On December 16, 2008, the FDIC adopted a final rule increasing its risk-based deposit insurance assessment scale uniformly by seven (7) basis points for first quarter 2009. The assessment scale for first quarter 2009 will range from twelve (12) basis points of assessable deposits for the strongest institutions to fifty (50) basis points for the weakest. The across-the-board increase is identical to that proposed in the FDIC’s Notice of Proposed Rulemaking, which was published in the Federal Register on October 16, 2008 (the “NPR”), and which was the subject of a Kilpatrick Stockton Legal Alert dated October 8, 2008.
The FDIC attributes the assessment increase to recent failures of FDIC-insured institutions. The costs arising from the failures lowered the reserve ratio of the Deposit Insurance Fund (“DIF”) from 1.19% as of March 30, 2008 to 0.76% as of September 30, 2008. The agency also indicated that it expects a higher rate of failures over the next several years.
The FDIC is required by law to establish a Restoration Plan any time the DIF reserve ratio falls below 1.15%. The Restoration Plan must provide for achieving the 1.15% reserve ratio within a five (5) year period absent “extraordinary circumstances.” The FDIC adopted the required Restoration Plan in October and it contemplates increased deposit insurance assessments. The FDIC rejected, at least for now, comments in response to NPR that urged it to use its authority to declare “extraordinary circumstances,” which would have allowed it longer than five (5) years to restore the reserve ratio to 1.15% and thereby reduce the necessary assessment increase. The FDIC called that approach “premature” in light of uncertainty surrounding future DIF losses and insured deposit growth, but noted that it could revisit the issue should circumstances dictate.
The FDIC’s action applies only to the first quarter of 2009 and does not affect the NPR’s proposal to adopt further changes in the risk-based assessment scale effective April 1, 2009, designed to make the assessment system more risk sensitive and ensure that riskier institutions bear a greater share of the assessments. Proposed adjustments to the scale include: (i) adding a surcharge for certain institutions (institutions in the three riskiest categories for FDIC assessment purposes) that use brokered deposits to fund growth, (ii) providing a possible discount of up to two (2) basis points based on an institution’s ratio of long-term unsecured debt, including senior unsecured and subordinated debt, to domestic deposits (for “small institutions” (generally, those with less than $10 billion in assets), the ratio could include a certain amount of Tier 1 capital) and (iii) adding a surcharge based upon an institution’s ratio of secured liabilities (including Federal Home Loan Bank advances, securities sold under repurchase agreements, secured Federal Funds purchased and certain other secured borrowings) to domestic deposits, if greater than 15%.
In conjunction with the suggested changes for April 2009, the FDIC’s NPR proposed to reduce the now adopted base assessment scale for January 1, 2009, to a minimum of ten (10) basis points for the most highly rated institutions and a maximum of forty-five (45) basis points for the riskiest. However, with the NPR’s proposed sensitivity adjustments, the actual proposed assessment scale could range anywhere from eight (8) basis points to 77.5 basis points for very risky institutions that rely on secured liabilities and brokered deposits.
The comment period on the NPR’s proposed changes for April 2009 closes on December 17, 2009. Final action on the FDIC’s further revisions to the assessment scale is expected in early 2009.