WSJ Hits Mark on Deposit Insurance

A September 1 Wall Stree Journal commentary on the FDIC insurance fund is right on the mark. On the one hand, the government encourages our 8000 small banks to raise capital and make loans. With the other hand, they take away our profits with higher DIF fees and special assessments that have raised our FDIC contributions 500% over 2007 levels, all this to pay for the sins of the big banks (who typically finance their assets with about 25% domestic deposits compared to roughly 100% for small banks). The large banks must pay for their bad behavior, not small banks. In the future, DIF charges should be based on assets, not core deposits (it’s the assets that produce deposit losses), and should rise with bank size and asset complexity (e.g. rising risk to deposits). In the meantime, current and prospective charges reduce profits, making it harder to raise capital and make loans. Ultimately, all banks must make the fund whole again, but in the near-term, FDIC should use a Treasury loan (why not? everyone else has, including the big banks) to provide resolution funding and reduce the burden on the Main Street banking system so we can restore profitability and lending more quickly.

William Dunkelberg, Chairman, Liberty Bell Bank, New Jersey

An added thought, not included in my letter: discussions about capital adequacy to support lending or other asset acquisition) makes no sense absent a discussion about risk. The adequacy of capital depends on the risks taken on the asset side of the balance sheet. And what community bank can issue government insured debt or borrow with an implicit government guarantee against failure at low rates or “permanently” borrow Federal Funds to finance assets? These big banks are cashing in while small banks give up earnings, even capital, to pay for their sins.