May 11 (Portal) – Large US lenders will bear the brunt of the cost of replenishing a deposit insurance fund weakened by $16 billion from the collapse of Silicon Valley Bank and two other lenders, although mid-sized banks will also be hit , the Federal Deposit Insurance Corporation (FDIC) announced on Thursday.
Banking regulators will impose a “special valuation fee” of 0.125% on uninsured deposits from lenders over $5 billion based on the amount of uninsured deposits a bank holds at the end of 2022, the FDIC proposed at a board meeting.
While the fee applies to all banks, in practice, lenders with assets in excess of $50 billion would pay over 95% of the cost, the agency said. Banks with less than $5 billion in assets would not pay a fee. Around 113 banks are expected to pay the fee.
The top 14 U.S. lenders spend an estimated $5.8 billion a year, which could eat into their earnings per share by an average of 3%, Credit Suisse analyst Susan Roth Katzke wrote in a report.
The levy would be levied over eight quarters from June 2024, but could be adjusted if the insurance fund’s estimated losses change. The extended schedule is aimed at minimizing the impact on bank liquidity and is expected to have a negligible impact on bank capital, according to FDIC officials.
JPMorgan Chase & Co (JPM.N) is expected to pay an estimated $1.3 billion annual fee, followed by $1.1 billion for Bank of America Corp (BAC.N) and $898 million for Wells Fargo & Co (WFC.N). The three banks declined to comment.
“This is a higher estimate than we expected as the FDIC is looking to recoup the funds in just two years,” wrote Jaret Seiberg, an analyst at TD Cowen, in a research note. “We expected the agency to spread payments over at least three years.”
The S&P 500 Banks Index (.SPXBK) slipped 0.6% on Thursday, while the KBW Regional Banking Index (.KRX) fell more than 2%.
The FDIC fund, which guarantees up to $250,000 in customer bank deposits, was worth $128.2 billion at the end of 2022, according to the FDIC.
Banks typically pay a quarterly fee to fund the fund, but the FDIC said the levy was necessary to cover high costs it incurred after Silicon Valley Bank and Signature Bank failed in March. Both banks, which held extremely high levels of uninsured deposits, failed abruptly after depositors fled fears for their financial health. Regulators declared them critical to the financial system and allowed the FDIC to protect all deposits to prevent the spread of the contagion.
The acquisition of First Republic Bank and its sale to JP Morgan Chase this month is expected to cost that fund an additional $13 billion.
Other regional lenders with a high proportion of uninsured deposits include Comerica Bank (CMA.N), Western Alliance Bank (WAL.N), Zions Bank (ZION.O) and Synovus Financial (SNV.N), according to a Portal – Analysis of last month based on December data.
Comerica’s shares fell nearly 7%, Zions Bancorp and Synovus both fell more than 4%, while Western Alliance slipped nearly 1%. The banks did not immediately respond to requests for comment.
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Under the law, the FDIC has discretion in designing the fee, and FDIC Chairman Martin Grünberg said Thursday the proposal is targeting those who have benefited most from the backstop.
“In general, large banks with large amounts of uninsured deposits benefited the most from the systemic risk determination,” he said in a statement.
The Independent Community Bankers of America (ICBA), Washington’s largest lobby group for small banks, welcomed the plans.
“Community banks should not have to bear financial responsibility for deposit insurance fund losses caused by miscalculations and speculative practices by large financial institutions,” ICBA CEO Rebeca Romero Rainey said in a statement.
The FDIC board approved the proposal Thursday on a partisan basis, with its three Democratic board members supporting it and its two Republican members voting no, on the grounds that the banks that would have to pay the most are generally the biggest beneficiaries of the Escape to safety were The collapse of the SVB. The agency will now seek feedback from the banking industry and the public before finalizing the new fee.
TD Cowen’s Sieberg said he didn’t think the dissenters’ arguments would prevail as it would effectively exempt the world’s systemically important banks from the special review.
“We don’t think that’s politically feasible,” said Sieberg.
Reporting by Niket Nishant in Bengaluru; Edited by Anil D’Silva
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