, which pays the highest fees, and that will mean reduced income to the FDIC rather than an increase.
Large banks opposed the fee change on the grounds that it is overwhelmingly small banks that become insolvent, although one large bank, IndyMac, was seized by regulators in 2008. In contrast, there have been 141 small bank failures this year, surpassing last year's problems.