Today, the FDIC Board of Directors approved (1) a Final Rule on Risk-Based Assessments, (2) an Interim Rule imposing a 20 basis point emergency special assessment and (3) an Amended Restoration Plan.

Risk-Based Assessments Final Rule

The Final Rule on risk-based assessments approved by the Board today is expected to improve the way the assessment system differentiates risk by making it more sensitive to risk and fairer to healthy institutions by limiting the subsidization of riskier institutions. The Final Rule generally tracks the proposed rule but includes certain changes that reflect comments received and the further deterioration of the U.S. financial system. The Final Rule provides for the following:

  1. an expanded range between minimum and maximum initial assessment rates (from 2 to 4 basis points) for institutions in Risk Category I;
  2. a new brokered deposit adjustment (of up to 10 basis points) to be included with the financial ratio method for institutions in Risk Category I that have brokered deposits (less reciprocal deposits) in excess of 10% of domestic deposits and whose total gross assets are more than 40% greater than they were four years previously after adjusting for mergers and acquisitions;
  3. the addition of the financial ratios method assessment rate to the assessment rate formula for large institutions with a long-term debt issuer rating (the large bank method);
  4. an increase in the maximum possible Risk Category I large bank adjustment from 0.5 basis point to 1.0 basis point;
  5. an unsecured debt adjustment for institutions in all risk categories, with any downward adjustment limited to 5 basis points;
  6. a secured liability adjustment for institutions in all risk categories;
  7. a brokered deposit adjustment for institutions in Risk Category II, III, and IV limited to no more than 10 basis points; and
  8. new initial and total assessment rates for each risk category with total base assessment rates ranging from 7 to 24.0 basis points for Risk Category I to 40 to 77.5 basis points for Risk Category IV.

The Final Rule is effective April 1, 2009 and will apply to second quarter assessments to be collected September 30, 2009.

Emergency Special Assessment Interim Rule

The Interim Assessment Rule imposing an emergency special assessment also was approved today by the Board pursuant to the emergency special assessment provision of the Federal Deposit Insurance Act (12 U.S.C. § 1817(b)(5)). The FDIC is imposing this assessment because it is concerned that the Deposit Insurance Fund balance and reserve ratio may drop to zero or become negative in the near future as a result of the substantial number of anticipated institution failures over the next few years and that this drop may undermine public confidence in the federal deposit insurance. The assessment will be 20 basis points on an institution’s June 30, 2009 assessment base and will be due September 30, 2009. The FDIC expects the assessment to increase the reserve ratio by approximately 32 basis points and, combined with the rates adopted today in the Final Rule, will return the reserve ratio to the required 1.15 percent by year-end 2015 as required by the Amended Restoration Plan. However, the Interim Assessment Rule also provides the Board with the authority to impose additional emergency special assessments of up to 10 basis points thereafter if the reserve ratio is estimated to fall below a level that would (a) adversely affect public confidence or (b) be close to zero or negative at the end of a calendar quarter. In approving the Interim Assessment Rule, the Board members recognized that they were balancing competing interests. In fact, OTS Director Reich was the lone dissenter, arguing that this assessment comes at a time when the banks can least support it. He posited that the public is not focusing on the reserve ratio and that the assessment would result in a 12% reduction in lending capacity. He recommended that the FDIC instead use its authority to borrow from the Treasury.

Restoration Plan Amendments

Finally, the FDIC Board of Directors today also approved amendments to the Restoration Plan for the Deposit Insurance Fund established on October 7, 2008. The Restoration Plan was amended to extend the period of the Restoration Plan from 5 to 7 years. This extension is permitted under the Federal Deposit Insurance Act for “extraordinary circumstances.” The FDIC has determined that the $26.2 billion fourth quarter losses for banks and thrifts, the “enormous stresses on financial institutions and the likelihood of a prolonged and sever economic recession” met the statutory “extraordinary circumstances” requirement. The amendments also included, among other provisions, the publication of the Final Rule and the Interim Assessment Rule. The Amended Restoration Plan is to be implemented immediately.