BANCVUE RECOMMENDS CREDIT DERIVATIVE BASED-FORMULA FOR FDIC’S SPECIAL ASSESSMENT

Directional Formula Based on Recent Analysis Showing MegaBanks With 23,000 Times More Exposure to Credit Default Swaps Than Community Banks

Coming on the heels of its analysis that demonstrates megabanks have 23,000 times more exposure to complicated and unregulated credit default swaps (CDS) than community banks, BancVue, a leading provider of products and consulting to community banking institutions, issued a formula that recognizes that the financial crisis has been caused by toxic assets and credit derivatives rather than deposits. Commercial banks with $10 billion or more in assets fund only 63% of those assets with deposits. Because community banks fund 73% of their assets with deposits and have less exposure to credit derivatives, they are unfairly impacted by an assessment based on deposits as a percent of assets. Developed by the consultants at BancVue, the formula is being forwarded as a directional answer to the call for comments to the FDIC’s proposed 10 to 20 basis points levy against all bank deposits.
Proposed formula:

Step 1: Estimate anticipated annual losses due to assets (A) and credit derivatives (D) as a percentage of total anticipated losses from those 2 categories: (A/total losses)+(D/total losses) = 100% of total losses due to toxic assets and credit derivatives.

Step 2: Allocate the total premium needed by FDIC by those percentages (A*Premium) and (D*Premium). As an example, a 20bp assessment on the $9 trillion on deposit in FDIC institutions as of 12/08 would raise roughly $18 billion. If 80% of anticipated losses are caused by on-the-book assets and 20% by credit derivatives, a total of $14.5 billion would come from assets and $3.5 billion from credit derivatives.
Step 3: Convert the total premium needed in each category to a per-dollar amount that can be assessed against each institution. For example, $14.5 billion over $13.8 trillion in assets = 10.5 bp asset assessment, and $3.5 billion over $15.9 trillion in credit derivatives = a 2.2 bp credit derivative assessment.

“Obviously, we’re not suggesting this is the absolute solution, but it is a call that consideration be given to the credit default swap catastrophe haunting the country’s largest banks, and pay recognition to the nation’s healthy community institutions,” said Don Shafer, Chairman of BancVue. “Again, if you are going to unfairly burden smaller banks that played by the rules, the least the FDIC can do is base the levy on the banks that helped trigger the crisis.”

BancVue’s analysis, based on FDIC data as of 12/2008, shows that commercial banks $10 billion or larger have just over $24 worth of credit derivatives for each dollar of equity. By comparison, the rest of the industry has essentially one-tenth of a penny of CDS for each dollar of equity. Those numbers translate to the big banks having roughly 23,000 times as much credit derivative exposure versus all other community financial institutions.

In February, federal regulators facing a cascade of bank failures depleting the deposit insurance fund began looking at increasing the fees paid by U.S. financial institutions for replenishment. Although the FDIC intended on charging more from higher risk banks, they also suggested levying a hefty emergency premium in a bid to collect $27 billion this year. The higher premiums being assessed were originally set for 20 cents for every $100 of insured deposits levied equally on the 8,305 federally insured institutions. To put that in perspective, for a $250 million dollar community bank, the “one time tax” would constitute a $500,000 hit, which could wipe out 20% to 40% of a bank’s annual profits. At the Independent Community Banking Association Convention last week, FDIC Chairman Sheila Bair predicted that the assessment will probably be lower. She went on to say that the FDIC is seeking comments by April 2nd on whether the agency should use total assets or some other base for the special assessment, which would have consequences for how the burden is distributed.

About BancVue
BancVue is the leading provider of innovative software, marketing, and consulting solutions to community financial institutions nationwide. Serving nearly 600 community banks and credit unions around the country, BancVue’s solutions allow these institutions to compete and win in the war for deposits. Consumers benefit from the development and implementation of BancVue’s innovative products, including REWARDChecking®, a free high-yield checking account specifically designed for community banks and credit unions. For more information on BancVue, visit www.bancvue.com.