The Federal Deposit Insurance Corporation (“FDIC”) board recently adopted by a vote of four (4) to one (1) substantial revisions to its February 2009 interim final rule which imposed a special assessment on all insured depository institutions. Among the revisions are a reduction of the special assessment from twenty (20) basis points to five (5) basis points and a significant change in the method of calculating the special assessment.
The February interim rule imposed a special emergency assessment of twenty (20) basis points in light of recent existing and projected losses to the Deposit Insurance Fund (“DIF”) due to increased failures. The special assessment was part of a Restoration Plan for the DIF adopted by the FDIC’s board. The special assessment was to be based on each institution’s deposit assessment base as of June 30, 2009, which is the typical formula for calculation of FDIC assessments. It was to be collected on September 30, 2009 along with the regular quarterly risk-based assessments. The interim rule also provided for the possibility of additional emergency assessments in subsequent quarters of up to ten (10) basis points of each institution’s deposit assessment base if deemed necessary by the FDIC.
The final rule made major changes to the interim rule. The twenty (20) basis point special assessment was reduced to five (5) basis points. However, instead of using each institution’s deposit assessment base for the special assessment, it will be calculated upon the institution’s total assets less tier one capital as of June 30, 2009. Notwithstanding the use of the asset-based formula, the final rule provides that the special assessment may not exceed ten (10) basis points times the institution’s deposit assessment base for the second quarter of 2009. The FDIC estimated that the total amount collected under the asset-based special assessment will approximate seven and one-third (71/3) basis points of the industry’s aggregate deposit base for the second quarter. The special assessment will continue to be collected on September 30, 2009.
The final rule allows for additional emergency assessments in the final two quarters of 2009. Those additional assessments may each amount to up to five (5) basis points of total assets less tier one capital (with any single assessment not exceeding ten (10) basis points times the institution’s usual deposit assessment base for the corresponding quarter). The additional assessments may be imposed by the FDIC if deemed necessary to ensure that the DIF reserve ratio does not decline to a level that is close to zero or that could otherwise undermine public confidence in federal deposit insurance. FDIC Chairman Bair commented at the FDIC board meeting that her current view is that, at worst, there may be a similar five (5) basis point asset-based assessment in fourth quarter 2009.
The FDIC noted that it was able to reduce the special assessment because of subsequent events which provided additional sources of funding. For example, the FDIC recently imposed a surcharge on certain senior unsecured debt guaranteed under its Temporary Liquidity Guarantee Program. Congress also increased the FDIC’s borrowing authority from the U.S. Treasury from $30 billion to $100 billion. With the concurrence of the Federal Reserve Board and the Secretary of the Treasury, after consultation with the President, the FDIC has temporary additional borrowing authority until December 31, 2010 of up to $500 billion. That increase in available funding provided the DIF with an additional cushion against unexpected bank failures and allowed a reduction of the special assessment.
The FDIC indicated that it received over 14,000 comments on the twenty (20) basis point interim rule, the “vast majority of which” stressed the significant adverse effect the assessment would have on the banking industry at a time of great economic stress. Many commenters argued that the special assessment should be based on assets rather than deposits because assets more accurately reflect risk and that approach would lessen the burden on smaller banks. The FDIC agreed with those commenters, indicating that it believed that the asset-based assessment “better balances the burden of the special assessment.”
Comptroller of the Currency John Dugan dissented from the FDIC board’s vote approving the final rule. His dissenting statement suggested that the final rule created a presumption of a special assessment whenever the fund is projected to approach zero, which he viewed as inappropriate in light of the FDIC’s increased borrowing authority. He indicated that the FDIC’s borrowing authority could be used to reduce the up front costs of assessments by spreading them out over time. He also did not believe that the change to an asset-based formula had been adequately presented for public comment or, as a substantive matter, sufficiently justified, noting his view that the case for making the change was “exceptionally thin.”
The FDIC also issued a Financial Institutions Letter (“FIL”) emphasizing that examiners will be instructed to consider the expected nonrecurring nature of the special assessment when evaluating an institution’s earnings, capital and liquidity. For example, when evaluating earnings, the FIL states that examiners are expected to develop an understanding of the institution’s core business activities and consider how nonrecurring events, such as the special assessment, affect earnings performance by adjusting earnings on a tax-equivalent basis. The FIL indicated that institutions are expected to comply with applicable regulatory capital and Prompt Corrective Action standards. However, the FIL suggests that an institution’s CAMELS component or composite ratings will not be downgraded just because of the adverse effect of the special assessment. The other federal depository institution regulators are expected to take a similar approach.