On October 7, the Federal Deposit Insurance Corporation (“FDIC”) issued a notice of proposed rulemaking (“NPR”) that would increase deposit insurance assessments in light of the recent decline in the reserve ratio of the Deposit Insurance Fund (“DIF”). The NPR is a part of a restoration plan adopted by the FDIC’s board that is designed to return the DIF to a ratio of at least 1.15% within five years.
The FDIC is required by law to implement a restoration plan if the DIF’s reserve ratio drops below 1.15%. Recent failures and the deterioration in economic and financial conditions, have increased DIF’s losses and reduced the reserve ratio to 1.01% at June 30, 2008. The FDIC indicated it expects a higher rate of failures in the next few years, meaning further losses to the fund are likely. The increased assessments proposed by NPR are the primary component of the FDIC’s restoration plan to restore the ratio to at least 1.15% within a 5 year period.
The NPR proposes to maintain its existing four risk categories but to raise the current assessment scale of five (5) to forty-three (43) basis points by seven (7) basis points across the board beginning January 1, 2009. However, the FDIC is also proposing to adopt further changes effective April 1, 2009 that are designed to make the assessment system more risk sensitive and ensure that riskier institutions bear a greater share of the proposed assessment increases. These include adjustments designed to (i) add a surcharge for certain institutions (institutions in the three riskiest categories for FDIC assessment purposes) that use brokered deposits to fund growth, (ii) provide a possible discount of up to two basis points based on an institution’s ratio of long-term secured debt (including senior unsecured and subordinated debt) and, for “small institutions” (generally, those with less than $10 billion in assets), a certain amount of Tier 1 capital to domestic deposits and (iii) add a surcharge based upon an institution’s ratio of secured liabilities (including Federal Home Loan Bank advances, securities sold under repurchase agreements, secured Federal Funds purchased and certain other secured borrowings to domestic deposits (if greater than 15%)).
In conjunction with the suggested changes for April 2009, the FDIC is proposing to reduce the base assessment scale proposed to be effective in January 2009 to a minimum of ten (10) basis points for the most highly rated institutions to forty-five (45) basis points for the riskiest. However, with the proposed adjustments, the actual assessment scale could range anywhere from eight (8) basis points to a maximum of 77.5 for very risky institutions that are reliant on secured liabilities and brokered deposits.
The NPR notes that the FDIC, when it adopts the final rule, may need to set a higher base assessment schedule depending on the information available at the time, including intervening failures and updated projections, or if the final rule contains changes from the NPR that requires additional base revenues. The NPR would continue to allow the FDIC to adopt rates going forward that are higher or lower than the base schedule that is adopted without further notice and comment rulemaking as long as rates were not increased or decreased from one quarter to the next, or cumulatively, by more than three (3) basis points.
There will be a comment period of thirty (30) days after the NPR is published in the Federal Register.