The Federal Deposit Insurance Corporation (FDIC) announced that major U.S. banks will carry the majority of the expense of replacing a deposit insurance fund depleted of $16 billion by the failure of Silicon Valley Bank and two other lenders, though mid-sized banks will also be on the hook.

The FDIC suggested a “special assessment” tax of 0.125% on uninsured deposits of lenders over $5 billion, based on the amount of uninsured deposits a bank held by the end of 2022, at a board meeting.

While the levy applies to all banks, the regulator estimates that lenders with more than $50 billion in assets will cover over ninety-five percent of the cost.

Banks having no more than five billion in assets will be exempt from the fee. The fee is likely to be paid by 113 banks.

According to Credit Suisse analyst Susan Roth Katzke, the top 14 U.S. lenders will have to pay an estimated $5.8 billion each year, which may reduce earnings per share by a median of 3%.

The fee would be paid over eight quarters commencing in June 2024, but it could be altered as expected insurance fund losses vary. According to FDIC officials, the extended schedule intends to minimise the impact on bank liquidity and is predicted to have a small impact on bank capital.

JPMorgan Chase & Co is expected to pay an annual charge of $1.3 billion, followed by Bank of America Corp at $1.1 billion and Wells Fargo & Co at $898 million. The three banks did not respond to requests for comment.

“This is a higher assessment than we were expecting as the FDIC is seeking to recoup the funds over just two years,” wrote TD Cowen analyst Jaret Seiberg in a research note. “We had expected the agency to spread the payments over at least three years.”

On Thursday, the S&P 500 Banks Index fell 0.6%, while the KBW Regional Banking Index fell more than 2%.

According to the FDIC, the FDIC fund, which protects bank deposits of up to $250,000, stood at $128.2 billion at the end of 2022.

Banks typically pay a quarterly fee to fund the fund, but the FDIC said the extraordinary levy was required to repay the substantial costs paid after Silicon Valley Bank and Signature Bank failed in March. Both banks, which had extraordinarily high amounts of uninsured deposits, folded abruptly when depositors fled due to concerns about their financial soundness. Regulators designated them as crucial to the financial system, allowing the FDIC to backstop all deposits in an effort to halt the spread of the contagion.

This month’s seizure and sale of First Republic Bank to JP Morgan Chase is anticipated to cost the fund another $13 billion.

According to a Reuters analysis based on December data, other regional institutions with significant proportions of uninsured deposits include Comerica Bank, Western Alliance Bank, Zions Bank, and Synovus Financial.

Comerica shares plunged about 7%, Zions Bancorp and Synovus both lost more than 4%, and Western Alliance fell nearly 1%. Requests for comment were not immediately returned by the banks.

The FDIC has discretion to create the fee under law, and FDIC Chairman Martin Gruenberg stated on Thursday that the plan targets individuals who profited the 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 initiatives were praised by the Independent Community Bankers of America (ICBA), Washington’s leading small bank lobbying group.

“Community banks should not have to bear any financial responsibility for losses to the Deposit Insurance Fund caused by the miscalculations and speculative practices of large financial institutions,” ICBA CEO Rebeca Romero Rainey said in a statement.

The FDIC board endorsed the suggestion on a partisan basis on Thursday, with three Democratic board members supporting it and two Republican board members voting no, disputing that the banks on the hook for having to pay the greatest amount were usually the biggest beneficiaries of the the flight to safety following SVB’s collapse. The agency will now seek opinions from the banking industry and the general public before finalising the new fee.

According to Sieberg of TD Cowen, the dissenters’ arguments would essentially remove the global systemically important institutions from the special examination.

“We do not see that as politically viable,” Sieberg said.

(Adapted from Nasdaq.com)

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