After disclosing that banks lost $26.2 billion in fourth quarter of 2008 and the deposit insurance fund (DIF) declined by $16 billion to $19 billion, the Federal Deposit Insurance Corp. last week "took action to ensure the continued strength of the [deposit] insurance fund by imposing a special assessment on insured institutions of 20 basis points, implementing changes to the risk-based assessment system, and setting rates beginning the second quarter of 2009." The FDIC's release says, "The amended restoration plan was accompanied by a final rule that sets assessment rates and makes adjustments that improve how the assessment system differentiates for risk. Currently, most banks ... pay anywhere from 12 cents per $100 of deposits to 14 cents per $100 for insurance. Under the final rule, banks in this [best risk] category will pay initial base rates ranging from 12 cents per $100 to 16 cents."
In their latest weekly "Short-Term Fixed Income," J.P. Morgan Securities analysts Alex Roever and Cie-Jai Brown, in a section entitled, "Assessing the FDIC's 'gift'," comment on the charges. "Although that doesn't sound like much for deposit insurance, a couple of basis points on trillions of dollars adds up fast. In addition, there are other insurance-related fees that banks must bear such as the surcharge for non-interest bearing accounts, now fully covered under the TLGP, without regard to deposit size. Although amounts will vary by institution, higher-quality banks will likely pay insurance premiums on interest-bearing deposits of 13-18bp, and on non-interest bearing accounts of 23-28bp. This does not include the proposed special assessments," they say.
Roever and Brown continue, "As they are not charitable institutions, banks are passing some or all of these fees back to their customers. As a result, a depositor with a non-interest-bearing bank account actually 'earns' a negative interest rate, meaning they get back less than they put in. This dynamic goes a long way toward explaining why, in spite of expanded insurance coverage, US commercial bank deposits have only grown about 7% since the time of the Lehman Brothers bankruptcy, in spite of what are likely the most volatile credit and equity markets in recorded history. At the same time, alternatives like money market funds have seen, and continue to see, significant growth in assets under management. From the start of this year through February 18 (the most recent Fed data on deposits) AuM at taxable money funds grew almost $64bn, while deposits increased only about $36bn over the same period."
They conclude, "German speakers among you may recall the German word for 'gift' translates into the English word for 'poison'. Rising insurance assessments, to a degree, are poisoning the competitive position of US bank and savings institution deposits. The high cost of deposit insurance is pushing cash in the direction of market based alternatives like money market funds, repurchase agreements, and other money market instruments. Even with net yields on most money funds well inside of one percent (and falling), funds continue to offer better returns than some common forms of bank deposits. Coming into 2009 we expected money funds to suffer competitively versus insured bank deposits. However, the high-and-rising cost of deposit insurance seems to be shifting the competitive landscape in favor of funds and other market-based alternatives."
