Banks Worried About FDIC Debt Guarantees

With all the discussion over fed funds, I thought I'd point out this recent American Banker article revealing that many banks are concerned over the 75-basis-point fee the FDIC will start to charge on Nov. 13 for guaranteeing bank debt.

With the fed funds rate at one percent, the fee would almost double the cost of issuing new senior unsecured debt, the banks argue. And opting out of the program, which the FDIC announced last month to help the functioning of interbank markets, is not without consequences: The FDIC has decided to list the names of such banks on its web site.

The most vocal banks appear to be smaller ones who say that the fee will force them to opt out.

"If you leave the assessed fee" at 75 basis points "in the current economic conditions, many smaller banks will opt out," Jim Murphy, a vice president at the $452 million-asset Pacific State Bank in Stockton, Calif., wrote in an Oct. 29 letter. "They may then be at a severe competitive disadvantage in terms of retaining and attracting customers."

You can read other letters sent to the FDIC over the debt-guarantee program here.

Comments

[herbert hoover:]

We could just let the Fed pickup the fees so that banks get a free ride. Better yet, we could just let the banks make the profits and let the government pick up all the expenses.

2008 Nov 11 06:37 PM

[Steven Hansen:]

we continue to have the same problem - transparency. whatever the government or its instrumentalities guarantee - must be made public. the banks if they opt out, need to be fingered.

this whole argument by the banks is silly. they will pay the 75 basis points either to the government, or even more to the parties who buy this debt due to higher risk.

2008 Nov 11 08:29 PM

[SugarDaddy:]

This is all part of the continued erosion process of the smaller banks that all of the big 4-5 banks in the US would like to see happen. The earlier the better, in their minds and greedy pockets.

2008 Nov 11 09:04 PM

[Getridofthe...:]

The 75bp will not end up applying to Fed Funds. For the rest of the senior unsecured, clearly there should be a fee applied for insurance for the program, so complaining banks shouldn't be taken too seriously. Rather than complaining, how about presenting a solution? Hey, that's a neat idea.

Is the flat 75b is sensible? Well of course its not. It's an arbitrary # that will help Sheila replenish her DIF and plucked out of thin air.

The fee should be risk based, not flat rate. FDIC should base the insurance fee on CAMELS ratings and other safety and soundness indicators.

2008 Nov 12 12:45 AM

[Ronald Pires:]

Hmmm ... So the small banks opt out because of price. Except that this puts them at a competitive disadvantage, which in turn leads their share prices lower. And this in an environment where the big boys can't seem to convert to commercial banks fast enough in order to???? Yes, buy little banks.

How nice. If I didn't know better, I'd be tempted to think thay are rigging the game.

2008 Nov 12 07:34 PM