U.S. banking regulators on Tuesday approved an initial plan to change the way they calculate how much banks pay for deposit insurance, placing a greater burden on bigger banks.

The Federal Deposit Insurance Corp., which guarantees deposits in the event of a bank failure, currently charges banks quarterly fees based on the total domestic deposits.

The new Dodd-Frank financial overhaul law directs the FDIC to change that formula. The FDIC is proposing to base the fees on a measure of banks' assets, a formula that favors smaller banks.

FDIC official said banks with $10 billion or more in assets would pay 80% of total insurance fund fees, up from 70%. Most of that increase would be shouldered by the very largest banks, those with $100 billion or more of assets.

The change will mean the three largest banks, Citigroup Inc. (C), Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) will pay a combined $1 billion in additional premiums every year, said James Chesssen, chief economist at the American Bankers Association.

"It's a very large cost for the very largest banks," he said.

Acting Comptroller of the Currency John Walsh called the new system "a sea change."

"It breaks the link between deposit insurance and deposits for the first time," he said. "This is quite significant."

Under the FDIC's proposal, those fees will be calculated based on a bank's average total consolidated assets, minus tangible equity, such as common stock.

The new assessment system would start on April 1, 2011, after a 45 day public comment period, during which the agency could make changes to the proposal. The April 1 start date would call for the new charges to take effect in the second quarter of next year.

Community bankers stand to save billions in fees under the new assessment scheme and have championed the measure. They pitched it as a way to hold the largest firms more accountable for the greater risk they pose to the financial system.

The provision "will ensure that these institutions pay their fair share," Camden Fine, president of the Independent Community Bankers of America, said during the House debate on the bill.

The new assessment formula gained traction during the Dodd-Frank bill negotiations, backed by the anti-Wall Street sentiment that fueled a crackdown on the country's biggest banks. It drew far less notice than a proposed bank tax or efforts to break up the largest financial firms.

Smaller banks rely more on bank deposits to provide money for lending. Larger banks, by contrast, have access to other sources of funding, such as the commercial paper market.

The FDIC proposal is revenue neutral. Because the proposal would broaden the assessment base, FDIC officials said the overall rates banks pay would fall to a range of 0.05% to 0.35%, from a range of 0.12% to 0.45%.

The FDIC proposal would give a special adjustment to so-called custodial banks and bankers' banks, essentially giving these institutions a break on a low-risk portion of their balance sheets due to their unique business models, FDIC officials said.

Bankers' banks provide financial services to smaller banks and don't provide retail services to the general public. Neither do custodial banks like State Street Corp. (STT) and Bank Of New York Mellon Corp. (BK), which instead act as agents in securities sales and transactions for institutional investors and brokerage houses.

Also Tuesday, the FDIC proposed a new system to assess the risks posed by the largest banks. Under the agency's new formula, those institutions would be evaluated based on the risks they pose to the financial system and their probability of failure.

So far this year, 141 banks have failed, eclipsing last year's total of 140. The FDIC last month lowered its estimates for bank losses to the deposit insurance fund to $52 billion from 2010 through 2014. That's down from $60 billion in losses predicted in June. The change is due to projections that bank failures this year will be less costly than anticipated.

As a result, regulators have decided to forgo a planned rate increase on banks paying into the FDIC's insurance deposit fund.

-By Alan Zibel and Victoria McGrane, Dow Jones Newswires; 202-862-9263; alan.zibel@dowjones.com
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