A special, five basis point assessment for the second quarter will be added to the new risk-based assessments for participants in the Deposit Insurance Fund (DIF).1 Unlike other assessments, which are based on deposits, the special assessment is based on an asset measurement—for all but the smallest institutions, total assets less Tier 1 capital. A second special assessment probably in the same amount is likely in the third or fourth quarter of this year.
The FDIC has explained that the special assessment is part of an effort to restore public confidence in the banking system, by ensuring that the FDIC has the funds necessary to protect consumers in the event of a bank failure. Absent the new special assessment, the costs of anticipated failures and resolutions would, according to the FDIC, likely overwhelm the DIF. The special assessment is part of the recent series of changes to the FDIC’s assessment methodology; we review that history, together with the special assessment, below. A summary chart is provided at the end.
2008 Restoration Plan
The changes to and increases in DIF assessments have their roots in Section 7(b)(3)(E) of the Federal Deposit Insurance Act (“FDI Act”). This provision requires the FDIC to set the designated reserve ratio for the DIF within a range of 1.15 percent to 1.50 percent of estimated insured deposits. If, at any time, the reserve ratio falls below 1.15 percent or the FDIC projects that, within six months, the ratio will drop below this floor, the FDIC must establish a plan to restore the DIF to at least 1.15 percent within a five year period.2 Any consequent changes to assessments must adhere to the requirement in Section 7(b)(1)(A) that the FDIC implement a risk-based assessment system.
The DIF fell below the 1.15 ratio to 1.10 as of the end of the second quarter in 2008 (and fell further as of the end of the third quarter to 0.76).3 Accordingly, on October 7, 2008, the FDIC announced a Restoration Plan4 to rebuild the DIF. Accompanying the plan were proposals to change the assessment process in the first and second quarters of 2009. The first quarter change would have taken the form of an across-the-board increase in the assessment rate schedule. For the second quarter, the FDIC proposed an increase of 20 basis points in all base assessments and additional risk factors.
Assessment Changes for 2009
The final rule for the first quarter of 2009 followed the across-the-board concept, raising all rates by seven basis points.5
As for the second quarter, the widespread industry consensus was that the proposed base rate increase would be too burdensome. The FDIC agreed and, at the end of February 2009, published three documents that took account of this concern. First, the FDIC revised its October 2008 Restoration Plan6 to extend the restoration period to seven years from five.7
Second, the FDIC significantly revised its risk-based methodology for all quarters going forward. Highlights of the final rule include
- an expanded range between minimum and maximum initial assessment rates (from two to four basis points) for institutions in Risk Category I;
- a new brokered deposit adjustment 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 percent of domestic deposits and whose total gross assets are more than 40 percent greater than they were four years previously, after adjusting for mergers and acquisitions;
- 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);
- an increase in the maximum possible Risk Category I large bank adjustment from 0.5 basis point to 1.0 basis point;
- an unsecured debt adjustment for institutions in all risk categories, with any downward adjustment limited to five basis points;
- a secured liability adjustment for institutions in all risk categories;
- a brokered deposit adjustment for institutions in Risk Category II, III and IV, limited to no more than 10 basis points; and
- new initial and total assessment rates for each risk category, with total base assessment rates ranging from seven to 24.0 basis points for Risk Category I to 40 to 77.5 basis points for Risk Category IV.
For Risk Category I, which includes the bulk of insured depository institutions, the eligibility criteria have not changed. As a general rule, any bank or thrift that is well-capitalized and has a composite CAMELS rating of 1 or 2 is a Category I institution.8 The risk-based assessment calculation for each institution is complicated, however. Three elements are taken into account. The base assessment is within the range of five to seven basis points. The institution’s place in the range depends either on certain financial ratios or, in the case of a bank with $10 billion or more in assets, a calculation that takes the issuer debt rating into account. Additionally, a brokered deposit component comes into play for institutions where brokered deposits constitute more than 10 percent of domestic deposits and where total gross assets have increased by more than 40 percent over the past four years (after adjusting for mergers and acquisitions). A second element is an adjustment for the ratio of long-term unsecured debt to domestic deposits, which can result in a reduction in the assessment of up to five basis points. The last adjustment is a potential increase that reflects the ratio of secured liabilities to domestic deposits. The maximum increase in Risk Category I is eight basis points, but it can be significantly higher in the higher risk categories.
The Second Quarter Special Assessment
The third release at the end of February was a final interim rule for an emergency special assessment.9 Section 7(b)(6) of the FDI Act authorizes the FDIC authority to impose special assessments on insured depository institutions in “emergency” situations. The interim rule would have imposed a one-time assessment equal to 20 basis points of an institution’s assessment base on June 30, 2009.10
On May 22, 2009, the board of directors of the FDIC approved a more modest special assessment of five basis points, but nevertheless one that applies equally to all banks and thrifts—i.e., it is not risk-based—and that is based on asset size rather than deposits. The rule includes the following provisions:
- A five-basis point special assessment on each institution’s assets minus its Tier 1 capital as reported in its report of condition as of June 30, 2009. For institutions that rely proportionately more substantially on non-deposit funding, the assessment may have a greater comparative effect on those institutions.
- The assessment is capped at 10 basis points of domestic deposits.
- The FDIC may, for the third and fourth quarters, impose additional and similarly calculated special assessments of up to five basis points for the third and fourth quarters of 2009. Any such assessments also would be subject to the 10 basis point cap.
- The FDIC’s authority to impose any additional special assessments expires on December 31, 2009.
In connection with the May 22 decision on the second quarter special assessment, the FDIC staff recommended, and Chairman Bair has since confirmed, that the FDIC should consider another similar assessment later in the year. Chairman Bair has indicated that such a decision is likely for the fourth quarter.
Please click here to view Deposit Insurance Assessments, 2007-2009, Annualized.