On February 7, 2011 the Federal Deposit Insurance Corporation (FDIC) approved a Final Rule on Deposit Insurance Assessments, Dividends, Assessment Base and Large Bank Pricing (Final Rule). The Final Rule implemented changes to the insurance assessment system as authorized in the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Final Rule is effective April 1, 2011. Here are some of the highlights:

Deposit Insurance Assessment Base

The Final Rule changed the assessment base for insured depository institutions (IDIs) from adjusted domestic deposits to the average consolidated total assets during an assessment period less average tangible equity capital during that assessment period. Tangible equity is defined in the Final Rule as Tier 1 Capital and shall be calculated monthly, unless the IDI has less than $1 billion in assets, then the IDI will calculate the Tier 1 Capital on a end of quarter basis. Parents or holding companies of other IDIs are required to report separately from their subsidiary depository institutions.

Pepper Point: Average consolidated total assets are defined in the Final Rule as the schedule of quarterly averages in the financial institutions’ Call Reports, using a daily average method. Unlike the Proposed Rule, however, the Final Rule permits certain financial institutions, those with less than $1 billion in assets (other than newly insured banks), to report average weekly assets rather than using a daily-average reporting method.

Assessment Rate Adjustments

In an effort to encourage less risk to the FDIC’s insurance fund, the Final Rule retains the unsecured debt adjustment, which lowers an IDI’s assessment rate for any unsecured debt on its balance sheet. In general, the unsecured debt adjustment in the Final Rule will be measured to the new assessment base and will be increased by 40 basis points. The Final Rule also contains a brokered deposit adjustment for assessments. Unlike the proposed rule, the Final Rule provides an exemption to the brokered deposit adjustment to financial institutions that are “well capitalized” and have composite CAMEL ratings of 1 or 2.

Pepper Point: The lower assessments for unsecured debt reinforce the FDIC’s recent attempts to protect its insurance fund from significant exposure to secured debt claims, which in essence could lead to a smaller amount of assets available to satisfy depositors of a failed institution and lead to greater potential losses to the FDIC’s deposit insurance fund.

Assessment Rates and Dividends

The Final Rule also creates a new rate schedule that intends to provide more predictable assessment rates to financial institutions. The revenue under the new rate schedule will be approximately the same. Moreover, it indefinitely suspends the requirement that it pay dividends from the insurance fund when it reaches 1.5 percent of insured deposits, to increase the probability that the fund reserve ratio will reach a sufficient level to withstand a future crisis. In lieu of the dividend payments, the FDIC has adopted progressively lower assessment rate schedules that become effective when the reserve ratio exceeds 2 percent and 2.5 percent.

Large Bank Pricing

While the overall amount collected for the insurance fund will remain relatively unchanged, as a general matter, the Final Rule creates higher assessments for larger banking institutions. It creates a Large Bank Pricing system in which IDIs with deposits of at least $10 billion in total assets will have increased assessment rates. In addition, the FDIC has created a category for highly complex IDIs (including IDIs with more than $50 billion in total assets that are controlled by a parent). These larger banks with high asset risk concentrations, less stable balance sheet liquidity or higher loss severity in the event of failure will pay the higher assessments. The FDIC will assess each of the large banks through a scorecard method that will combine CAMELS ratings and certain other financial measures into two scorecards: one for most large IDIs, and another for the remaining highly complex IDIs.