Magazine article American Banker

Time to End Big Brokerage Firms' Free Ride in Deposit Insurance

Magazine article American Banker

Time to End Big Brokerage Firms' Free Ride in Deposit Insurance

Article excerpt

Our deposit insurance fund is facing a problem that could force all bankers to pay dearly.

Extremely rapid growth in insured deposits at just a few banks owned by major securities firms threatens the reserve ratio. For example, Merrill Lynch has shifted more than $50 billion into its banks insured by the Bank Insurance Fund since last year, effectively reducing the BIF reserve ratio by more than 3 basis points.

These big institutions are free-riding on the backs of all the banks that have paid into the insurance funds. Basic fairness dictates that since we've paid our own way, the big houses should too.

Excessive growth could cause the BIF reserve ratio to fall below 1.25%, especially if there are unexpected failures. Under current law, if the fund falls below that ratio and is not recapitalized within a year, the Federal Deposit Insurance Corp. would charge all banks a 23-basis-point premium. A bank with $100 million in deposits would have a $230,000 assessment. We all remember how painful that premium level was in the 1990s.

America's Community Bankers supports the risk-based approach to pricing insurance. But we strongly oppose dividing the 1A category into three units, with the imposition of premiums ranging from 1 basis point to 6 basis points on the highest-rated institutions. As long as the funds' reserves are above the designated reserve ratio, there is no valid reason why these well-capitalized, well-managed banks should pay a premium to a well-funded insurance fund.

The FDIC's recommended approach offers no immediate resolution to the problem of the free riders. …

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