All Animals Are Equal
(but some are more equal than others)
When the FDIC was created in 1933, the largest bank in the nation was, ironically, National City Bank (forerunner of Citibank) with $1.2 billion in total assets. At the time it was only on its second taxpayer bailout (recently it got its fourth government bailout). When the FDIC established the current premium assessment formula for banks in 1934, all banks were, in effect, local banks. No single bank or small group of banks dominated the financial services industry. All markets were essentially local.
That was then, this is now. Today, banks under $10 billion in assets hold about 19% of total financial assets in FDIC insured banks, but pay just over 30% of the premiums to support the deposit insurance fund. Why? Well for two primary reasons. First, the premium assessment formula has not changed in 75 years and is still based on domestic deposits only -- which made sense at the time this formula was created, since domestic deposits were about the only funding instrument that existed. Second, because over the past 30 years two distinct banking systems have evolved in this nation - the Main Street Community banks and the Wall Street mega-banking firms. Main Street's primary funding source is still domestic deposits; Wall Street has multiple funding sources of which domestic deposits are only a fraction. Consider this: Citigroup’s entire banking empire relies on domestic deposits for only 27% of its total funding. The typical Main Street community bank relies on domestic deposits for 89% of its total funding.
This situation reminds me of George Orwell’s classic novel Animal Farm. At first, all animals are considered equal, then one morning the animals wake up to find a large sign in the barn yard proclaiming: “All animals are equal, but some animals are more equal than others.” (The sign was posted by a group of animals who believed they were superior to all other animals.)
Orwell was exposing the injustices inherent in a totalitarian system, but over the years his allegory has turned out to be a spot-on description of the damages created by inequities in any system where the rules are based on one group having special status. It’s a devastating depiction of how those in power can persuade others to go against their own self-interest. And it reminds us of the dangers of indifference and failure to act when faced with injustice.
The FDIC’s current assessment formula discriminates against community banks. But we have an opportunity to correct this imbalance. ICBA supports the bill introduced by Rep. Luis Gutierrez (H.R. 2897) that would eliminate the inequality in the assessment formula by broadening the assessment base the FDIC uses to determine insurance premiums. The bill would also require too-big-to-fail financial institutions to pay a systemic-risk premium to the FDIC in addition to their regular FDIC premium.
I cannot understand why every community bank and every state association that represents community banks doesn't get behind the Gutierrez bill; a bill that will provide a significant benefit for over 99% of all community banks. After all, isn't that what our associations are for?
Recently, one non-affiliated state association executive told ICBA that everyone seems to have their own math. Well, ICBA's math comes straight from the FDIC. No obfuscation. No tricks. We use the FDIC as our source. Unfortunately, this state executive withheld his support for the bill, even after we proved to him that all but five of the banks in his state would benefit greatly from a change in the assessment formula. In fact, nationwide, over 8,100 banks will pay lower premiums while only 124 will pay more. Additionally, more than 99% of banks with less than $1B in assets will pay lower premiums using the new assessment base, with 95% saving more than 20% on their premiums. So what is the problem? Why wouldn’t every state association get behind a bill that would benefit over 98% of its member banks?
The Gutierrez bill is about FDIC premium parity, plain and simple. It is about aligning premiums to risk. At present, the very largest “systemically important” banks in our nation are not paying their fair share of FDIC insurance premiums – what they do pay certainly is not in line with the enormous risk they present to the entire banking system.
ICBA is advocating for parity in assessing premiums; the same parity that once existed in this nation before the rise of “too-big-to-fail” or more accurately “more equal than others” banks. We are not asking the largest banks to pay more, we are asking them to pay their fair share.
I hope all community banks and all state bank associations will stand with ICBA in demanding premium parity. Don't let some animals be more equal than all the other animals. We all hold FDIC insured charters, let’s be assessed fairly for the privilege. Send email to Congress supporting Gutierrez bill.