FDIC increases insurance rates to banks

This just in from the FDIC – banks will now pay more for FDIC insurance for depositors.  To which I say – Duh!

When you get home insurance in Florida, you’re going to pay more than you would for the same priced home in say, Tennessee.  That’s because Florida is riskier from an insurance perspective because of hurricanes.  The insurer is more likely to have to pay up, so it costs more.  No problem.  That’s the (somewhat) free market system at work.  I say “somewhat” because the insurance industry is heavily regulated by the government.

The problem with FDIC insurance (government sponsored of course, no free market rules apply) is that they charge basically the same rates to everyone.  Here’s a quote from the link above:  Currently, most banks are in the best risk category and pay anywhere from 12 cents per $100 of deposits to 14 cents per $100 for insurance.

The FDIC is adjusting the rates – that’s a good thing – but only slightly: Under the final rule, banks in this category will pay initial base rates ranging from 12 cents per $100 to 16 cents per $100 on an annual basis, beginning on April 1, 2009.

In other words, the new rates will make the riskiest banks pay 16 cents instead of 14 cents per $100 of deposits.  Not much of a change in my opinion.

The FDIC also adopted an interim rule imposing a 20 basis point emergency special assessment on the industry on June 30, 2009. The assessment is to be collected on September 30, 2009. The interim rule would also permit the Board to impose an emergency special assessment after June 30, 2009, of up to 10 basis points if necessary to maintain public confidence in federal deposit insurance.

I’m not sure how much of an additional increase that amounts to, because I don’t know the starting point.  I know 20 basis points is .2%, so it sounds like they mean an additional 2 cents on top of the existing premiums, but I’m guessing at that.

Regardless, raising insurance rates on the riskier banks is a no brainer, and it should have been done years ago.  It makes no fiscal sense to charge the same rate to a technically bankrupt bank like Citi as they charge a fiscally responsible bank.

gk

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