Today, the Board of the Federal Deposit Insurance Corporation (FDIC) took the following actions while meeting in open session:
1. Adopted an interim rule extending the Transaction Account Guarantee (TAG) Program (a component of the FDIC’s Temporary Liquidity Guarantee Program) until December 31, 2010 from its scheduled June 30, 2010 expiration. The 6-month extension is further subject to an additional 12-month extension at the discretion of the FDIC Board without further rulemaking "should economic conditions warrant." The existing tiered pricing assessment of between 15-25 basis points for participation in TAG will remain in effect during the extension, and the interim rule provides that a participating insured depository institution may opt-out of the TAG extension by providing email notice to the FDIC no later than April 30, 2010. Failure to opt-out will obligate the participating insured depository institution to remain in the TAG program through December 31, 2010 or until December 31, 2011 if the FDIC further extends the TAG program.
All FDIC Board members "strongly supported" the staff recommended extension. FDIC Chairman Bair noted a number of reasons why an extension of the TAG program is "quite warranted," such as the continued "stressful conditions" of community banks from the lingering effects of the financial crisis, the expectation that failures will "peak this year" (in particular with "mostly smaller institutions"), and that termination would be "premature" given the "delicate state of the nation's financial recovery." Currently, approximately 6,400 insured depository institutions participate in the TAG program, "guaranteeing an estimated $340 billion of deposits" as of the end of 2009.
2. Approved a Notice of Proposed Rulemaking to revise the deposit insurance assessment system for large institutions, which "pose unique and concentrated risks to the Deposit Insurance Fund." Under the proposal, which is proposed to be effective January 1, 2011, the FDIC would no longer use risk categories and long-term debt ratings for large institutions, although supervisory ratings would continue to be used as a factor in measuring risk. The FDIC proposes to utilize a scorecard of "well-defined financial measures that are more forward looking and better suited for large institutions," with different scorecards for large institutions (defined as an insured depository institution with $10 billion or more in assets for at least four consecutive quarters) and for highly complex institutions (defined as either an insured depository institution with more than $50 billion in total assets that is fully owned by a parent company with more than $500 billion in total assets, or a processing bank and trust company with greater than $10 billion in assets). Each scorecard would have two components—a performance score and loss severity score—"that are of particular interest to the FDIC as an insurer." The two scores would be combined to produce a total score, which would be translated into an initial assessment rate, although the FDIC would retain the ability to make limited discretionary adjustments.
The FDIC staff recommended the change "to better capture risk at the time an institution assumes the risk, to better differentiate institutions during periods of good economic and banking conditions based on how they would fare during periods of stress or economic downturns, and to better take into account the losses that the FDIC may incur if an institution fails." Chairman Bair stated that the use of the proposed system during pre-crisis periods "would have predicted the current rank ordering of large institutions much better than the system used now," and that "by better differentiating risk among large institutions, the proposal would reduce insurance assessments paid by lower-risk institutions—both large and small."