CNBC report here that mid-sized banks are asking the FDIC for 100% of all deposits with no limit on deposit amounts for the next two years.
According to the Bloomberg report, the group proposed that the expanded insurance program be paid for by the banks themselves by increasing the deposit-insurance assessment on lenders that choose to participate in increased coverage.
The group advocating this is the Mid-sized Bank Coalition of America (MBCA). It states is has over 100 members and indicates the average size is $20 Billion in deposits per bank. That is over $200 Billion in deposits. The current cost of FDIC insurance is between 2.5 and 32 cents per $100 of insured deposits per year based on a five factor ratings of a bank’s “Capital adequacy, asset quality, management, earnings, and liquidity and asset-liability management” (www.federalregister.gov/....).
That is the level for banks that have held FDIC insurance for over 5 years — I would assume that MBCA members would fit in this category.
However, there remains the (remote) possibility of a tremendously adverse shock that not only overwhelms the insurance funds (which, together, now have about $40 billion), but also leaves the economy and the banking system so weak that it becomes unwise to burden the banks too heavily--the proverbial "100-year flood." So, in reality, the taxpayer probably bears some small residual risk. Indeed, it is not obvious to us that reducing the taxpayers' potential exposure all the way to zero is the appropriate goal of policy. In many other spheres (natural disasters, health, etc.), it is taken as axiomatic that the government will serve as the ultimate backstop. Furthermore, reducing taxpayer exposure to zero de facto (as opposed to de jure) is probably unrealistic in any case. As the present electricity crisis in California illustrates, if the problem is big enough, the taxpayer is ultimately on the hook. Finally, as we noted earlier, the macroeconomic externality can justify some taxpayer exposure in extreme cases.
Source: FDIC paper on FDIC insurance reform — 2001: www.fdic.gov/...
That was the 2001 value. Currently, the FDIC has approximately $128 billion in reserves (from Barrons). The FDIC targets are reserve ratio of 2.2% of “estimated insured deposits” as its funds on hand. However, the FDIC reported that its reserves were below the statutory minimum of 1.35 of estimated reserves as of June 202, 2020 (www.fdic.gov/...). Its plan at that time was to increase all deposit insurance rates by 2 basis points (.02%) effective January 1, 2023 (that is reflected in that rates noted above. This was designed to hit the minimum 1.35% by September 30, 2028.
The FDIC Quarterly Report from Fourth Quarter, 2022 (www.fdic.gov/...) indicates that the FDIC has a reserve of $128.2 Billion, a ratio of 1.27% of estimated insured deposits. This indicates that the current insured deposits held in US banks is approximately $10,1 Trillion dollars. That is a lot of money.
So, what this means is:
1. The FDIC has an obligation to increase its reserves over $20 billion dollars by 2028 to be in compliance with federal law.
2. The addition of the MBCA request would increase the shortfall in the FDIC reserves by $2.7 Billion (about the amount that the FDIC has been adding per quarter in 2022)
3. The average MBCA member bank would have an exposure of 20% of the existing FDIC reserve if it failed.
BUT — SVB had about $175 Billion in deposits. Now it looks like up to $45 billion of deposits was pulled out in the run. That means that somewhere over $130 Billion in deposits are exposed to FDIC coverage (since the FDIC stepped in to cover 100% of deposits).
This means, technically, that amount of deposits that the FDIC is exposed to exceeds the total reserves. That is not likely to be the total the FDIC exposure in the end.
But this does mean that between SVB and MBCA, the FDIC reserves exposure will be stretched significantly. The appropriate response would be for the FDIC to increase the bank insurance cost.
That would have worked two years ago when rates were low and banks were printing money. But with rate increases and lending slowing, this may be difficult.
This is a very long way of saying that the MBCA request , in my mind, significantly increases the risk that taxpayers could end up holding the bag on poor management at the MBCA members.
I think this is would have been a Katie Porter whiteboard moment in the last Congress. Not sure how this gets done (Senator Warren — is this your turn now?) but the numbers say the FDIC needs to increase reserves and quickly to keep taxpayers off the hook.