Change In FDIC Charge To Benefit Local Banks, But Still Too Little Policy To Prevent Them Going Bust

(MoneyWatch)  Now big banks will be forced to pay higher insurance premiums than smaller ones in order to guarantee deposits. Banks will be required to pay a one-time cost of 5 cents per $100 of assets vs. a previously mandated cost of 20 cents per every $100 of deposits. That benefits smaller banks with less assets vs. their deposit bases considerably.

The one-time charge was introduced as an increasing number of bank failures are draining the coffers of the Federal Deposit Insurance Corporation, which guarantees bank deposits against loss caused by freak events such as bankruptcies.

The charge metrics were changed after smaller banks complained that they were being unfairly penalized as a result of big bank failures. In fact, however, it's the smaller, regional banks which are suffering the most bankruptcies right now, as was pointed out here at BNET recently.


Then again, the regional banks are already showing signs of being penalized by TARP regulations and stress tests, as they struggle to come up with the requisite capital to satisfy federal regulators. That is because investors would much rather put their money in a big bank which has taken billions in bailout funds than they would in a regional one which is more or less the victim of the local economy.

In the latest development, two Illinois banks were seized by federal regulators Friday, pushing the toll of failed U.S. lenders to 36 in 2009.

Whichever way you cut it, all of this news merely compounds to a point I made last week about the changing face of the U.S. banking industry. While the credit kabuki may have been caused primarily by large, national banks, it's those same institutions that will probably end up benefiting the most when the economy comes out of the mess the other side.

Being in the spotlight of the nation, big banks have been reinforced with multi-billion dollar government loans, carefully handled to ensure that capital requirements reasonably suit earnings expectations, and that accounting changes are made to fulfill that requirement. On the other hand, small, regional banks are less politically sensitive and the evidence seems to be that they have duly been dealt with a little less delicately.

The FDIC rule change is fair, but it's nowhere near enough to prevent local banks suffering disproportionately to national ones. The U.S. is still headed towards an overwhelmingly monopolized banking sector.



Related Reading at BNET:

• Guaranty May Follow In Bank United's Private Equity Bankruptcy Fire-Sale
• Stress Tests & TARP Funds May Be Penalizing Local Banks
• FASB Lets Banks Mark to Myth, Not Mark to Market
• FASB Change Doesn't Ease the Fair Value Rule
• FASB Roundup: Mark-to-Market, Or Cash For Trash?