The FDIC board decision on Oct. 18 to raise deposit insurance premium assessments beginning first quarter 2023 is disappointing on at least three counts:
First, the agency is on track to reach its legally-mandated coverage ratio of 1.35 percent by September 2028 without any increase in rates. In fact, with deposits now flowing out of the banking system, the coverage ratio is rising. Insured deposits at U.S. banks declined at a 2.8 percent annual rate in the second quarter. While deposits typically decline in the second quarter, this year’s decline substantially surpassed the average over the past two decades of 1.7 percent.
Second, the FDIC remains committed to a designated reserve ratio of 2 percent. This is an arbitrary coverage level the board has targeted since 2010. In the current inflationary environment, the FDIC should slow down its pursuit of this target. It is more important to keep funds available for lending at banks than it is to shore up a healthy deposit insurance fund that is meeting its legal coverage obligations. Many bankers would argue they are already over-reserved (thanks to CECL) on their loan portfolio; they really can’t get too excited about also over-reserving on deposit insurance at the industry level.
And third, why are community banks included in this rate increase at all? I would argue the FDIC could exempt all small banks (which the FDIC identifies for assessment purposes as any institution with less than $10 billion in assets) from this 2-basis point increase and still meet its goals. Banks with more than $10 billion in assets would provide sufficient new revenue to build reserves, and proportionally that cost would be less noticeable at these larger banks than they would be at smaller banks. In the case of many smaller banks, say those with $500 million in assets or less, any increase in deposit insurance premiums could have an impact on their ability to lend. It is a mistake to curtail lending for the sake of being too aggressive on deposit insurance coverage.
Keep in mind, the coverage ratio for the Deposit Insurance Fund currently stands at 1.26 percent, which is up from 1.23 percent from the first quarter. The coverage ratio is increasing under current economic conditions, making it difficult to argue that a premium rate hike is really necessary.