Sleeper deposit-insurance cost for big U.S. banks gaining steam

November 20, 2009

A California National Bank branch employee posts notices that the bank has been taken over, near the bank's ATM machine in suburban Los Angeles October 30, 2009. U.S. authorities seized nine failed banks, including Los Angeles-based California National Bank, that day, the most in a single day since the financial crisis began and the latest stark sign that substantial parts of the nation's banking industry are being crippled by bad loans. REUTERS/Fred Prouser   By Karey Wutkowski
WASHINGTON, Nov 20 (Reuters) – As the biggest U.S. banks clamor to defeat Congressional measures that could break up their firms or slap a big tax on their transactions, another costly proposal is quietly gaining steam.

A key House of Representatives panel this week agreed to include in a broader financial reform bill a measure that would force big banks to pay more of the fees the government collects for deposit insurance.

The amendment did garner some Republican opposition within the House Financial Services Committee, but grabbed relatively little attention on its way to being included in the bill.

With bank lobbyists focusing on taking down other proposals — such as an amendment that would let regulators dismantle healthy financial giants — the deposit fee change could slip in without much of a fight. The wide-ranging bill will go to the full committee for a vote as early as Dec. 1.

The provision inserted by Democrat Luis Gutierrez of Illinois would force the largest banks to pay hundreds of millions of dollars more in fees each quarter.

It would follow the model used temporarily by the Federal Deposit Insurance Corp this year when it charged banks a $5.6 billion emergency fee to shore up the deposit insurance fund depleted by more than 120 bank failures so far this year.

The emergency fee shifted the assessment base to a bank’s assets — from deposits — much to the dismay of the largest institutions who say a change is unfair.

Larger lenders such as Bank of America and Wells Fargo pay more under that formula because they have relatively low levels of deposits as part of their assets when
compared with regional banks. About $500 million of the $5.6 billion industrywide emergency fee was shifted to big banks from smaller ones.

At the time of the emergency fee debate in May, Comptroller of the Currency John Dugan called the shift in the assessment burden “perverse.” The FDIC insurance fund was largely drained by smaller banks that failed, said Dugan, whose agency supervises the largest U.S. banks.

FDIC Chairman Sheila Bair countered that notion during
debate, saying that many of the larger institutions did not fail simply because of massive government aid.

The Gutierrez amendment would make that changed formula apply to the FDIC’s regular quarterly assessments.

One financial services lobbyist said the Gutierrez
provision is “under the radar” at this time but is part of the pressure on lawmakers to show they are punishing Wall Street.

“There’s absolutely no question the hunters are out for the big banks,” the lobbyist said, who was not authorized to speak publicly.

Gutierrez himself released a statement this week that
referred to the “wolves on Wall Street.”

Small banks cheered the proposed change, saying it would ensure ‘too-big-to-fail’ firms pay their fair share.

Camden Fine, president of the Independent Community Bankers of America, said on Friday the fee shift “would make the financial system more equitable and hold too-big-to-fail firms — the culprits of our economic woes — accountable for the risks they pose to America’s taxpayers and our nation’s economic system.”

The provision’s future is uncertain.

A full House vote on the broader bill is slated to occur in December, and it is unknown if the change in FDIC insurance fees will get support in the U.S. Senate, which is working on its own version of financial regulation reform legislation.

If each chamber approves reform legislation, Senate and House negotiators must reconcile both versions before sending a final bill to the president to sign into law.

(Editing by James Dalgleish)
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