Deposit insurance assessments on deposits at foreign branches of U.S. banks

Under current law, domestic deposits of federally insured banks are subject to a 1/12th of one percent per annum insurance assessment, while foreign deposits are not. This paper examines the arguments for and against extending this assessment to foreign branch deposits of insured banks, which in the aggregate amount to more than $200 billion. These arguments are based on real or imagined effects on FDIC revenues, the competitive position of various types of U.S. banks, international lending, bank capital format ion, the functioning of the international interbank markets, the general efficiency of resource allocation, and the \"fairness\" of assessment allocations. These arguments depend critically on assumptions about the incidence of an extension of the FDIC assessment. ; The arguments are individually evaluated under assumptions about likely incidence effects on loan and deposit customers in a three sector--money center banks, foreign banks, and regional and smaller banks--collar banking system. In general, assuming all loan and deposit schedules are somewhat but not perfectly elastic in the neighborhood of equilibrium, the likely effects of an extension of the FDIC assessment can be summarized as follows: (1) slight increase in domestic deposit rates and volumes of U.S. and foreign-chartered banks; (2) slight decline in foreign branch deposit rates and volumes of U.S.-chartered and insured banks; (3) slight increase in deposit rates and volumes at foreign offices of foreign-chartered banks; (4) slight increase in interbank rates; and (5) slight increases in loan rates and a slight decline in the aggregate loan volume of the dollar banking system. The distribution of the decline in aggregate volume would depend on the elasticities of various Loan demand functions. It is also likely that the total deposits of the dollar banking system would decline slightly. The sectoral distribution of this effect would again depend on the elasticities of demand schedules.