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FDIC to charge higher premiums for repo use

On April 1 banks will have to start paying Federal Deposit Insurance Corp. premiums on all types of debt including repurchase agreements, not just on domestic deposits.

The switch “will be seismic at the nation’s largest banks, which in some cases will see their assessment base more than double. For example, the base for Citigroup Inc. could increase roughly 240 percent. JPMorgan Chase & Co.’s base could rise nearly 140 percent,” according to the American Banker March 23.

The new rule could reduce bank reliance on repurchase agreements. Alternatively, banks could just move their repos off their books.

From the American Banker:

Observers said large banks may not only shift more of their funding to deposits, but could also opt to move liabilities out of their FDIC-insured subsidiaries and into the holding company.

The purpose of the new assessment, mandated by the Dodd-Frank Act, is to make sure commercial banks pay FDIC premiums commensurate to the risk they pose to the FDIC fund. In the financial crisis of 2007-2008, banks that funded themselves outside of traditional deposits – for example, with repurchase agreements – were the biggest threat to the FDIC fund, but their FDIC premiums did not reflect that threat because the banks paid premiums based only on their domestic deposits, not other liabilities.

Starting next month, the FDIC insurance fund will base its fee on banks’ total liabilities, calculated as assets minus tangible equity (specifically, “average consolidated total assets minus average tangible equity”). Tangible equity is also known as Tier I capital.

Banks will continue to get a favorable adjustment on long-term unsecured debt, which reduces FDIC loss if the bank fails, the FDIC said.

The total amount collected by the FDIC is not expected to change much, as the FDIC is making other adjustments to offset premium increases.  In general, banks that fund themselves from the shadow banking sector, with debt like repurchase agreements, foreign deposits and commercial paper, will pay higher premiums than those that fund themselves with domestic deposits.

Banks do not disclose the dollar amount of their FDIC premium. An expert interviewed by the American Banker estimated FDIC annual premiums for mega-banks under the new rules at $30 million to $1.4 billion.

From the American Banker article:

But as money-center banks have gained more access to a wide variety of funding sources, the new fees are expected to hit them hardest. The FDIC estimates that banks with more than $10 billion of assets will pay 79 percent of the industry’s assessment, compared with 70 percent under the old system. In the aggregate, large institutions could pay as much as 12 percent more. Banks with assets of more than $100 billion will pay 57 percent of the assessment, up from 49 percent. …

To be sure, the vast majority of the industry will likely pay less under the new system, with community banks shouldering less of the deposit insurance burden. The FDIC has said that small institutions in all will pay 30 percent less than before. Moreover, exceptions go both directions, with several larger institutions paying less while a few smaller ones paying more.

Munsell St. Clair, an official in the FDIC’s insurance division, said assessments will be higher at fewer than 100 banks with assets below $10 billion.

 The article does not mention repurchase agreements.

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