FDIC Rule Changes Would Help Community Banks
The Nov. 9 vote by the board of directors of the FDIC approving two proposed rules amending bank deposit insurance regulations continues the process of leveling the playing field for community banks. The actions of community banks before, during and subsequent to the financial crisis have never warranted their shouldering an unfair burden during the recovery and repair process and the Nov. 9 vote by the FDIC recognizes that fact.
Refined Assessment
The first proposed change addresses the way FDIC insurance premiums are assessed. Currently, all banks’ insurance premiums are assessed based upon the value of that bank’s domestic deposits. A provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act changed that assessment method for the first time since 1935 to one based on asset size rather than domestic deposits. It has been determined that under the current domestic deposit assessment formula, banks with less than $10 billion in assets pay approximately 30 percent of total FDIC premiums, even though they only hold 20 percent of total bank assets.
Updating the formula to reflect asset size will lower assessments for 98 percent of smaller community banks, saving roughly $4.5 billion over the next three years and allow them to reinvest those savings back into their communities. Total premiums received by the FDIC will remain relatively the same, but those larger banks engaged in riskier activities that pose more danger to the economy will pay an amount more proportionate to the risk they pose. It will more fairly assess the mega-banks that attract deposits from non-domestic sources that historically had not been subject to insurance assessment.
The second rule approved by the FDIC would revise the deposit insurance assessment system for large institutions. Concerning this decision, FDIC Chairman Sheila Bair put it in perspective when she said: “Over the long term, institutions that pose higher risk would pay higher assessments when they assume these risks rather than when conditions deteriorate. During the crisis, it became clear that our large bank pricing metrics were lagging indicators of financial deterioration, to a greater extent than the metrics we use for smaller institutions.” Under the second rule as approved, a large financial institution would continue to be defined as an insured depository institution with at least $10 billion in assets.
Local Focus
Community banks have been investing in their communities for generations. Community bank boards of directors are composed entirely of local men and women who advocate prudent lending and provide for homeownership opportunities for their neighbors using common sense underwriting standards. Mortgage delinquency and foreclosure rates have been and continue to be significantly lower at community banks as a result. It is well-documented that community banks were never part of the problem that created the economic crisis but they continue to be part of the solution. They remain financially strong and ready to serve their customers' deposit and lending needs as a result.
As unemployment figures improve and housing prices start to stabilize, the ability of community banks to lend to local customers will be a catalyst for growth. The FDIC’s actions will provide institutions that are invested in their local community greater opportunity to provide help at a most critical time, while ensuring those larger institutions that choose to engage in risky lending activities designed to drive growth in their own balance sheets shoulder the appropriate burden. I commend the FDIC for its actions that will certainly benefit community banks and their customers during the coming years.
Wayne A. Cottle is president and CEO of Franklin-based Dean Bank and national secretary of the Independent Community Bankers of America. He can be reached at wcottle@deanbank.com.
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