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US banks face new multibillion-dollar hit to bottom line

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By Charbel Kadib
  •  
4 minute read

Banks benefiting from uninsured deposits could bear the burden of a new regulatory levy, set to deliver a two-year blow to earnings.

The Federal Deposit Insurance Corporation (FDIC) has approved a proposal requiring large US banks to pay a new levy, described as a “special assessment”, to cover costs associated with the collapse of Silicon Valley Bank and Signature Bank.

Banks subject to the new levy would be charged at an annual rate of 12.5 basis points over eight quarterly assessment periods.

The FDIC stressed that the “special assessment rate” could be subject to change off the back of any adjustments to the loss estimate, mergers or failures, or amendments to reported estimates of uninsured deposits.

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The FDIC has estimated that of the total cost linked to the collapse of SVB and Signature Bank, approximately US$15.8 billion (AU$23.5 billion) is currently attributable to the protection of uninsured depositors.

According to the FDIC, banks with total assets exceeding US$50 billion (AU$74.6 billion) would pay over 95 per cent of the special assessment, with peer institutions managing less than US$5 billion (AU$7.4 billion) exempt from the levy.

The measure — introduced as part of the Federal Deposit Insurance Act (FDI Act) — would apply to approximately 113 US banks.

“The proposal applies the special assessment to the types of banking organisations that benefited most from the protection of uninsured depositors, while ensuring equitable, transparent, and consistent treatment based on amounts of uninsured deposits,” FDIC chairman Martin J. Gruenberg said.

Mr Gruenberg claimed the proposal also “promotes maintenance of liquidity”, ensuring US banks have enough capital to support the flow of credit.

If the entirety of the special assessment was paid in a single quarter, the levy is estimated to reduce average quarterly bank earnings by 17.5 per cent.

The base for the special assessment is reportedly equal to an insured depository institution’s (IDI’s) estimated uninsured deposits (as of 31 December 2022) — adjusted to exclude the first $5 billion.

The FDIC is expected to commence collecting the levy from 1 January 2024, with the special assessment rate charged over the March quarter.

Banks subject to the levy would be required to make their first payment by 28 June 2024.

FDIC has invited stakeholders to offer feedback on the proposed measure over a two-month consultation period.

The announcement of the new proposal comes just weeks after the collapse of First Republic Bank — the latest US regional bank to fail following a liquidity drain.

First Republic was rescued by US giant JPMorgan, which was selected by the FDIC following a competitive bidding process.

JPMorgan is set to assume full ownership of First Republic’s deposits, assets, and bank branches (84 branches located in eight US states).

This includes:

  • approximately US$173 billion (AU$260.5 billion) of loans;
  • approximately US$30 billion (AU$45 billion) of securities.
  • approximately US$92 billion (AU$138.5 billion) of deposits, including US$30 billion (AU$45 billion) of large bank deposits, which will be repaid post-close or eliminated in consolidation.
The FDIC stressed customers are not required to change their banking relationship in order to retain their deposit insurance coverage (totalling an estimated US$13 billion) up to applicable limits.

The FDIC and JP Morgan Chase Bank have also entered into a loss-share transaction on single family, residential, and commercial loans it purchased from First Republic Bank.

The institutions are set to “share in the losses and potential recoveries” on the loans covered by the loss-share agreement.

This aims to “maximise recoveries” on purchased assets by “keeping them in the private sector”, while also minimising disruptions for loan customers.

Additionally, FDIC has pledged to provide $50 billion (AU$75.2 billion) of five-year, fixed-rate term financing.

US banks face new multibillion-dollar hit to bottom line

Banks benefiting from uninsured deposits could bear the burden of a new regulatory levy, set to deliver a two-year blow to earnings.

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