FDIC’s Hill Plans Cuts to Bank Deposit Insurance Fund Fees (1)

The Federal Deposit Insurance Corp. is planning changes that would let banks, especially the largest ones, pay less to the agency’s bedrock insurance fund that protects customer accounts when a lender collapses.

FDIC Chair Travis Hill said Tuesday the agency could cut quarterly insurance assessments for large banks if managers take steps now that would make it easier and thus less costly to wind down the firm if it should ever fail. Banks could qualify for this “resolution readiness adjustment” by showing they could give the FDIC expedited access to their data and internal systems, Hill said during a speech to the US Chamber of Commerce.

Travis Hill

Photographer: Graeme Sloan/Bloomberg

Hill envisions lower fees for both large and small institutions, though the latter group wouldn’t have to deal with the resolution readiness criteria. The goal, he said, is to free up capital.

“We are mindful of the costs of assessments, which, among other costs, effectively take funds away from lending and investing in the real economy and divert them to financing the federal government,” he said.

Separately, Hill also nodded to a push from some lawmakers to increase deposit insurance caps for certain accounts.

“I think if we are talking about reforming deposit insurance, having a new category with a higher cap from a public policy standpoint achieves more than just raising of the cap,” Hill said on Bloomberg Television’s Balance of Power, adding that trying to target a certain category of deposits “makes a lot of sense.”

Looser Rules

President Donald Trump’s top banking regulators have sought to refocus bank supervision on core financial risks and cut rules that discourage lending. Those moves include relaxing how much capital a bank must hold as a buffer against potential losses, narrowing the way examiners can issue warnings to lenders, shrinking a Federal Reserve unit dedicated to oversight and allowing crypto assets into the traditional financial system.

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The Deposit Insurance Fund or DIF is a pool of money managed by the FDIC that’s filled via quarterly fees imposed on banks, which have complained that this crimps their lending and profits. Under Hill’s plan, small banks could see their assessment cut by two basis points. Big banks could get a comparable break if they show they can populate a virtual data room in a short period of time, and/or quickly provide the FDIC with temporary access to third-party service providers and internal systems.

In another change that might benefit private equity firms, Hill said the agency wants to allow capital from outside the banking sector to bid on failed banks to reduce costs to the insurance fund. Plans could include letting a nonbank set up a “shelf charter” that would position the firm to buy a bank after it fails, or letting a nonbank partner with an existing smaller bank to bid on a larger institution. A nonbank could also purchase pools of a failed bank’s assets at the time of failure, Hill said.

“We expect to open the pre-qualification process later this year to additional nonbanks that satisfy certain criteria,” Hill said.

The insurance fund is required by law to meet a reserve ratio of at least 1.35% and sits at 1.43% today, the highest in decades, Hill said. While the agency is keeping its long-term target of 2%, the changes — which haven’t been formally proposed — will slow the pace of reaching that goal, he said.

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The bank regulator is also considering ways to modify its “least-cost” test for resolutions. The FDIC is required to choose the option for selling or winding down a bank that is least costly to the Deposit Insurance Fund in most cases. But regulators can decide to backstop all of a bank’s uninsured depositors if they think there’s a systemic risk.

That’s typically allowed only when large banks fail — like the collapse of Silicon Valley Bank in 2023 — which Hill said creates the perception “of a two-tier deposit insurance regime, where uninsured depositors take losses at small banks but not large banks.” Hill wants the FDIC to be permitted to choose a lesser bid from a rescuer who promises to cover all deposits “when the difference in cost to the DIF is essentially a rounding error in the overall cost of bank resolutions.”

(Updates with details beginning in fifth paragraph.)

--With assistance from Kailey Leinz.

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