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FDIC examines effects of insurance premiums on bank lending
Recently, the FDIC’s Center for Financial Research released a working paper examining the procyclical effects of FDIC insurance premiums on bank lending. Using confidential FDIC data from the 2008-2009 financial crisis, the FDIC analyzed procyclical deposit insurance premium schedules and bank lending. Among other things, the study found that the lending growth rate decreased 1.6 percent in the quarter after a seven basis-point increase in deposit insurance premiums. The study also found that this effect was exaggerated for banks with less than $100 million in assets who experienced a 2 percent decrease in lending growth rates. According to the FDIC, the working paper “suggest[ed] that deposit insurance premiums, which have been relatively overlooked in the procyclicality discussion, can be a significant driver of bank credit procyclicality.” The FDIC also noted that “changes in deposit insurance premiums can influence the real economy through the bank lending channel,” and suggested that “there may be costs to raising deposit insurance premiums that should be considered, particularly during a crisis.” The working paper highlighted that throughout its long history, “the FDIC has adapted its approach to setting deposit insurance premiums in response to an evolving banking system” and has recently implemented changes that address some procyclicality concerns. These changes include the use of scorecards for large banks to determine assessment rates derived from data showing how each institution fared during the financial crisis, updating of the pricing structure for established small banks, and the indefinite suspension of dividends under the Deposit Insurance Fund management plan “to increase the probability that the reserve ratio will reach a level sufficient to withstand a future crisis.” The working paper concludes that “[t]hese efforts will likely reduce the risk of major assessment-rate increases during future economic downturns.”