April 12 (Reuters) – The Federal Deposit Insurance Corporation is expected to propose next month how the U.S. banking sector can pay for an estimated $23 billion hole in its insurance fund from the collapse of Silicon Valley Bank and Signature Bank in March.

The agency has broad authority to set terms known as “special assessments” to fill vacancies, and exactly what that will look like is still an open question.

Banking trade firms told Reuters they had yet to hear specifics on the valuation. The FDIC declined to comment.

Here’s what to know about appraisals and insurance funds:

What is Deposit Insurance Fund?

The Deposit Insurance Fund (DIF) is a pool of cash that the FDIC guarantees up to $250,000 of depositors’ money. As an insurance premium, banks typically provide a quarterly “valuation” based on financial data and a set methodology for determining risk.

Last month to stem the spread of panic withdrawals throughout the banking system, the FDIC guaranteed all deposits at SVB and Signature Bank, even those over $250,000. Such losses require the FDIC to impose a “special assessment” to meet the DIF.

The law does not define the “assessment base” for special assessment or which banks will pay it. There is no time limit for recovery of funds. Echoing testimony from FDIC Chair Martin Gruenberg, former FDIC Chair Sheila Baer told Reuters on April 6 that the agency has “a lot of latitude” in designing special assessments.

What happened last time?

Currently, the law requires the FDIC to maintain $1.35 in funds for every $100 of insured deposits. By the end of December, DIF’s balance stood at $128.2 billion, meaning bank failure funds in March could account for about 18%.

The sheer volume of bank failures during the 2008 financial crisis pushed DIF nearly $20 billion into the red. After a public comment period, the FDIC’s May 2009 special assessment final rule placed the cost burden on the shoulders of the largest financial institutions.

In the second quarter of 2009, for example, JPMorgan Chase & Co ( JPM.N ) booked a $675 million pre-tax charge for special assessments, which it said deducted 10 cents from earnings per share. Wells Fargo (WFC.N) reported an 8 cents-per-share earnings hit

Who will give special assessment?

When the FDIC initially called for a 20 basis point assessment of banks’ insured deposit amounts after the 2008 financial crisis, small-town bankers pushed back hard, letters written at the time show.

Top officials in Washington have indicated that regulators likely won’t make small banks pay this time for last month’s failure. This reflects a shift by Congress and the FDIC after the 2008 debacle to require larger, riskier banks to contribute proportionately more to maintaining DIF.

An industry representative, speaking on condition of anonymity, told Reuters that bankers expect the final bill to be less than $23 billion after the FDIC completes the sale of SVB and Signature Bank’s assets.

Reporting by Douglas Gillison and Hannah Lang in Washington; Edited by Anna Driver

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Hannah Lang

Thomson Reuters

Hannah Lang covers financial technology and cryptocurrency, including the businesses that drive the industry and the policy developments that govern the sector. Hannah previously worked at American Banker where she covered bank regulation and the Federal Reserve. He graduated from the University of Maryland, College Park and lives in Washington, DC.

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