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July 21, 2023

FDIC Must Ensure Large Banks Pay for the Losses Resulting from Recent Bank Failures

Better Markets filed a comment letter with the Federal Deposit Insurance Corporation (FDIC) in response to the agency’s proposed rule for special assessments to recover losses resulting from the protection of uninsured depositors at the failed Silicon Valley Bank and Signature Bank.

Why It Matters. Once again large, systemically significant banks caused and benefited from a banking crisis. Those banks caused the credit contraction, depositor flight, increased cost of funding, contagion, and the loss of $18.5 billion to the FDIC’s Deposit Insurance Fund (DIF), and Wall Street’s biggest banks benefited from the belief that they, unlike community banks, are government-supported too-big-to-fail banks. As a result, Main Street families, businesses, and community banks – the innocent victims of the failures of Silicon Valley Bank and Signature Bank – were harmed.

What We Said. The FDIC should not make community banks contribute one penny of the $18.5 billion to replenish the DIF as required by law. That loss should be fully paid by the large banks, who greatly benefited from the undeserved windfall of deposits following the bank failures in March. That’s one of the reasons large banks are experiencing near record profits and continue to fund enormous dividends and stock buybacks. In stark contrast, community banks suffered from the outflow of deposits which is causing lower profits, higher costs, and slower economic growth in the local Main Street markets they support. The Federal Deposit Insurance Act (FDI Act) provides the FDIC with authority to impose a special assessment to recover losses to the DIF when there is a systemic risk determination as was the case with Silicon Valley Bank and Signature Bank. The special assessment is imposed on a specific subset of banks to recover losses to the DIF, rather than the normal process that allocates the assessment across the entire banking industry. Entities that benefit from the government’s assistance, in this case the large banks, must be held responsible for paying the entire special assessment.

Bottom Line. The largest banks can and should replenish the DIF in one year. The banking industry is reporting near record profits. There is no evidence of a liquidity problem or credit crunch, and the largest banks continue to fund enormous dividends and stock buybacks. Furthermore, 11 of the nation’s largest banks conditionally deposited a combined $30 billion (far more than the proposed amount of the special assessment) to try to save First Republic Bank in March.  These same institutions should be even more willing and able to replenish the DIF, which supports the entire banking industry. Furthermore, the fact that the DIF is already in a Restoration Plan and the fact that the longer the DIF is without the lost funds, the less interest income it earns, unquestionably supports the faster repayment period.

Read the letter here or click the button below.

Comment Letters

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