|Copyright:||(c) 2010 SourceMedia Inc , Source: The Financial Times Limited|
|Source:||Financial Times Limited|
Many community bankers are already celebrating the plan, which was required as a part of the Dodd-Frank Act, but at the same time some say it could cause some large banks to rethink their funding strategies. Some analysts said that because banks will no longer get a premium discount for relying on alternative forms of funding, more institutions could compete for domestic deposits.
“To the degree that over the long term the Dodd-Frank changes could hurt the flexibility of banks to resort to alternative funding sources … that could potentially be setting banks up to put stress on their ability to profit,” said
Small banks have long argued that charging assessments based on deposits was unfair. While larger institutions can impose risk on the
“This is an attempt to close a loophole,”
The new base is just a piece of the face-lift that Dodd-Frank gave the deposit insurance system, including other victories for small banks. The law also removed a cap on the size of the
A further proposal expected next year would outline how under Dodd-Frank the agency will ensure community banks are not affected by a required rise in the fund’s mandatory minimum ratio to 1.35% from 1.15%.
While community banks generally have cheered the new assessment base, not all small institutions will be unscathed. For instance, those that carry a large amount of Federal Home Loan bank advances could see their premiums rise. Likewise, certain large institutions relying on retail deposits may welcome the change.
Experts said many institutions will likely re-evaluate their funding methods, and many have already done so.
“It’s obviously going to increase the cost and reduce the desirability of [FHLB] borrowings,” said
But Dennis said the largest banks will face the biggest costs as a result of the proposal.
“For community banks, the ones using advances would be the hardest hit. But all in all, it’s going to hit large banks much more than community banks,” Dennis said. “In some sense, the large banks will be subsidizing the overall fund because of their non-deposit-based liability structure. Generally, the community banks will come out ahead on this one.”
O’Brien said although core deposits are already popular in the low interest rate environment, competition for deposits could intensify as large banks see a smaller cost advantage in other types of liabilities resulting from the
One result could be that banks will use funding instruments that they do not have to report.
“In the long run, it certainly encourages off-balance-sheet financing,” Kane said. “But it’s hard to predict the precise instruments and corporate structure they will use.”
“What it really means is a lot of people are going to be looking for fee-based revenues as opposed to asset-based revenues,” Bleier said. “If you can generate revenue from fee-based businesses that don’t add assets to your balance sheet, then that’s certainly an area to focus on.”
“It may motivate them to be more competitive for retail deposits, but the cost of the deposit is not just the interest expense plus the
Dennis agreed the impact could be limited. He said there will be more competition for deposits only when there is more loan demand.
“It certainly can increase competition” for deposits, “if people want to grow,” he said. “But right now, there’s no loan demand. Everybody is flush with cash. They’re dying for loans. What you’ll see is a reallocation with deposit and borrowing costs.”