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Journal of Economics and Business 64 (2012) 24– 36

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Journal of Economics and Business

Moving FDIC insurance to an asset-based assessmentsystem: Evidence from the special assessment of 2009�

Scott E. Heina,∗, Timothy W. Kochb, Chrislain Nounamoa

a Texas Tech University, United Statesb University of South Carolina, United States

a r t i c l e i n f o

Article history:Received 19 May 2010Received in revised form 28 March 2011Accepted 8 April 2011

JEL classification:G2, G21, G28

Keywords:Financial crisisFederal Deposit Insurance CorporationDeposit insurance assessment baseSpecial assessmentSupervisory Capital Assessment ProgramStress testToo Big to FailCommunity banksDeposit insurance fund (DIF)Bank subsidiaries

a b s t r a c t

In the second quarter of 2009, the FDIC imposed a special assess-ment on insured banks to replenish the deposit insurance fund.While the traditional assessment base for regular deposit insur-ance premiums was all insured deposits, the special assessmentwas applied to a bank’s total assets minus Tier 1 capital (total lia-bilities), with the maximum ‘capped’ at 10 basis points of insureddeposits. We find that the cap yielded the greatest savings for bankswith assets above $10 billion and that the FDIC would have raiseda substantially greater amount of funds using holding companyadjusted assets or could have applied a lower assessment rate tocollect the same amount of proceeds.

© 2011 Elsevier Inc. All rights reserved.

1. Introduction

During the financial crisis, the federal government, including the Federal Deposit Insurance Cor-poration (FDIC), effectively declared many large financial institutions as “Too Big to Fail.” They did so

� We wish to thank Ram Vinjamury and Suresh Ramaswamy for research assistance on this paper. We would also like to thankMichael O’Rourke, Mike Stevens, and Larry Wall for helpful comments on earlier drafts of this research.

∗ Corresponding author at: Rawls College of Business, Texas Tech University, Lubbock, TX 79409-2101, United States.Tel.: +1 806 742 3433; fax: +1 806 742 3197.

E-mail address: [emailprotected] (S.E. Hein).

0148-6195/$ – see front matter © 2011 Elsevier Inc. All rights reserved.doi:10.1016/j.jeconbus.2011.04.002

S.E. Hein et al. / Journal of Economics and Business 64 (2012) 24– 36 25

informally by providing numerous liquidity facilities to keep these large financial institutions opera-tionally solvent as well as providing capital via the Troubled Asset Relief Program (TARP). In addition,they conducted stress tests on the largest nineteen financial institutions in the country that ultimatelyrequired certain firms to raise additional external capital.

The joint Treasury and FDIC bailout plan of October 2008 extended the federal safety net for theselarge institutions in three ways. First, the Treasury acquired $125 billion of preferred stock in thenine largest institutions thereby marking the inception of the TARP. Second, the FDIC guaranteed newissues of unsecured bank debt at the holding company level to ensure that large firms could makedebt service payments. The final element of the plan involved the FDIC extending deposit insuranceto all non-interest-bearing transactions deposits in all banks. This last step appeared to help smallerfinancial institutions not protected by the implicit “Too Big to Fail” label, and did not significantly helpthe very large banks.

In their analysis, Veronesi and Zingales (2010) refer to the initial $125 billion capital injection as“Paulson’s Gift,’ because Henry Paulson, Treasury Secretary at the time, was the main supporter of theplan. Veronesi and Zingales (2010) provide empirical evidence indicating that the U.S. government, inOctober of 2008, initially acted to provide financial aid to the nine of the largest financial institutionsin the country. The authors show that the plan lessened the likelihood of bank runs, not runs ontraditional deposits, but instead runs caused by the refusal of short-term creditors to rollover short-term lending. They estimate that the biggest beneficiaries from the “Paulson’s Gift” were debt holdersin the nine banks who benefited by $125 billion. Interestingly, they find no evidence to suggest thatcommon stockholders in these nine institutions gained from the “bailout.”

Even with the initial TARP capital injections in the nine largest banks, some of these banks, suchas Bank of America and Citigroup, quickly found themselves facing further financial difficulties. Toprevent failure, both financial institutions turned to the Treasury for additional capital injections. TheU.S. Treasury dates the initial TARP transactions from “Paulson’s Gift” as October 28, 2008 with thenext set of TARP transactions dated November 14, 2008. Unlike large financial institutions, smallerbanks did not begin to actively participate in TARP funding until December 5, 2008.

In May 2009, the Federal Reserve and the Treasury implemented a stress test on the 19 largestfinancial institutions in the country, formally called the Supervisory Capital Assessment Plan (SCAP).The stress test required the banks to assess their capital under alternative economic scenarios, includ-ing the worst case scenario. If the banks found themselves less than well capitalized after these proforma financial statements were analyzed, then the deficient banks had a short period of time to raisenew equity capital in the marketplace or the Treasury would give them further injections from TARP.Most of the financial institutions were well capitalized, even under the most severe economic forecast,and the ten institutions that failed the test were able to raise approximately $75 billion in capital inthe public securities market. Interestingly, GMAC was given more federal assistance by way of capitalinjection. Clearly, actions taken during the initial stages of the financial crisis showed that policy mak-ers were most worried about the health of the largest banks in the country. The federal governmentdid many unique things to directly help these institutions while they did very little to help smallerfinancial institutions.

Another problem for the FDIC was that the large number of bank failures resulting from the financialcrisis exhausted the deposit insurance fund (DIF).1 Prior to 2008, well-capitalized banks were allowedto pay no deposit insurance premiums because the DIF was presumed to be overfunded. Subsequentfailures of insured institutions swamped the DIF reserves leading to the current negative balance. Inorder to replenish the DIF in an actuarial sense, the FDIC imposed a special assessment against insuredbanks operating in mid-2009. Interestingly, instead of applying the assessment rate against insureddeposits, the FDIC set the basic assessment rate equal to five basis points times’ total consolidatedassets minus tangible equity (labeled adjusted assets or total liabilities). The presumed intent was toshift the burden of replenishing the DIF more towards the largest banking organizations.

1 The deposit insurance fund represents the cumulative amount of premiums, or ‘reserves’, paid by insured institutions netof operating costs and expenses related to closing failed banks. The DIF fell negative in 2009 given large losses from actualbank failures and expected losses from anticipated failed institutions. The Dodd–Frank Act of 2010 established a minimumdesignated reserve ratio equal to 1.35% of insured deposits.

26 S.E. Hein et al. / Journal of Economics and Business 64 (2012) 24– 36

Our research focuses on the impact of the FDIC’s one-time, five basis point “special assessment”imposed against a bank’s total liabilities in the second quarter of 2009. Interestingly, the assessment‘capped’ the amount of premiums owed at 10 basis points of a bank’s traditional domestic depositbase. The fact that the FDIC felt compelled to impose a cap limiting the assessment in 2009 suggeststhat some regulators worried that the move to a total liability assessment system might “unfairly”increase the cost of deposit insurance for some institutions.

We estimate both the cost of the five basis point special assessment applied to total liabilitiesand the “savings” from the ‘cap’ imposed at the same time. We demonstrate that, as a conceptualmatter, the cap favored institutions that had substantial non-deposit liabilities. Initially, we estimatethe impact of the cap in limiting the assessment for each of the 19 large financial institutions that were“stress-tested” in May 2009. This group of banks is a proxy for financial institutions deemed “Too Bigto Fail” at the height of the crisis.2

The results show that these firms realized a significant “savings” from the cap. However, the capdid not help all of the stressed-tested banks; instead, savings are found to be large for only a selectfew of these institutions. For comparison purposes, we then estimate the impact of the cap on allFDIC-insured banks including those of smaller asset sizes.3 The empirical findings indicate that thecap was not meaningful for most banks because any premium increase was less than 0.10% of insureddeposits. However, the cap produced savings for roughly five percent of banks with total assets lessthan $50 million. These findings are interesting as they suggest a relatively large change in depositinsurance assessment premiums paid going forward as a result of Dodd–Frank, because Dodd–Frankdoes not cap the increase in premiums. In sum, many large banks will see substantial increases in theirinsurance premiums as will some of the very smallest banks.

2. The 2009 FDIC special assessment

On May 22, 2009, the Board of Directors of the FDIC approved a “special assessment” on all FDIC-insured banks in order to help replenish the DIF, which had fallen below its statutory minimum. Thespecial assessment was set at five basis points on each insured-institution’s total assets minus Tier 1capital (total liabilities) as of June 30, 2009.4 According to the FDIC, the special assessment collectedon September 30, 2009 raised approximately $5.5 billion.5 The Board, without explicit legislativeauthority, imposed the special assessment because the DIF had fallen sharply as a result of the largenumber of bank failures. More importantly, the special assessment was added to the regular quarterlypremium assessment that the FDIC levies on all insured institution, which imposed a significant burdenon many firms.

The FDIC also chose to limit the potential amount of the special assessment. Specifically, the FDICimposed a cap on the special assessment for each institution equal to ten basis points times theinstitution’s traditional assessment base, domestic deposits, at the end of June 2009.6 As such, the caplimited the amount paid by institutions with a limited amount of domestic deposits relative to theiroverall size. Sheila Bair, FDIC Chairman, stated that “This hybrid approach – using assets minus Tier 1capital as the assessment base but with a cap based on domestic deposits – will shift the allocation ofthe special assessment somewhat towards banks that rely more on non-deposit funding, which largebanks tend to do.”7 However, the cap on the special assessment continued the favorable treatment oflarge institutions with relatively small amounts of domestic deposits.

2 Regulators and other government officials never formally designated these firms as “Too Big to Fail.”3 See Appelbaum (2009) for more discussion on big banks versus small banks and the special assessment.4 Because the special assessment subtracts Tier 1 capital instead of tangible capital, the two assessment bases between the

proposed legislation and the special assessment differ. The differences in these two capital measures should generally notbe large, but could be sizeable in isolated cases. Our empirical evidence uses Tier 1 capital measures, not tangible capital asproposed by the legislation. We leave the importance of this difference to future research.

5 See Murton (2009). Following this, at the end of the third quarter the FDIC Board voted to have FDIC-insured institutionsprepay 13 quarters of insurance premiums on December 30, 2009 in order to raise an additional $46 billion.

6 See Eisenbeis and Wall (2002) for an overview of FDIC premiums and the role of the DIF in changing premiums.7 See FDIC Adopts Final Rule Imposing a Special Assessment on Insured Depository Institutions (FDIC, 2010).

S.E. Hein et al. / Journal of Economics and Business 64 (2012) 24– 36 27

An interesting question is: What was the purpose of the cap? To our knowledge, the FDIC Board hasnot offered an explanation beyond Chairman Bair’s reference to a shift in allocation ‘somewhat’ to largebanks. Apparently, the FDIC felt that some institutions would be assessed “too much” if they based theassessment on total liabilities, so a ceiling was needed to protect them. It is not clear, however, whichspecific institutions were deemed to need this help. Empirically, it is useful to determine which banksdid and did not benefit from the cap, which we attempt below.

Recall that the 2009 special assessment for each insured institution was set at five basis points(0.0005) of an insured-bank’s total assets less Tier 1 capital.8 The assessment for each bank can thusbe represented as:

SA = (0.0005) × (TA − T1) = 0.0005 × (TL), (1)

where SA is the bank’s special assessment, and TA and T1 are the bank’s total assets and Tier 1 capitaland we designate total liabilities (TL) as TA − T1, respectively, as of June 30, 2009.

Consider next the cap (CAP) that the FDIC Board also implemented in the second quarter of 2009,which limited the amount of the special assessment to 10 basis points times the institution’s insureddomestic deposits (ID). In this case, we can write CAP as:

CAP = (0.0010) × (ID). (2)

Setting Eq. (1) equal to Eq. (2), we can identify the minimum amount of insured deposits relative tototal liabilities at which the CAP is non-binding (ID/TL)min,

(IDTL

)min= 1

2. (3)

This tells us that any institution that funded 50% or more of its total liabilities with insured depositsfound the cap to be non-binding and paid the full amount of the special assessment.9 For such insti-tutions the cap was irrelevant. In contrast, any institution with insured deposits less than 50% of totalliabilities was subject to a binding cap such that the special assessment was smaller than it otherwisewould have been. Institutions subject to a binding cap effectively received an implicit subsidy fromthe FDIC, relative to other insured institutions. Such institutions pay no insurance premiums for theseexcess liabilities, thus making it relatively less expensive for them to fund operations than smallerbanks that pay premiums on most of their funding sources, insured deposits. Moreover, it wouldappear that the cap was a bit capricious in the sense that an institution that had insured deposits equalto 51% of its total liabilities would be treated differently than an institution with insured deposits equalto 49% of its total liabilities. The former institution would receive no benefit from the CAP, while thelatter would receive some benefit, although admittedly the savings from the CAP would be small forthe latter institution.

3. Which institutions gained from the special assessment CAP?

The analysis in the previous section demonstrates that any banking subsidiary that funded overone-half of its non-equity funded assets with something other than insured domestic deposits wouldhave benefited from the cap. These other liabilities potentially include non-insured deposits, such asforeign deposits and balances in excess of insured amounts, as well as borrowings from the FederalReserve, federal funds purchased, FHLB advances and other longer-term debt obligations previouslymentioned. Generally, none of these “non-core” liabilities represent a large source of funds for mosttraditional commercial banks, especially most community banks. However, these funding sources aremuch more relevant for relatively new banks with business models emphasizing fast growth and forlarger financial institutions.

8 See Special Assessment Final Rule (2009) for more detail on the special assessment.9 It is useful to point out that the effective assessment rate for total assets is one-half of the effective assessment rate on

domestic deposits, suggesting that the banking system as a whole has significant amounts of non-deposit funding sources. Ofcourse, most of these are found in the largest banks in the country.

28 S.E. Hein et al. / Journal of Economics and Business 64 (2012) 24– 36

3.1. Impact of the special assessment on insurance payments of the stress-test banks

We now examine the impact of the special assessment on the 19 stress-tested U.S. bank holdingcompanies in May 2009.10 For each of these large financial institutions, we estimate the special assess-ment based on total assets less Tier 1 capital (TL) for each banking subsidiary using publicly available“call report” information (TFRs in the case of thrifts). We then estimate the cap for the same institution,using the same data source, to see if the cap was binding and thus limited the actual special assessmentpaid. If the cap is binding, we quantify the “savings” as the difference between the assessments basedon the institution’s total liabilities versus the cap determined by the institution’s insured deposits. Wedesignate the “savings” as a subsidy from institutions paying the full special assessment. We recog-nize that we do not have data on the actual special assessments for the separate bank subsidiaries,but rather derive our estimates based on publicly-available data.

Two critical structural features of banks and bank holding companies dramatically influence theempirical results. In turn, these structural features introduce fundamental questions regarding thespecial assessment. First, various bank subsidiaries finance their operations in very different ways,which can greatly influence the deposit insurance premiums and the special assessment, cap. Thelargest banks rely proportionately more on non-deposit funding sources such as foreign deposits,federal funds purchased, repos and FHLB advances, and subsequently pay proportionately smallerdeposit insurance premiums when the premiums are levied on insured deposits. Second, FDIC depositinsurance premiums and assessments are levied at the bank subsidiary level, not the holding companylevel. But, most large bank holding companies have both bank and non-bank subsidiaries with the non-bank subsidiaries engaged in businesses not involving insured deposit funding. The special assessmentis applied only to the bank subsidiaries and thus only against each subsidiary bank’s total assets minusTier 1 capital. If these 19 holding company firms, however, are truly “Too Big to Fail,” the federalgovernment guarantees the viability of the entire bank holding company and not just the subsidiarybanks.

3.2. Application to JPMorgan Chase & Co.

We use data for JPMorgan Chase & Co. to demonstrate our estimate of the FDIC special assessmentfee at the bank holding company level. As of June 30, 2009, JPMorgan Chase & Co., a bank holdingcompany, had the following five separate bank subsidiaries with insured deposits, thus labeled banksubsidiaries:

- JPMorgan Chase Bank, Dearborn- Custodial Trust Company- JPMorgan Bank and Trust Company, N.A.- Chase Bank USA, N.A.- JPMorgan Chase Bank, N.A.

While the holding company controlled over $2 trillion in assets, these bank subsidiaries controlledapproximately $1.77 trillion in assets or 87% of the holding company total assets. We arbitrarily selectthe banking subsidiary, Chase Bank USA, for the purpose of demonstrating the calculations for the spe-cial assessment. For this bank, we identified the amounts for total assets, Tier 1 capital, and its relatedadjustments as of June 30, 2009.11 As demonstrated in Table 1, we calculate the special assessmentbase and the special assessment payment ignoring the cap.

10 Appendix A lists the nineteen bank holding companies for which the special stress test was applied in 2009, as well as eachof their separate banking “financial institution” subsidiaries.

11 According to FDIC regulation, the Tier 1 capital adjustment represents one-half of the bank’s aggregate outstanding equityinvestment in financial subsidiaries as of the report date. If a financial subsidiary is not consolidated into the bank for purposesof these reports, one-half of the bank’s aggregate outstanding equity investment in the subsidiary is one-half of the amountsof the bank’s ownership interest accounted for under the equity method of accounting. In the case of Chase bank, NationalAssociation, there were no Tier 1 capital adjustments.

S.E. Hein et al. / Journal of Economics and Business 64 (2012) 24– 36 29

Table 1Calculation of special assessment payment ignoring the cap for Chase Bank USA, N.A.

1 Total assets $92,705,149,0002 Tier 1 capital $11,106,968,0003 Tier 1 capital adjustments $04 Special assessment base (Line 1 − Line 2 + Line 3. Line 4 cannot exceed Line 1) $81,598,181,0005 Special assessment multiplier (5 basis points) 0.00056 Estimated special assessment payment (Line 4 × Line 5) $40,799,091

Table 2Calculation of special assessment payment cap For Chase Bank USA, N.A.

1 Total deposit liabilities $22,822,112,0002 Total allowable exclusions $1,318,796,0003 Quarterly deposit insurance assessment base (Line 1 − Line 2) $21,503,316,0004 Special assessment multiplier (10 basis points) 0.0015 Special assessment payment: cap (Line 3 × Line 4) $21,503,316

Table 3Calculation of special assessment payment for all JPMorgan Chase subsidiaries.

Financial institution name Special assessment Cap Amount paid

1 JPMorgan Chase Bank, Dearborn $5,844 $514 $5142 Custodial Trust Company $69,854 $127,802 $69,8543 JPMorgan Bank and Trust Company, N.A. $5,019,416 $508 $5084 Chase Bank USA, N.A. $40,799,091 $21,503,316 $21,503,3165 JPMorgan Chase Bank, N.A. $781,200,000 $646,124,000 $646,124,000

6 Total $827,094,204 $667,698,192

The estimated $40.8 million payment would be the amount paid only if the cap was not binding.To determine whether the cap was binding, we calculate the cap for Chase Bank using the frameworkin relationship (2). Table 2 provides the detail on the cap for Chase Bank using bank level data for totaldeposit liabilities and the allowable exclusions.12 As noted, the cap on the special assessment paymentamounted to $21.5 million. Thus, the cap for Chase Bank saved it approximately $19.3 million overwhat it would have had to pay based solely on total assets less Tier 1 capital. Finally to determine therequired payment for JPMorgan as a holding company, we did similar calculations for each of its otherseparate four banking subsidiaries with summary figures presented in Table 3. Our calculations arenot exactly accurate, as they do not reflect consolidation adjustments made for interbank financialtransactions, but these consolidation adjustments are likely relatively small in comparison.

The results in Table 3 show that the cap was binding for each of the financial subsidiaries forJPMorgan Chase, other than Custodial Trust Company, suggesting that FDIC-insured deposits made upmore than one half of non-capital funding only for this one subsidiary. Other non-insured liabilitieswere presumably more important than insured deposits at the four other subsidiaries, and as a resultthe cap produced savings compared to the special assessment without a cap. Based on our estimates,JPMorgan Chase & Co. paid roughly $668 million with the special assessment, when it would haveowed over $827 million if the FDIC had chosen not to cap the special assessment. In other words, weestimate that the JPMorgan Chase holding company saved around $159 million as a result of the capbeing put in place, which represents a subsidy from insured institutions that paid the full assessmentwith no benefit bestowed them by the cap.

12 According to FDIC regulation, the total allowable exclusions represent the estimated amount of uninsured deposits (indomestic offices) of the bank plus foreign deposits, including interest accrued and unpaid.

30 S.E. Hein et al. / Journal of Economics and Business 64 (2012) 24– 36

Table 4Savings from the cap on the FDIC’s special assessment for the 19 stress-tested bank holding companies.a

Name of bank Special assessment based ontotal assets less Tier 1 capital

Estimated cap Savings from the cap

American Express $22,266,311 $20,063,951 $2,202,360Bank of Americab $814,095,112 $724,944,058 $89,151,054Bank of NY Mellon $80,138,278 $62,308,853 $17,829,425BB&T $68,359,171 $68,359,171 0Capital One Financial $81,128,264 $81,128,264 0Citigroupb $583,337,122 $343,114,535 $240,222,587Fifth Third Bancorpb $55,219,176 $55,219,176 0GMACb $18,349,348 $18,349,348 0Goldman Sachs $52,244,500 $35,670,000 $16,574,500JPMorgan Chase $827,094,204 $667,698,192 $159,396,012KeyCorpb $43,584,444 $43,584,444 0MetLife $6,916,635 $6,916,635 0Morgan Stanleyb $29,604,500 $29,604,500 0PNC Financialb $133,030,702 $133,030,702 0Regions Financialb $66,764,617 $66,764,617 0State Street $70,410,803 $21,083,648 $49,327,155SunTrustb $78,867,937 $78,867,937 0U.S. Bancorp $124,692,096 $122,527,972 $2,164,124Wells Fargob $575,977,147 $543,965,639 $32,011,508

a Based on June 30, 2009 values.b Institutions deemed in need of additional capital according to the stress test.

3.3. Estimated savings from CAP for the nineteen stress-tested holding companies

We now replicate the analysis for the other 18 bank holding companies, again looking first at theindividual financial subsidiaries and then aggregating to the holding company level. Table 4 summa-rizes these estimates with the final column presenting the aggregate savings for each of the nineteenbank holding companies.13

Interestingly, the estimates indicate that the cap did not benefit all of the 19 stress-tested institu-tions. Indeed, ten holding companies, Morgan Stanley, MetLife, PNC Financial Corp., GMAC, SunTrust,Capital One Financial Corp., BB&T, Regions Financial Corp., Fifth Third Bank Corp., and Key Corp., sawno realized savings attributable to the cap, suggesting that each uses FDIC-insured deposits as itsmajority funding source. The remaining nine holding companies, however, saved a combined $609million from the cap. Citigroup had the largest estimated savings, exceeding $204 million, while thecap savings at U.S. Bancorp and American Express amounted to around $2.2 million each.

3.4. Estimated savings from CAP for all FDIC-insured institutions

For comparison purposes, we estimated: (1) the special assessment payments based on each bank’stotal liabilities, (2) the cap based on their insured deposit liabilities, and (3) the savings from the cap fordifferent-sized banks in the population of all banks in the call report data. This data set only includescommercial banks, and thus excludes thrift institutions, which are included in our earlier analysisof the “stress tested” banks. To better summarize our findings, we selected eight different asset-sizecategories, starting with banks having less than $50 million in assets and ranging to banks with assetsexceeding $10 billion.

For each specific bank we estimated both the special assessment for that bank, the cap and thesavings attributable to the cap, using the same approach illustrated in Tables 1 and 2. Table 5 summa-rizes our findings, for each peer-sized grouping. The table reports the number of banks that benefited

13 Adler (2009) and Kim (2010) summarize estimates of the magnitude of the special assessment for several large banks thatare close to the magnitudes reported in Table 4. Curiously, none of the estimates provided by the banks incorporates the savingsfrom the cap.

S.E. Hein et al. / Journal of Economics and Business 64 (2012) 24– 36 31

Table 5Savings from cap for all banks in call report, by asset-sized peer groups.

Total asset range for peergroup (PG): millions ofdollars

No. of banks in PGwith no savingsfrom cap

No. of banks in PGwith positivesavings from cap

Percent of PGbanks with positivesavings in relationto all banks in PG

Total $ savingsfrom cap by allbanks in this PG

PG1: TA < $50 1235 61 4.71% $110,710PG2: $50 < TA < $100 1519 14 0.91% $153,095PG3: $100 < TA < $500 3395 22 0.64% $959,147PG4: $500 < TA < $1,000 640 4 0.62% $487,738PG5: $1,000 < TA < $3,000 365 8 2.15% $5,572,007PG6: $3,000 < TA < $5,000 60 1 1.64% $1,909,140PG7: $5000 < TA < $10,000 58 4 6.45% $8,690,514PG8: TA > $10,000 76 16 17.39% $597,718,987

from the cap and the number that did not benefit, the percentage of banks in that asset category thatbenefited from the cap and the aggregated cap savings for all the banks that benefited from the cap inthat asset category. For our smallest asset category, banks with less than $50 million in total assets,the cap lowered the required payment for almost 5% of the population.

The 61 very small banks that benefited saved an estimated $110,710 which is far below the “savings”realized by larger institutions in both dollar and percentage terms. The “savings” for the smallestasset size categories likely reflects the fact that many of these banks were de novo institutions withsubstantial equity, and a heavy reliance on, wholesale funding and thus relatively small amounts ofdeposits.

According to our estimates, commercial banks with less than $1 billion in assets received littlebenefit from the cap. Larger institutions appear to have saved well into six figures each. In particular,data for the largest bank category suggest that over 17% of these banks benefited from the cap withan average savings exceeding $37 million. In fact, the aggregate savings for the largest group of banksdominates the total savings for all other banks, $597 million versus less than $18 million.14

4. What if deposit insurance premiums were levied at the holding company level?

The previous analysis examines the FDIC’s special assessment as applied to bank holding companysubsidiaries that hold insured deposits, and it completely ignores non-bank subsidiaries of the bankholding company.15 It can be argued, however, that such treatment provides an unreasonable subsidyto the large financial institutions that are deemed “Too Big to Fail.” If the federal government trulyguarantees that these institutions will not fail, it is protecting the assets of the entire holding companyand not just the bank subsidiaries. As such, it seems reasonable that the special assessment shouldhave been applied to total assets less Tier 1 capital for the entire bank holding company. The FDIC doesnot have statutory authority to do this, but it could be achieved through legislation.

As a final piece of empirical evidence, we replicate the previous analysis with two substantivedifferences to examine the quantitative significance of this issue. First, instead of using balance sheetdata for just the bank subsidiaries, we use aggregate holding company data, including the non-banksubsidiaries. Second, we ignore the cap. We then compare the size of the special assessment assumingit is based on total bank holding company assets with the estimated special assessment from Table 4(without the cap). Table 6 presents estimates of the savings for the 19 stress-tested bank holdingcompanies from basing the special assessment on just bank subsidiary data.16

14 This aggregate savings estimate for the banks with more than $10 billion in assets is less than reported for the nineteenstress test banks because the latter includes thrift institutions and some bank subsidiaries with less than $10 billion in totalassets, which are excluded in Table 5.

15 For more in depth discussion on systemic risk, see Kaufman and Scott (2003).16 Appendix B provides the information for the second quarter 2009 total assets of each of the nineteen holding companies

and the total assets of the aggregation of banking subsidiary assets.

32 S.E. Hein et al. / Journal of Economics and Business 64 (2012) 24– 36

Table 6Savings from using balance sheet data for bank subsidiaries versus bank holding companies for the 19 stress-tested bank holdingcompanies when determining the FDIC’s special deposit insurance assessment.

Name of bank Special assessmentbased on total assetsless Tier 1 capital forbank holding company

Special assessmentbased on total assetsless Tier 1 capital forbank subsidiaries

Savings from usingonly bank subsidiaries

American Express $52,487,214 $22,266,311 $30,220,903Bank of America $1,032,577,384 $814,095,112 $218,482,272Bank of NY Mellon $94,101,500 $80,138,278 $13,963,222BB&T $70,133,035 $68,359,171 $1,773,864Capital One Financial $79,699,784 $81,128,264 ($1,428,480)Citigroup $860,877,500 $583,337,122 $277,540,378Fifth Third Bancorp $51,120,755 $55,219,176 ($4,098,420)GMAC $78,118,000 $18,349,348 $59,768,652Goldman Sachs $416,797,000 $52,244,500 $364,552,500JPMorgan Chase $952,234,000 $827,094,204 $125,139,796KeyCorp $43,158,735 $43,584,444 ($425,708)MetLife $240,022,816 $6,916,635 $233,106,181Morgan Stanley $316,570,000 $29,604,500 $286,965,500PNC Financial $127,447,708 $133,030,702 ($5,582,993)Regions Financial $64,691,297 $66,764,617 ($2,073,319)State Street $71,090,522 $70,410,803 $679,719SunTrust $79,138,135 $78,867,937 $270,198U.S. Bancorp $590,727,500 $575,977,147 $14,750,353Wells Fargo $121,925,000 $124,692,096 ($2,767,096)

The findings in Table 6 are quite revealing. First, levying premiums on total holding company assets,and not just banking subsidiary assets, would have resulted in much larger assessments for 13 of the19 holding companies. Goldman Sachs provides a prime example of a firm that benefited from theassessment being limited to banking subsidiary assets. Because its banking subsidiary makes up avery small part of the holding company, an assessment against Goldman’s holding company totalassets would have been more than eight times larger, or $364 million more, than the actual specialassessment (absent the cap). Morgan Stanley and MetLife similarly ‘saved’ $286 million and $233million, respectively, because the comparable holding company assessments would have been almost11 times and 36 times (respectively) larger than the actual assessments. The “savings” from limitingthe assessment to bank subsidiaries are much smaller for holding companies with multiple banksubsidiaries. Citigroup, Bank America, Wells Fargo, BB&T and SunTrust, for example, would have paidjust slightly more with holding company net assets as the base. Of these, Citigroup would have paid48% more in assessment, with SunTrust effectively paying the same amount under each system. Theproportionate increase in amounts due for the others is between these figures. Some bank holdingcompanies would have been better off with the holding company assessment. PNC, U.S. Bancorp,Capital One Financial Corp., Regions, Fifth Third and KeyCorp are in this category as each firm actuallywould have paid a smaller assessment if the assessment was levied on holding company net assets.17

Finally, banking organizations that emphasize businesses other than traditional lending and deposit-gathering would have paid proportionately more than traditional banks, but far less than traditionalinvestment banks and insurance firms. Bank of NY Mellon and State Street are in this category. In theaggregate the special assessment for the “stress test” banks at the holding company level would havebeen over $1.6 billion more than that raised by the smaller bank subsidiary asset base. Alternatively,the FDIC could have raised a large sum of money, ignoring the cap, if it levied only a 3.5 basis pointcharge on holding company assets less Tier 1 capital.

17 Total subsidiary assets exceed total holding company assets in rare cases when intra-company transactions between sub-sidiaries are large. Also the holding company assessment can be smaller when the components of Tier 1 capital are much higherat the holding company level compared with the combined bank subsidiaries. The latter is the case with Capital One.

S.E. Hein et al. / Journal of Economics and Business 64 (2012) 24– 36 33

5. Deposit insurance provisions in the Dodd–Frank Wall Street Reform and ConsumerProtection Act (Dodd–Frank)

In response to the recent financial crisis, the U.S. Congress instructed the FDIC to change theassessment premium for deposit insurance. As a result of the Dodd–Frank Act of 2010 (henceforthDodd–Frank), the FDIC Board changed the assessment base used to calculate a bank’s insurancepayment from insured domestic deposits to consolidated total assets minus tangible equity (totalliabilities). The premium assessment changes are effective during the second quarter of 2011. TheFDIC further declared its intention that the total amount of revenue collected not be significantly dif-ferent under the new regime.18 An implicit objective of this change is to increase payments owed bylarger institutions relative to payments by smaller community banks. Given the preceding analysis,the change in assessment will be small for most community banks, whereas larger banks will experi-ence a relative increase in their assessments. The shift is driven by the difference in domestic depositfunding versus other funding.

The Dodd–Frank Act substantially changes federal deposit insurance in the U.S in other importantways. First, the Act increases the minimum reserve ratio for the deposit insurance fund (DIF) from 1.15%to 1.35% by September 2020. It further requires that the cost of the increase be borne primarily byinsured depository institutions with total assets in excess of $10 billion and grants the FDIC additionalauthority to build up excess reserves when the DIF has otherwise met its targets (FDIC, 2009). Second,the Act makes permanent the increase in the standard maximum federal deposit insurance to $250,000per account from the prior limit of $100,000. Finally, the Act extends the unlimited insurance coverageon noninterest-bearing transaction accounts from December 2010 to December 2013. One aspect ofthe deposit insurance premiums that remains the same is that charges are levied at the bank subsidiarylevel and not at the bank holding company level.

6. Conclusion

During 2009, the FDIC imposed a special deposit insurance assessment equal to five basis pointstimes an insured institution’s total assets minus Tier 1 equity. This is the first time the FDIC changedthe assessment base from domestic deposits to a net assets figure. While such a change had littleimpact on most community banks, the change could have potentially increased the amount paid bylarger financial institutions that fund themselves proportionately more with non-deposit liabilities.Without fanfare or much discussion, the FDIC limited the assessment for such institutions by cappingthe amount that any single firm would pay under the special assessment to a maximum of 10 basispoints times the firm’s domestic deposit base. This cap limited the amount that firms with high levelsof non-deposit funding would pay, and essentially represented a subsidy from banks paying the fullspecial assessment to those with a binding cap, which were mainly large banks.

We generally find that smaller banks, which rely more on core deposit funding received little orno benefit from the cap. However, we did find a small percentage (five percent) of the very smallestbanks benefitted from the existence of the cap, as they, like many big banks, had important non-deposit funding sources. In contrast, the impact of the cap was quantitatively meaningful for manylarger financial institutions. We pay particular attention to the impact of the special assessment andcap on the nineteen largest banks in the country which were subjected to the regulatory stress testsin mid-2009. We do not find that all of these large banks benefitted from the cap. Of these nineteenfirms, our estimates indicate that ten received no benefit from the cap, but the other nine savedapproximately $609 million combined. Interestingly, almost 40 percent of these aggregate savingswent to Citigroup.

The special assessment was intended to replenish the deposit insurance fund which has beendepleted with the large number of bank failures. Traditionally, the FDIC bases its insurance assessments

18 According to the Federal Register, “The FDIC believes that the change to a new, expanded assessment base should not resultin a change in the overall amount of assessment revenue expected to be collected under the restoration plan adopted by theBoard on October 19, 2010.”

34 S.E. Hein et al. / Journal of Economics and Business 64 (2012) 24– 36

solely against banks with insured deposits. Given the role that “Too Big to Fail” institutions played inthe financial crisis, we extend the analysis from just banks to bank holding companies. Specifically, iflarge institutions are not allowed to fail, both depositors and non-depositor creditors are effectivelyinsured. As such, it seems reasonable to levy insurance premiums against total holding companyassets (less Tier 1 capital), as opposed to limiting the premiums to banking subsidiary assets (lessTier 1 capital). Importantly, the FDIC does not have statutory authority to do this without legislativeapproval, even following Dodd–Frank. Still, we estimate that a move to charges against total holdingcompany assets would have resulted in substantial increased assessments for thirteen of the nineteenstress-tested banks, which would have raised about $1.6 billion more for the deposit insurance fund atthe five basis point assessment rate. This result confirms that assessing deposit insurance premiumsat the holding company level, as opposed to the bank subsidiary level, is quantitatively significant,deserving Congressional consideration as financial reforms are being debated.

Acknowledgements

We would like to thank Josh Pickrell, Mike Stevens, Bruce Resnick, Kenneth Kopecky, and refereesfor the Journal for comments on earlier versions of this manuscript.

Appendix A. The 19 U.S “Stress Test” bank holding companies and their financial institutionsubsidiaries

1- American Express- American Express Centurion Bank- American Express Bank, FSB*

2- Bank of America- Bank of America Oregon, National Association- Bank of America California, National Association- Bank of America, Rhode Island, National Association- Merrill Lynch Bank & Trust Co., FSB*- Merrill Lynch Bank USA- FIA Card Services, National Association- Bank of America, National Association

3- Bank of New York Mellon- BNY Mellon Trust of Delaware- The Bank of New York Mellon Trust Company, National Association- Mellon United National Bank- BNY Mellon, National Association- The Bank of New York Mellon

4- BB&T- BB&T Financial, FSB*- Branch Banking and Trust Company

5- Capital One Financial Corp.- Chevy Chase Bank, FSB*- Capital One Bank (USA), National Association- Capital One, National Association

6- Citigroup- Department Stores National Bank- Citibank (Banamex USA)- Citicorp Trust Bank, FSB*- Citibank (South Dakota), N.A.- Citibank, National Association

7- Fifth Third Bancorp- Fifth Third Bank, National Association

S.E. Hein et al. / Journal of Economics and Business 64 (2012) 24– 36 35

- Fifth Third Bank – Grand Rapids- Fifth Third Bank – Cincinnati

8- GMAC- Ally Bank

9- Goldman Sachs- Goldman Sachs Bank USA

10- JPMorgan Chase- JPMorgan Chase Bank, Dearborn- Custodial Trust Company- JPMorgan Bank and Trust Company, National Association- Chase Bank USA, National Association- JPMorgan Chase Bank, National Association

11- KeyCorp- Keybank National Association

12- MetLife- Metlife Bank, National Association

13- Morgan Stanley- Morgan Stanley Bank, National Association

14- PNC Financial Services- PNC Bank, Delaware- PNC Bank, National Association- National City Bank

15- Regions Financial Corp.- Regions Bank

16- State Street- State Street Bank and Trust Company

17- SunTrust- SunTrust Bank

18- U.S. Bancorp- U.S. Bank National Association ND- U.S. Bank National Association

19- Wells Fargo- Wells Fargo Central Bank- Wells Fargo Bank, Ltd.- Wells Fargo HSBC Trade Bank, National Association- Wells Fargo Financial National Bank- Wachovia Card Services, National Association- Wachovia Bank of Delaware, National Association- Wells Fargo Bank Northwest, National Association- Wachovia Bank, FSB*- Wells Fargo Bank South Central, National Association- Wachovia Mortgage, FSB*- Wells Fargo Bank, National Association- Wachovia Bank, National Association

36 S.E. Hein et al. / Journal of Economics and Business 64 (2012) 24– 36

Appendix B. II/2009 Total assets of the nineteen stress-test bank holding companies versusthe total assets of the bank subsidiaries of the same holding companies (Millions of Dollars)

Name of bank Total assets of bankholding company(BHC)

Total assets of FDICinsured banksubsidiaries

American Express $115,975 $1,768,412Bank of America $2,256,060 $1,282,012Bank of NY Mellon $203,246 $1,767,148BB&T $152,398 $1,240,733Capital One Financial $171,911 $150,465Citigroup $1,848,533 $119,678Fifth Third Bancorp $115,984 $65,328GMAC $181,250 $14,640Goldman Sachs $890,137 $176,965JPMorgan Chase $2,026,642 $281,272KeyCorp $98,390 $95,249MetLife $509,457 $149,664Morgan Stanley $676,957 $135,430PNC Financial Services $279,788 $53,007Regions Financial $142,825 $265,542State Street $152,921 $173,939SunTrust $176,854 $42,460U.S. Bancorp $265,560 $122,356Wells Fargo $1,284,176 $170,140

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