FDIC fee proposal

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Regarding FDIC fees, the smaller the better, so nice to seem them sort of moving in that direction.

All they do is raise rates as they raise the common cost of funds for banks, and Fed policy is to lower rates.

Be nice to have leadership that understands banking and the monetary system!


Details on the proposal still rolling in. Two immediate takeaways:
less acute quarter-end dislocations, and definitional problems in LIBOR
likely to remain. There will be no more special assessments– those
assessments were based off of quarter end levels of assets, so banks had
a very strong incentive to squeeze quarter end balance sheets. Regular
fees are based off of quarterly average levels of insured deposits, so
you won’t get the same degree of quarter end window dressing (which
means smaller market dislocations).

In addition, they are talking about relatively moderate increases in
future FDIC fees– a 3bp increase in 2011. Fees will be lower than the
23bps hit after the S&L crisis. That means there will be less of a
shift toward uninsured deposits (overseas deposits) in order to avoid
that fee. Which means activity in eurodollar deposits remains light, so
there is no good benchmark for LIBOR (banks are likely to continue to
look at CP/CD rates when submitting their settings).

There will be a near-term increase in bank financing needs, as banks
need to come up with $45bn to prepay fees. This may create a small
hiccup in the downward trend in CP, as well as some additional bank
issuance in the 2yr to 3yr sector.

Also, a small decline in bill supply over year end– the FDIC will take
the $45bn and buy “nonmarketable treasuries” with it (the same IOUs that
are in the social security trust fund). The Tsy will take the $45bn of
cash and spend it, so they dont need to issue quite as many bills as
they otherwise would have. Note that the payments are due Dec 30.