4/13/2010

Risky banks should pay a higher deposit insurance premium, but the rate shouldn't be based on bank size

The question is whether the insurance premium per dollar deposited should vary with the size of the bank. Obviously the premium should vary with risk (whatever its cause), but there shouldn't be an additional higher insurance premium per dollar deposited based on the size of the bank.

Regulating bank size through the back door.

Some of the largest U.S. banks would have to pay higher government fees under a proposal that federal regulators are considering to discourage risky behavior by big financial institutions.

The Federal Deposit Insurance Corp.'s five-member board approved a preliminary proposal Tuesday that would alter the way the agency assesses deposit-insurance fees for banks with more than $10 billion in assets.

Regulators would use new financial measures to gauge a bank's risk profile and how the bank would deal with financial stresses. Those determined to be more risky, or which would cost the FDIC more if they were to fail, would have to pay more to the government.

Additionally, the proposal would allow the FDIC to take a special look at "highly complex" financial institutions: those with more than $50 billion in assets and holding company assets of more than $500 billion. FDIC staff said these firms, which number less than 10, would be subject to additional risk evaluations given the nature of their business.

The proposed change wouldn't result in the FDIC receiving more money but would shift the burden for funding the deposit-insurance fund to riskier, large institutions. FDIC staff said if it had been in place at the end of 2009, roughly half of large banks would have paid higher fees, while the other half would have paid less. . . .

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4 Comments:

Blogger Al B. said...

(risk of failure) = (cost of failure) * (probability of failure)

Seems pretty basic. A larger bank will have a higher risk of failure than a smaller bank having the same probability of failure.

So, premiums really should be based, in part, on bank size.

4/13/2010 4:03 PM  
Blogger John Lott said...

Dear Al B:

Sorry, but you are wrong. The insurance premium is per dollar deposited. Larger banks already pay more total.

4/13/2010 4:42 PM  
Blogger Al B. said...

John,

I stand corrected -- unless there is a non-linear relationship between bank size and risk. But I have no idea whether or not this would be so.

The article you quoted seemed to suggest that 'larger' would equate to "highly complex" and therefore potentially riskier, although it didn't come right out and say that "larger means riskier."

4/13/2010 5:10 PM  
Blogger chrisyana leon said...

First Deposit insurance is a system established to protect depositors against the loss of their insured first deposits placed with scheme members in the event the depositors making loss in trades.
…………………………
Deposit Insurance Coverage

2/07/2014 5:11 AM  

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