Today, the FDIC Board of Directors approved, by a 4-1 vote, a Final Rule on special assessments. The Final Rule amends an Interim Rule that would have charged banks a one-time fee of 20 basis points based on domestic deposits. Recognizing the significant expense that the proposed assessment would have imposed on banks, particularly smaller banks, the FDIC undertook a number of measures to reduce the special assessment following the adoption of the Interim Rule. First, the FDIC imposed a surcharge on senior unsecured debt guaranteed under the Temporary Liquidity Guarantee Program (“TGLP”). Second, the FDIC successfully urged Congressional action to increase the FDIC’s borrowing authority . Both of these measures allowed for the FDIC to somewhat reduce the size of the special assessment, but the FDIC staff estimates that without the special assessment, the reserve ratio of the Deposit Insurance Fund will be negative by the end of this year.
The Final Rule:
- Imposes a 5 basis point special assessment on each insured depository institution's assets minus its Tier 1 capital as reported in its report of condition as of June 30, 2009, effectively imposing more of the special assessment burden on larger banks, which tend to rely more on non-deposit funding sources.
- Caps the special assessment at 10 basis points for risk-based assessment for the second quarter of 2009.
- Authorizes the impositions of additional special assessments up to 5 basis points on all insured depository institutions based on each institution's assets minus its Tier 1 capital for the third and fourth quarters of 2009.
- Caps additional special assessments at 10 basis points on the institution's assessment base for the corresponding quarter's risk-based assessment.
- Terminates the FDIC's authority to impose any additional special assessments under the final rule on January 1, 2010.
The special assessment will be collected on September 30, 2009.
FDIC Chairman Sheila Bair stated, “[a]ssessments are a significant expense, particularly during a financial crisis and recession when bank earnings are under pressure.” While recognizing the effect that these assessments may have on the ability of banks to lend, Bair went on to say, “deposit insurance provides a benefit for which banks have always paid. And backed by deposit insurance, deposit funding costs have fallen significantly, approaching historic lows. Indeed, the unique ability of banks to access low-cost, government-backed deposits has contributed to the recent increased profitability of many banks. For these reasons, we have tried to strike the right balance between keeping the assessment low enough so that it does not unduly burden lending capacity with our longstanding commitment to cover all projected costs through industry assessments, not taxpayer borrowing."
Comptroller of the Currency John Dugan, while agreeing that steps are needed to “ensure that the fund has the resources it needs to deal with future bank failures,” voted against adoption of the Final Rule. He offered the following three reasons for his decision: (i) the special assessments “without further comment from the public is too high, with the significant potential for pro-cyclical consequences”; (ii) the Board should not “create a presumption of special assessments” any time the fund has the potential of falling below zero; and (iii) the public did not have adequate notice of the changes nor did the changes bear any relation “to the increased losses to the deposit insurance fund – both incurred and projected – that are the very reason for the special assessment.”
Also today, the FDIC issued a Financial Institution Letter (FIL-23-2009) entitled “Consideration of the Special Assessment When Analyzing and Rating Financial Institutions.” In the letter, the FDIC stated that these special assessments should not affect an insured institution’s supervisory component or composite rating. Instead, when assessing an institution's earnings posture, capital, and liquidity, examiners will treat the special assessment like a nonrecurring item.