Major US banks must pay billions to fill up failure funds

May 11 (Reuters) – Big U.S. lenders will bear most of the cost of replenishing a deposit insurance fund that was drained of $16 billion in the collapse of Silicon Valley Bank and two other lenders, although mid-sized banks will also be on the hook, it said Federal Deposit Insurance Corporation (FDIC) on Thursday.

The banking regulator will apply a “special assessment” fee of 0.125% to uninsured deposits from lenders above $5 billion, based on the amount of uninsured deposits a bank had at the end of 2022, the FDIC proposed at a board meeting.

While the fee applies to all banks, in practice lenders with more than $50 billion in assets will cover over 95% of the cost, the agency said. Banks with less than $5 billion in assets would pay no fee. Around 113 banks are expected to pay the fee.

The top 14 U.S. lenders will have to pay out an estimated $5.8 billion a year, which could erode their earnings per share by a median 3%, Credit Suisse analyst Susan Roth Katzke wrote in a report.

The fee will be collected over eight quarters from and including June 2024, but can be adjusted as estimated losses to the insurance fund change. The extended timeline aims to minimize the impact on bank liquidity and is expected to have a negligible impact on bank capital, according to FDIC officials.

JPMorgan Chase & Co ( JPM.N ) is expected to pay an estimated annual fee of $1.3 billion, followed by $1.1 billion for Bank of America Corp ( BAC.N ) and $898 million for Wells Fargo & Co ( WFC.N). The three banks declined to comment.

“This is a higher rating than we expected as the FDIC seeks to recoup the money over just two years,” TD Cowen analyst Jaret Seiberg wrote in a research note. “We had expected the agency to spread the payments over at least three years.”

The S&P 500 Banks Index (.SPXBK) fell 0.6% on Thursday, while the KBW Regional Banking Index (.KRX) fell more than 2%.

The FDIC fund, which guarantees customers’ bank deposits of up to $250,000, stood at $128.2 billion at the end of 2022, according to the FDIC.

Banks typically pay a quarterly fee to fund the fund, but the FDIC said the special fee was needed to cover large costs it incurred after Silicon Valley Bank and Signature Bank failed in March. Both banks, which had extremely high levels of uninsured deposits, failed abruptly after depositors fled amid concerns about their financial health. Regulators declared them critical to the financial system, allowing the FDIC to freeze all deposits in an attempt to stem the spread of contagion.

The seizure of First Republic Bank and its sale to JP Morgan Chase this month is expected to cost the fund another $13 billion.

Other regional lenders with high shares of uninsured deposits include Comerica Bank ( CMA.N ), Western Alliance Bank ( WAL.N ), Zions Bank ( ZION.O ) and Synovus Financial ( SNV.N ), according to a recent Reuters analysis. month based on December data.

Comerica shares fell nearly 7%, Zions Bancorp and Synovus both fell more than 4%, while Western Alliance fell nearly 1%. The banks did not immediately respond to requests for comment.

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Under the law, the FDIC has discretion over the design of the fee, and FDIC Chairman Martin Gruenberg said Thursday that the proposal targets those who benefited most from the backstop.

“In general, large banks with large amounts of uninsured deposits benefited the most from the systemic risk provision,” he said in a statement.

The Independent Community Bankers of America (ICBA), Washington’s top lobbying group for small banks, applauded the plans.

“Community banks should not have to bear any financial responsibility for losses to the deposit insurance fund caused by miscalculations and speculative practices by large financial institutions,” ICBA CEO Rebeca Romero Rainey said in a statement.

The FDIC board approved the proposal Thursday along partisan lines, with its three Democratic board members supporting it and its two Republican members voting no, arguing that the banks on track to pay the most were generally the biggest beneficiaries of the flight to safety after SVB’s collapse. The agency will now seek feedback from the banking industry and the public, before finally finalizing the new fee.

TD Cowens Sieberg said he did not see the dissenters’ arguments as winning, as it would effectively exempt the global systemically important banks from the special assessment.

“We don’t see it as politically viable,” Sieberg said.

Reporting by Niket Nishant in Bengaluru; Editing by Anil D’Silva

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