On September 29, 2009, the Board of Directors of the Federal Deposit Insurance Corporation (“FDIC”) issued a proposed rule that would require all FDIC-insured depository institutions to prepay estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The proposed prepaid assessments are an attempt by the FDIC to provide for additional liquidity for the Deposit Insurance Fund (“DIF”) in light of projected needs arising from bank and thrift failures.
The FDIC’s proposed rulemaking indicates that the DIF had $55 billion in total asset, in June 2008, almost all in cash and marketable securities. Given the recent economic crisis, the DIF’s liquid assets have declined to about $22 billion, as cash has been paid out to resolve failed institutions. The DIF has acquired less liquid claims against assets of failed institutions through that process. However, it will take time to convert those to cash, and the FDIC projects that the DIF has an immediate need for liquidity in order to fund near-term failures. According to the projections, if no action is taken, the FDIC’s liquidity needs to resolve failures could exceed its liquid assets beginning in the first quarter of 2010.
In order to address the DIF’s liquidity needs, the FDIC has proposed requiring all insured institutions to prepay their estimated risk-based assessments for the fourth quarter of 2009 and for 2010, 2011 and 2012. The prepayment would be collected on December 30, 2009, along with institutions’ regular quarterly deposit insurance assessments for the third quarter of 2009. For the fourth quarter of 2009 and all of 2010, the prepaid assessments would be based on an institution’s total base assessment rate in effect on September 30, 2009. That rate would be increased by three (3) basis points for the 2011 and 2012 prepayments. A quarterly five (5) percent growth rate in the assessment base would also be built into the calculation.
According to the FDIC, the prepaid assessments initially would be accounted for as a prepaid expense, which is an asset that would carry a zero risk-weighting for risk-based regulatory capital purposes. As of December 31, 2009, and quarterly thereafter, each institution would expense its regular quarterly assessment and record an offsetting credit to the prepaid assessment asset until the asset is exhausted. The FDIC indicated that, once the asset is exhausted, an institution would record an accrued expense payable each quarter for the assessment payment, which would be paid in arrears at the end of the following quarter. If the prepaid assessments are not exhausted by December 31, 2014, any remaining amount would be returned to the institution. Prepaid assessments could be used only to offset regular risk-based deposit insurance assessments.
The FDIC would reserve the right to exempt specific institutions from the prepaid assessments if it determines that the prepayment would adversely affect that institution’s safety and soundness. The FDIC proposes to notify any affected institution of its exemption by December 24, 2009. An institution could also apply for an exemption by December 1, 2009 if it believed the prepayment would cause undue hardship. Applications would be considered on a case-by-case basis and the FDIC has indicated that it expects few to be granted.
The FDIC’s proposed rule is subject to a comment period which ends on October 28, 2009.
In determining to propose the prepaid assessment, the FDIC indicated that it rejected other options such as additional special assessments or borrowing from its line of credit with the U.S. Treasury. The FDIC noted that a special assessment would need to be expensed immediately and be much greater in amount than the two additional special assessments provided for in the FDIC’s May 2009 final rule, which imposed the previous special assessment. The FDIC believes that additional special assessments could severely reduce industry earnings and capital during a stressful time for the industry. The FDIC’s view is that most of the prepaid assessment would be drawn from available cash and excess reserves, which it does not believe would significantly affect depository institutions’ current lending activities.
The FDIC deemed the borrowing option less desirable than the prepaid assessments since the latter would continue to ensure that the DIF remains directly funded by the industry and would not count toward the public debt limit. The borrowing option also would involve interest costs, which is not the case with prepaid assessments.
The FDIC has proposed what it considered to be a less burdensome option than special assessments but still keeps the responsibility for the DIF on insured institutions. However, the FDIC’s proposed rulemaking specifically requests comment on whether one of the other alternatives is more desirable.