Earlier today, in order to "shore up the resources of the Deposit Insurance Fund (DIF)," and to address "its need for cash to pay for projected failures," the FDIC Board of Directors took the following actions:

  • Adopted a further revised Amended Restoration Plan that contemplates, among other things, no further special assessments.
  • Approved a Notice of Proposed Rulemaking that would require insured institutions to prepay their estimated fourth quarter 2009 and full-year 2010 through 2012 assessments

Amended Restoration Plan. The FDIC adopted the following additional amendments, to be implemented immediately, to the Amended Restoration Plan adopted on February 27, 2009:

  • Extended the period of the Amended Restoration Plan from seven to eight years;
  • Prohibited the imposition of any further special assessments under the final rule adopted in May 2009, as this would "impose a burden on an industry that is already struggling to maintain positive earnings overall";
  • Maintain assessment rates at their current levels through the end of 2010, and then immediately adopt a uniform 3 basis point increase in assessment rates effective January 1, 2011, to ensure that the fund returns to the mandated 1.15% level within the eight-year Amended Restoration Plan period; and
  • At least semi-annually, the FDIC will update its loss and income projections for the DIF, and increase assessment rates (subject to notice and comment) prior to the end of the eight-year period, if necessary, to return the reserve ratio to the 1.15% level.

The amendments were recommended by FDIC staff, based on their projections that the DIF could "incur approximately $100 billion in failure costs," over the next four-five years, although primarily in 2009 and 2010 (of which an estimated $25 billion has been incurred during 2009 year-to-date), which would, assuming the FDIC Board imposes no further special assessments and leaves existing risk-based assessments in place, cause the DIF balance to "become significantly negative in 2010 and may remain negative until 2013."

Proposed Prepayment of Assessments. The FDIC approved a Notice of Proposed Rulemaking and Request for Comment that would require insured institutions to prepay, on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. For the fourth quarter of 2009 and for all of 2010, the prepaid assessment rate would be based on each institution’s total base assessment rate for the third quarter of 2009, modified to assume that the assessment rate in effect for the institution on September 30, 2009, had been in effect for the entire third quarter of 2009. The prepaid assessment rate for 2011 and 2012 would be equal to the institution’s modified third quarter 2009 total base assessment rate plus 3 basis points. Institutions' assessment base would be adjusted quarterly, assuming a 5% annual growth rate. If the prepayment amount is not exhausted by December 30, 2014, or if the institution ceases to be an insured institution, any remaining amount would be returned to the institution. Although the prepaid assessments would be mandatory for all institutions, the FDIC may exercise its discretion as supervisor and insurer to exempt an institution from the prepayment requirement if the FDIC determines that the prepayment would adversely affect the safety and soundness of the institution, or institutions may request exemption from payment under certain circumstances.

The FDIC staff proposed the prepaid assessments "as a means of collecting enough cash to meet upcoming liquidity needs to fund future resolutions," and believes that this proposal "should not significantly affect depository institutions' current lending activities" and is "preferable to borrowing from the US Treasury" in order to "ensure that the depository insurance system remains directly industry-funded." The FDIC states that it expects the prepayment would be accounted for as a prepaid expense, with no income statement impact until actual assessments are offset against the prepayment amount.

The deadline for submission of comments is October 28, 2009.