FDIC Study: Rising Deposit Insurance Ratings Drive Lower Bank Lending

According to a working paper released today by the FDIC’s Financial Research Center, the increase in deposit insurance valuation rates during a period of economic stress resulted in a “significant decline” in the growth of bank lending, which disproportionately affected smaller community banks. The authors used confidential FDIC data from the 2008-2009 financial crisis to explore the link between procyclical regulation of deposit insurance premiums and bank lending, and found that the rate of loan growth declined 1.6% in the quarter after a seven basis point increase in deposit insurance premiums. Banks with less than $100 million in assets saw a 2% decline.

The authors used credit unions as a control group, noting that 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 neglected in the procyclicality discussion, may be an important 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 that increasing deposit insurance premiums may have costs that should be taken into account, especially during a crisis.”