FSM Report DEPOSITINSURANCE92 analyzes the FDIC’s proposal to implement provisions in the Dodd-Frank Act that require a shift of the DIF assessment base from domestic deposits to assets with less tangible equity. The agency is also proposing other changes to reflect this shift, most notably by imposing a stiff penalty for banks that hold long-term secured debt issued by other insured depositories. As detailed in the FSM Report, FedFin fears that this could adversely affect bank liquidity, cutting against pending Basel III and U.S. prudential goals. Small banks pushed for the change because it requires larger banks to pay a greater share of DIF premiums and will cost the very biggest banks hundreds of millions of dollars a year more in DIF premiums. However, FedFin notes that eliminating the cost of holding domestic deposits makes big banks indifferent now to funding through this channel as opposed to wholesale liabilities and FHLB advances (assuming all other factors are constant). This could in fact increase the reach of the biggest U.S. banks into retail banking, making them more formidable competitors for small banks over time. The FedFin report also assesses the impact of the proposal on specialized institutions, including custodial banks. An in-depth assessment will follow shortly of the accompanying proposal from the FDIC to rewrite how risk is judged at large banks for purposes of setting DIF premiums on this new assessment base.
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