Tiny Lenders Bristle Over the $16 Billion Bill for Bank Failures

The collapse of a pair of high-flying banks in Silicon Valley and New York City is rattling lenders as far away as Tupelo, Mississippi.

(Bloomberg) — The collapse of a pair of high-flying banks in Silicon Valley and New York City is rattling lenders as far away as Tupelo, Mississippi. 

When top US regulators put together their plans for recouping the $15.8 billion it cost to protect depositors in the aftermath of the failures of Silicon Valley Bank and Signature Bank, they sought to spare the nation’s smallest lenders from the brunt of the pain. But Renasant Corp., Mississippi’s fourth-largest bank — which can trace its roots back to a bakery in Lee County — is among a chorus of lenders who say more revisions to the proposal are needed.

At the heart of Renasant’s concern is a rule tied to how thousands of banks across the country deal with the deposits they hold on behalf of public entities. Banks usually have to pledge assets to hold these funds, making them more costly to maintain. But here’s the rub: The Federal Deposit Insurance Corp. will still take these deposits into account when determining a bank’s contribution to the Deposit Insurance Fund, swelling the lender’s fee.

“That collateral costs money,” Gordon Fellows, president of the Mississippi Bankers Association, said in an interview. “They’re essentially double charging certain banks.”

‘Double-Charging’ Banks

Under the FDIC’s proposal, lenders’ contributions to the agency’s Deposit Insurance Fund will be based on their estimated levels of uninsured deposits at the end of last year. After the collapse of Silicon Valley Bank and Signature Bank in March, investors began scrutinizing lenders with the biggest share of uninsured deposits, speculating that customers who hold those deposits are more likely to withdraw their money in a crisis because their funds aren’t protected.

But some uninsured deposits are tied to the accounts that banks maintain on behalf of public entities like cities and schools. State law generally requires banks to pledge assets like Treasuries and other securities as collateral to protect those deposits when they exceed $250,000. Smaller banks say they tend to hold a larger proportion of public deposits than their larger rivals.

The FDIC’s decision to include these deposits in its proposed calculations will likely increase the fee smaller banks have to pay. That expense comes in addition to the collateral they’ve already pledged to cover the deposits.

Read more: FDIC Warns Banks Over Errors in Reporting Uninsured Deposits

Take Renasant: The Mississippi bank — based in Elvis Presley’s hometown of Tupelo — estimates its contribution to the FDIC’s fund will be as much as 10% higher if its collateralized deposits are counted as uninsured. The bank has said about $1.4 billion of its $5.3 billion in uninsured deposits at the end of the second quarter are collateralized public funds.

“Our concern is probably more the precedent this sets,” Kevin Chapman, Renasant’s chief operating officer, said in an interview. “This would inherently remove competition or remove earning capacity from small rural communities.” 

UMB Financial Corp., a bank with about $41 billion of assets, expects it would pay 30% less to the DIF if collateralized deposits were not included in the calculation, according to Chief Financial Officer Ram Shankar. 

The Kansas City, Missouri lender had $24.7 billion in uninsured deposits at the end of last year, with collateralized deposits accounting for $6.1 billion of that. Those deposits — which come from both public funds and corporate trust deposits — are backed by “high quality securities in UMB’s investment portfolio,” it said. 

FDIC Reprimand

Some banks have tried to take matters into their own hands. 

Earlier this year, more than four dozen lenders revised the deposit data they had disclosed in a regulatory filing known as a call report, according to an analysis by S&P Global Market Intelligence. In some cases, those banks no longer included uninsured deposits that were collateralized by pledged assets as well as those held by bank subsidiaries, the FDIC found. 

The agency was quick to reprimand those moves, ordering lenders that incorrectly reported uninsured deposits to amend their call reports. Since then, 65 banks have restated their data for the first quarter, according to additional analysis by S&P Global Market Intelligence.

Read more: FDIC Warns Banks Over Errors in Reporting Uninsured Deposits

“Some institutions incorrectly reduced the amount reported to the extent that the uninsured deposits are collateralized by pledged assets,” the FDIC said in a letter to banks in July. “This is incorrect because in and of itself, the existence of collateral has no bearing on the portion of a deposit that is covered by federal deposit insurance.”

A representative for the FDIC said the agency, which hasn’t yet issued a final rule, doesn’t comment on proposals during the rulemaking process. The agency’s final rules establishing how banks will top up the Deposit Insurance Fund are slated to go into effect at the start of next year.  

Challenging Communities

To be clear, it’s the biggest US banks, or those with more than $50 billion in assets, that are expected to bear 95% of the costs tied to the failure of Silicon Valley Bank and Signature Bank. JPMorgan Chase & Co., the nation’s largest lender, expects to pay $3 billion alone.  

But even some bigger banks are pushing back on the government’s plans for calculating what lenders owe to the insurance fund, arguing collateralized deposits don’t carry the same risk that typical uninsured deposits do. 

“In our experience, deposits of states and municipalities that are fully collateralized are not withdrawn in times of economic stress,” Fifth Third Bancorp, Huntington Bancshares Inc. and KeyCorp, which all have more than $150 billion in assets, wrote in a joint letter. “We did not experience any material withdrawals of collateralized government deposits in March prior to the systemic risk determination.”

Read more: Big Banks Face Billions in Extra FDIC Fees After SVB Failure 

In other cases, banks have warned that the higher costs could harm local communities by prompting banks to reconsider holding public deposits in smaller towns or reducing the interest they pay, meaning public entities would accrue less. 

“In many cases, these larger banks are often the only banks able to maintain branches in these economically depressed areas with little lending activity and ever-increasing regulatory and compliance costs,” the Mississippi Bankers Association’s Fellows wrote in a letter to the FDIC. “Adding additional costs to hold public deposits creates another challenge in these communities.”

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