Last week the FDIC released the FDIC assessment trends for insured depository institutions. The data shows that fees across the industry are dropping due to improved capital and asset quality measures. During the first part of 2013, 2,514 banks (19% of the assessment fees) were assessed fees between 5bp and 7.5bp. By the start of 2014, 2,895 institutions (72% of the assessment base) were assessed deposit fees in that range, equating to an average FDIC fee of a less than 8bp annualized. This means in the last year, more than half the banks in the industry had a material migration.
What this means for the average bank is that they should take these changing fees into account when planning. Declining insurance fees means more efficient operations, higher rates on deposits and/or lower rates on loans. Few banks we spoke with for this article took the time to adjust their loan pricing model for the change in their FDIC fees in their funding cost. This could be a mistake as adjusting FDIC fees to funding costs could make a difference of around 10% which may come into play for those marginal loan pricing, deposit gathering and new product decisions.
For banks active in M&A, the “great assessment migration of 2013” will also make an impact for the almost 500 banks that are targets and that pay over 15bp in assessment fees. The greater migration will make these banks more attractive as the savings will be part of the consolidated cost savings.
In addition, lower FDIC fees mean a wider range of investments in which to deploy cash. For many banks, a positive arbitrage can now be had at the Federal Reserve which should serve to increase balances slightly at the Fed. Although reserves are a low yielding asset, 100% of qualifying as high quality liquid assets (“HQLA”) and unlike Treasuries, they carry no interest rate risk. This latter point is particularly important given new capital rules for larger banks which require banks to include unrealized gains and losses on their available-for-sale securities when calculating Tier 1 capital measures. Given the potential for rising rates, large banks will continue to rotate out of Treasuries to prevent future accounting impact. Pair this trend with the fact that the Fed is in the process of gradually reducing accommodation and working towards normalizing monetary policy, all things considered, cash reserves will be a growing source of HQLA.
As such, look for the Fed to reopen the discussion soon on reducing the interest on reserve structure of 25bp, as growth in these reserve balances will cause a heighten policy discussion.
Migration in FDIC assessment will likely slow down for the rest of 2014, so we highlight these changes to encourage banks to update their assumptions and take the likely lower FDIC costs into account when making strategic decisions.
Submitted by Chris Nichols on June 02, 2014