Confirmed as a permanent agency of the U.S. government in 1935, the Federal Deposit Insurance Corporation, or FDIC, now provides deposit insurance of up to $250,000 for each depositor in a member bank. Additionally, the FDIC serves an oversight role for certain financial institutions. Currently, the FDIC insures deposits at more than 7,000 banks and savings associations.
Notably, the FDIC is not funded by the U.S. government. Member banks and other insured financial institutions fund the FDIC through the insurance premiums paid.
In a recent statement, FDIC Chairman Martin Gruenberg announced that the FDIC board had approved two new sets of rules affecting the amount of capital U.S. banks will be required to hold. Because the FDIC provides solvency insurance to the member banks, the FDIC has sought to strengthen the balance sheets of U.S. banks in an effort to avoid some of the solvency concerns that arose in the 2008-09 time frame.
The FDIC is not alone in its oversight responsibilities for financial entities. The Federal Reserve Board and the Office of the Comptroller of the Currency have regulatory authority over domestic financial institutions. International banking capital requirements have been established in the Basel III regulations. The capital levels recently approved by the FDIC are somewhat higher than the capital levels articulated in the Basel III rules.
Specifically, the parent entities of the largest U.S. lenders will see the amount of required capital increase to 5 percent of banking assets. For the actual banking entities, the capital level will be increased to 6 percent. These new regulations are targeted at the eight most systematically important banking entities in the U.S.
One noted shortcoming of the new capital rules is the lack of risk weighting for selected asset classes. Critics expect future risk exposures at these regulated banks to over-represent these excluded asset classes, as these entities seek higher return profiles.
These increased capital requirements will have a range of positive and negative implications for the banks affected. Because the capital required for U.S. entities is higher than the level required for most non-U.S. financial entities, profitability at the U.S. banks could suffer in comparison. With more capital on the balance sheets, these U.S. banks should have more ability to absorb future losses in times of economic stress.
Banking senior managers in the U.S. are left with two primary choices. They can either lower the risk profile of the bank and likely decrease future expected profitability or they can shrink the size of the bank balance sheet and likely decrease future expected profitability.
Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.