hypocritexposer
Well-known member
The Federal Deposit Insurance Corporation (FDIC), the very organization created to guarantee deposits against bank runs and failures, is instead about to guarantee that their services are in greater demand. They're doing this by requiring all banks, large and small, to pay a one time charge of 20 cents per $100 of deposits (aka 20 "basis points"). In the process, this unbudgeted expense will likely cause some otherwise stable and profitable smaller banks to fail while larger banks, with the assistance of federal TARP funds, will likely be able to survive.
The FDIC is a federally-chartered insurance company, and as such they charge their member banks a fee to provide deposit insurance. In the 2007-2008 federal fiscal year, the insurance charges ranged from five to 43 basis points, with an industry average of 6.3 basis points. As of April 1, however, the FDIC not only increased their rates to between seven and 77.5 basis points, but they also significantly changed the method by which banks are categorized according to risk. The rates paid by banks increased dramatically for nearly all risk categories, with some increasing over 100%. The worst increase was from 10 basis points to a maximum of 43, an increase of 330%.
The bigger deal is that the FDIC has chosen to implement a 20 basis point "special assessment" charge specifically to increase their own monetary reserves and to ensure that the public has confidence in the FDIC. In addition, the FDIC Board has given themselves the option to add an additional 10 basis points atop the first 20 if they feel that additional confidence-building measures are required. These special assessments were not in the proposed rule published in October of 2008, and as such the banks would not have been able to prepare and budget for the increased costs of keeping the FDIC financially solvent.
What's perhaps the most devastating, however, is that the entire amount is due by the end of September and the final rule was only announced in March, giving banks only two full quarters in which to make enough money to cover their special assessment charge.
So what does this all mean? It means that the largest banks in the industry, banks like JPMorgan Chase and Bank of America, banks that are "too big to fail," will feel little pain from the FDIC special assessment. The Treasury has already decided that these large banks will not collapse, and so the banks will be given (or have already been given) the billions of dollars needed to pay their portion of the FDIC special assessment. And so money will leave the Treasury, go trough the bank, and then come back to another part of the Treasury Department, the FDIC. Smaller banks, on the other hand, will be forced to take lower profits, cut staff, and close branches in order to afford the special assessment. In extreme cases, the special assessment designed to help keep banks alive may even force some to close their doors.
While the biggest banks will be propped up, smaller banks that are more financially sound will become less so. Added to the fact that these very same banks were were forced to take TARP money order to spread out expected Treasury losses from the bailout and we have a situation that will ultimately result in the failure of more small community banks that could have survived before the FDIC's special assessment.
http://nearing.newsvine.com/_news/2009/05/04/2775021-fdic-screws-community-banks-only-the-too-big-to-fail-will-survive