Concerns are “well founded” that the imposition of bank deposit insurance premiums can hurt lending “at precisely the wrong time in the business cycle,” according to a paper published Tuesday by the federal bank deposit insurance agency.
The paper, issued by the Federal Deposit Insurance Corp. (FDIC), also suggests that “efforts to smooth deposit insurance rates throughout business cycles can help reduce the procyclicality of bank credit,” the agency said.
The FDIC said the results of the study – titled “The Procyclicality of FDIC Deposit Insurance Premiums” – may be of interest to both academics and regulators as they “seek to understand and regulate financial institutions and to avoid unintended or procyclical consequences of deposit insurance premium change.”
The paper was written by the FDIC’s Center for Financial Research (CFR).
Bank lending decreases (or increases) in response to a premium increase (or decrease), the paper concludes. It reached that conclusion after looking at changes to deposit insurance premium schedules during the 2007-08 financial crisis, and using confidential FDIC bank regulatory ratings from that period to control for individual bank risk. The agency then used data from credit unions, also during that period (the credit unions were not subject to the same deposit insurance premiums), as a control group.