Raising deposit insurance assessment rates during a time of economic stress led to a “significant drop” in bank lending growth, which disproportionately affected smaller community banks, according to a working paper published today by the FDIC’s Center for Financial Research. The authors used confidential FDIC data from the 2008-2009 financial crisis to explore the link between procyclical deposit insurance premium regulations and bank lending, finding the lending growth rate shrunk 1.6% in the quarter following a seven basis-point increase in deposit insurance premiums. Banks with less than $100 million in assets experienced a 2% decline.
The authors used credit unions as a control group, noting the institutions are not subject to the same deposit insurance regulations as banks. The paper is the first to document a procyclical effect of deposit premium regulation using a large sample of U.S. banks, they wrote.
“Our finding suggests that deposit insurance premiums, which have been relatively overlooked in the procyclicality discussion, can be a significant driver of bank credit procyclicality,” the authors wrote. “It also shows that changes in deposit insurance premiums can influence the real economy through the bank lending channel and suggests there may be costs to raising deposit insurance premiums that should be considered, particularly during a crisis.”
