[Update 1: Adds comment from The Clearing House Association] Banks that take more risk with their investments will be forced to pay more in insurance costs to the Federal Deposit Insurance Corp., according to rules finalized on Monday. Under the Dodd-Frank Act, the FDIC was required to revise how banks are charged for payments into the deposit insurance fund for failed institutions. The regulator proposed new rules in November 2010 to eliminate its reliance on debt issuer ratings and make their assessment more forward-looking. As of the end of the third quarter of 2010, the fund stood at a negative $8 billion, which is narrower than the negative $15.2 billion a year ago. The final rule, which takes affect April 1, bases that assessment on what the banks hold in assets minus tangible equity, instead of what they hold in deposits. “By changing the assessment base from deposits to assets minus tangible equity, the act allows the FDIC to charge deposit insurance assessments on secured liabilities, which we have always protected,” FDIC Chairman Sheila Bair said. “The rule should keep the overall amount collected from the industry very close to unchanged, although the amounts that individual institutions pay will be different.” Banks with high-risk assets, less stable balance-sheet liquidity or higher potential loss severity in the event of failure will be charged more. The FDIC said larger institutions that pose a higher risk to the financial system will end up paying more. The Independent Community Bankers of America, a trade group for smaller banks, said under the current system banks with less than $10 billion in assets pay roughly 30% of total FDIC premiums even though they hold 20% of total bank assets. The new rules they said will lower assessments for 98% of these smaller banks and save them roughly $4.5 billion over the next three years. “ICBA led the charge throughout the Wall Street reform debate to create fairness within the deposit insurance system so that Main Street community banks, which are the lifeblood that drive economic stability and prosperity in thousands of communities across the nation, can continue to serve their customers and keep money where it belongs—in the community,” said James MacPhee, ICBA chairman and CEO of Kalamazoo County State Bank, in Kalamazoo, Mich. But The Clearing House Association, the oldest bank association in the country disagrees, saying that the new system will likely increase moral hazard, not reduce it. “Today’s action by the FDIC is disappointing,” said Paul Saltzman, president and general counsel of the group. “It has approved an exceedingly complex deposit insurance fund (DIF) assessment methodology that will increase – not decrease – risk to the DIF and all its stakeholders – large and small banks alike.” Bair said the final rule encourages banks to issue more long-term unsecured debt to lock in low rates and provide more stability to funding. The new rule also changes the assessment rate schedule when it goes into effect in April. The FDIC said the changes would bring the fund back to a positive balance even during periods of large losses. Banks, too, can expect more predictable rates throughout economic cycles. “The financial crisis provided ample evidence of the need to improve the assessment system. The banking industry, the Deposit Insurance Fund and the financial system will benefit from this rule in both the short and long term,” Bair said. Write to Jon Prior. Follow him on Twitter: @JonAPrior
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