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Thursday, March 31, 2011

CBO: Dodd-Frank’s Changes to the FDIC Impose Significant Costs on the Industry

CBO estimated that the increase in the insured deposit limit from $100,000 to $250,000 and raising the minimum reserve ratio from 1.15% to 1.35% in the Dodd-Frank Act will cost the banking industry $15 billion.

These two changes “will require an increase in premiums paid by depository institutions,” according to testimony presented by CBO Director Douglas Elmendorf before the House Oversight and Investigations Subcommittee.

According to the report, the Dodd-Frank Act’s increase of the deposit insurance limit to $250,000 will cost banks and credit unions $9 billion through 2020. Institutions will have to pay larger assessments over an extended period of time to increase the fund’s size to compensate for the higher insured deposit limit.

Additionally, the increase in the reserve ratio from 1.15% to a new minimum of 1.35% will cost larger institutions an additional $6 billion.

Furthermore, the Dodd-Frank Act removed the hard cap on the designated reserve ratio for the deposit insurance fund. The FDIC Board recently set the target size of the fund at minimum of 2% of insured deposits, with the expectation that it would rise above 2.5% – a move that imposes a significant, prolonged assessment burden on the entire industry – which ABA opposed.

Having the fund grow from 1.35% to 2% by the end of 2020 imposes an additional $67 billion assessment burden on the entire industry.

A balanced, thoughtful approach is needed when changing FDIC’s policies, as the associated costs have a direct impact on the economy and local communities that banks serve.

The full cost of the FDIC – including personnel, administrative, examination, and bank failure costs – is borne by the banking industry. These increased costs drain funds from banks that could be used to build capital and support lending to local households and businesses.

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