Big U.S. Banks Get to Keep $5 Billion More a Year Thanks to FDIC

(Bloomberg) -- Big U.S. banks that are already smashing profit records will soon get a $5 billion windfall, courtesy of the federal government.

The Federal Deposit Insurance Corp. announced Tuesday that lenders will no longer have to pay quarterly surcharges that cover some of the costs of insuring their customers’ deposits. Megabanks such as JPMorgan Chase & Co. and Bank of America Corp. shell out the lion’s share of such payments, which amount to about $5.2 billion annually.

Large banks have been paying the charges for years to replenish an FDIC insurance fund that was wiped out by the 2008 financial crisis. But now that the regulator has hit a funding target required by the Dodd-Frank Act, it’s ending the extra assessments. Banks will still have to pay quarterly fees, but their costs will be much lower.

The halt of the insurance surcharge comes after the industry posted a record $62 billion in third-quarter profit, and the highest return on assets in the 32-year history of the FDIC’s Quarterly Banking Profile.

Key Details

  • The FDIC’s latest report, released Tuesday, showed industry earnings for the three months ended in September spiked 29 percent from the same period a year earlier. Return on assets for the quarter was an unprecedented 1.41 percent.
  • Wider margins helped lenders post 7.5 percent more interest income than a year earlier. A big increase in service fees and investment-banking fees triggered a 4 percent gain in non-interest income. Revenue was a record $203.8 billion.
  • The industry continued to consolidate, despite efforts by President Donald Trump-appointed regulators to encourage new banks. One bank opened in the quarter, but the total number of lenders fell by 65, the FDIC said. At the end of the third quarter, there were 261 fewer banks in operation than there were a year ago -- mostly due to mergers with larger firms.
  • The FDIC’s deposit insurance fund now has a $100 billion stockpile -- much more than the $73 billion that the regulator spent during the 2008 crisis. The size of the reserve means FDIC quarterly charges on large banks will fall by about 45 percent.

Leveraged Lending

  • FDIC Chairman Jelena McWilliams noted that banks need to “maintain their underwriting discipline and credit standards” to keep the positive results coming.
  • Some of the most recent deals in the $1.3 trillion leveraged-lending market have involved banks that are willing to lend with fewer protections. But McWilliams said Tuesday that this market hasn’t spurred her and other members of the Financial Stability Oversight Council to take action beyond keeping an eye on it.
  • “We’re continuing to monitor the exposure our banks have to leveraged lending,” McWilliams said of the FDIC. She said that the members of the risk council haven’t discussed any formal policy response to changes in the market.

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