U.S. regulators proposed large banks pay higher fees if they engage in risky activities, introducing a new scorecard said to better predict how institutions will fare in economic downturns.

The Federal Deposit Insurance Corp said on Tuesday the more risk-sensitive system would determine fee levels for deposit insurance for banks with more than $10 billion in assets, a little over 100 banks currently.

The new fees could be in place as soon as next year.

The proposed system is fairer and less pro-cyclical because it charges for risk when it is assumed, and it provides incentives for institutions to avoid excessive risk during economic expansions, FDIC Chairman Sheila Bair told a meeting of the agency.

The FDIC board on Tuesday also extended the crisis-era Transaction Account Guarantee (TAG) program by six months to the end of this year, to ensure that community banks still relying on the government backing do not lose business accounts to larger banks that could be perceived as more stable.

It is the second extension of the program, and the FDIC gave itself the option for a third.

The extension reflects the still-fragile state of smaller banks and their struggle to retain low-cost deposits when customers are shifting to larger banks.

Allowing the TAG program to expire in this environment could cause a number of community banks to experience deposit withdrawals... increasing the risk of liquidity failures, Bair said.

The TAG program, which provides unlimited federal backing for accounts that businesses typically use to meet payroll and pay vendors, was put in place in October 2008 when businesses were pulling their money out of smaller banks.

The program has become a money-loser for the FDIC as larger banks have opted out. Bair said Congress should consider extending it to all institutions until 2013, creating a more level playing field.


In creating the new scorecard for large bank fees, the FDIC said it used lessons from the recent crisis to determine which risk factors increase the chance an institution will fail.

The fee proposal would try to capture long-term risks by factoring in higher-risk asset concentrations, credit quality measures and levels of underperforming assets.

The FDIC proposal, which will be out for public comment for 60 days, is designed to discourage excessive risk-taking in good times and prevent a repeat of the massive leveraging that occurred before the recent financial crisis.

The proposal also explores whether to include other less quantitative variables such as stress testing, underwriting standards, and risk management. If we had used the proposed system during pre-crisis periods, it would have predicted the current rank ordering of large institutions much better than the system used now, Bair said.

Since the beginning of 2008, regulators have seized 207 banks. Failures are expected to peak this year, as banks continue to clean up their balance sheets of bad loans.

The FDIC said it is still considering a proposal to also add the riskiness of compensation schemes as a factor in fee levels. The agency would not say when it will formally propose such a measure.


There would be a separate category for highly complex institutions that have a depository bank with $50 billion in assets, and a holding company with $500 billion in assets. That includes about nine banks, the FDIC said.

Those institutions would face four other measures that would factor in fee levels, including senior bond spreads and the parent company's tangible common equity.

Comptroller of the Currency John Dugan supported putting the proposal out for comment but expressed reservations about the fee system's complexity and possible subjective nature.

Bair acknowledged banks need clarity about what the FDIC is seeking to reward and penalize, but said institutions' risk profiles can be nuanced. She said regulators should be allowed to apply their own judgment of a firms' riskiness.

The revenue collected under the new system would be about the same as the current system; it would simply shift the fee burden to institutions that take on more risk.

The FDIC collects about $14 billion in deposit insurance fees per year from the bank industry.

(Reporting by Karey Wutkowski; Editing by Tim Dobbyn)