FDIC Warns Banks to Rectify “Inaccurate” Financial Statements Preceding Proposed Special Fee

The U.S. Federal Deposit Insurance Corporation (FDIC) has issued a warning to banks regarding “incorrectly” reduced uninsured deposits in their financial statements. These restatements coincided with the FDIC’s plan to impose a special fee, primarily targeting large firms, to recover losses resulting from the failures of institutions like Silicon Valley Bank. The proposed fee, assessed based on uninsured deposits at the end of 2022, has prompted complaints from banks potentially facing billions of dollars in fees.

In response to recent restatements of financial statements by several banks, the FDIC cautioned against inaccurately reducing uninsured deposits. These revisions occurred prior to the FDIC’s proposal for a special fee linked to the size of uninsured deposits held by banks at the end of 2022. Large firms, in particular, expressed concerns about the potential financial burden they may face due to this fee.

In May, the FDIC introduced a plan to impose a special fee assessment, mainly targeting large financial institutions. The objective was to recover losses incurred from the failures of banks like Silicon Valley Bank. The fee’s calculation would be based on the volume of uninsured deposits each bank held at the end of 2022, which could result in substantial financial consequences for the affected banks.

The FDIC raised concerns that some banks were not reporting estimated uninsured deposits in line with the provided instructions. While the regulator did not disclose the names of these banks, it emphasized the importance of accurate reporting, particularly regarding uninsured deposits backed by pledged assets and those held within bank subsidiaries.

The FDIC specifically highlighted that some banks inaccurately reduced the reported amounts of uninsured deposits. One common method involved reflecting collateralization of deposits by pledged assets. This means that banks used the value of pledged assets to offset the reported amount of uninsured deposits, which contravenes the FDIC’s reporting guidelines. Additionally, excluding intercompany deposit balances of subsidiaries was another method contributing to inaccurate reporting.

A report by S&P Global on July 6 drew attention to the issue, noting that 55 banks restated their fourth-quarter uninsured deposits in their FDIC reports. This number was more than twice the average number of restatements, indicating that the FDIC’s concerns were significant and widespread

Bank of America was one of the banks that revised its uninsured deposits downward by 13.8% to $783.92 billion in May. The revision aimed to remove intra-bank accounts from uninsured deposits. Bank of America’s spokesperson, Bill Halldin, clarified that the revision was due to the identification of certain internal or intra-bank accounts that should not have been reported as uninsured deposits. The bank has no plans to alter the latest reported number to the FDIC.

In S&P Global’s report, it was noted that Huntington National Bank reduced its uninsured deposits by 39.9% during the restatement, marking the largest percentage decline among all banks analyzed. However, bank spokespeople did not respond to requests for comments on this matter.

Several larger firms expressed their displeasure with the proposed special fee, arguing that it would disproportionately affect them. They claimed not to have benefited from the government’s efforts to backstop depositors at smaller lenders. The Bank Policy Institute, which represents larger banks, criticized the FDIC’s assessment methodology in a letter, stating that the regulator had not provided sufficient supporting analysis.

The FDIC’s warning to banks about “inaccurate” financial statements has raised concerns in the financial sector, particularly in light of the proposed special fee tied to uninsured deposits. As banks face potential financial consequences and challenges in complying with FDIC reporting guidelines, it is essential for them to address these issues promptly. The proposed fee has drawn criticism from larger firms, highlighting the need for transparency and robust analysis in the FDIC’s approach to recover losses from bank failures. As the situation unfolds, banks will need to navigate these challenges and ensure fair and accurate reporting to maintain stability and trust within the financial industry.