In connection with its new capital restoration plan for the Deposit Insurance Fund (DIF), the FDIC will forego a uniform 3 basis point increase in initial assessment rates that was scheduled to take effect on January 1, 2011. The FDIC on October 19 approved a long-range plan to manage the DIF, which includes the new Restoration Plan, to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The FDIC said that it decided to keep the current assessment rate schedule in effect because an updated FDIC analysis predicts somewhat lower DIF losses from 2010 through 2014. The FDIC now projects that the DIF reserve ratio will reach 1.15% by the fourth quarter of 2018 without the 3 basis point increase in initial assessment rates. The FDIC also issued a proposed rule that would set the DIF reserve ratio at 2% as a long-term, minimum goal, adopt a lower assessment rate schedule when the reserve ratio reaches 1.15% so that the average assessment rate over time should be about 8.5 basis points and, in lieu of dividends, adopt lower rate schedules when the reserve ratio reaches 2% and 2.5% so that average assessment rates will decline by about 25% and 50%, respectively. Comments on the proposed rule are due by November 26, 2010.
Nutter Notes: The proposed rule is based on an FDIC historical analysis of DIF losses which shows that, to maintain a positive fund balance and steady, predictable assessment rates, the DIF reserve ratio should be at least 2% before a period of large fund losses, and average assessment rates over time should be approximately 8.5 basis points. The Dodd-Frank Act raised the minimum designated reserve ratio of the DIF to 1.35% from the former minimum of 1.15%, and removed the upper limit on the reserve ratio which was formerly capped at 1.5%. The Dodd-Frank Act also requires the FDIC to take “such steps as may be necessary” to increase the DIF reserve ratio to 1.35% of estimated insured deposits by September 30, 2020, rather than 1.15% by the end of 2016, as formerly required. In addition, the Dodd-Frank Act eliminated the requirement that the FDIC pay dividends from the DIF when the reserve ratio is between 1.35% and 1.5% and granted the FDIC discretion in determining whether to suspend or limit the declaration or payment of dividends. In setting assessments, the Dodd-Frank Act requires the FDIC to “offset the effect of [requiring that the reserve ratio reach 1.35% by September 30, 2020] on insured depository institutions with total consolidated assets of less than $10,000,000,000.” Accordingly, the FDIC said it intends to propose another rule next year to address the method that will be used to assess insured depository institutions with total consolidated assets of $10,000,000,000 or more to reach the required reserve ratio of 1.35%.