Alert May 26, 2009

FDIC Levies Special Premium Based on Assets; Obtains Greater Borrowing Authority under Helping Families Save Their Homes Act

The Board of Directors of the FDIC voted 4-1 on May 22, 2009 to levy a special assessment of 5 cents per $100, or 5 basis points, of each insured institution’s total assets less Tier 1 capital.  The special assessment – a reduction from the original proposed assessment of 20 basis points on the regular assessment base of domestic deposits – is part of the FDIC’s efforts to rebuild the Deposit Insurance Fund (the “DIF”).  The special assessment will be capped at 10 basis points of an institution’s domestic deposits so that no institution will pay an amount higher than it would have paid under the original proposal.  The special assessment will be based on each institution’s report of condition of June 30, 2009, billed on June 30, collected on September 30, and booked as a second quarter expense for banks.  The special assessment, which is the subject of a final rule (the “Final Rule”) is in addition to the regular quarterly risk-based assessment billed at the same time, which is not changed by the Final Rule.

The special assessment will generate approximately $5.6 billion in revenue for the DIF – equivalent to a 7.3 basis point assessment on the regular assessment base.  According to the FDIC, the reserve ratio of the DIF declined from 1.22 percent as of December 31, 2007 to 0.40 percent (preliminary) as of December 31, 2008, and is expected to decline further by March 31, 2009.  The FDIC currently projects approximately $70 billion in losses due to bank failures over the next five years, the great majority of which are expected to occur in 2009 and 2010, leading to a further decline in the reserve ratio.  Because the reserve ratio fell below, and was expected to remain below, 1.15 percent, the FDIC was required under the Federal Deposit Insurance Act to establish and implement a Restoration Plan to restore the DIF.  The FDIC projects that without a special assessment, the fund balance and reserve ratio of the DIF will become negative by the end of 2009.  With the special assessment, the FDIC projects that the fund balance and reserve ratio will be low, but positive through 2009 and will begin to rise in 2010. 

The Final Rule also allows the FDIC to impose additional special assessments of 5 basis points on the expanded assessment base for the third and fourth quarters of 2009, if the FDIC estimates that the DIF reserve ratio will fall to a level that would adversely affect public confidence in federal deposit insurance or to a level that would be close to or below zero.  Any additional special assessment would also be capped at 10 basis points of domestic deposits.  FDIC authority to impose any additional special assessment terminates under the Final Rule on January 1, 2010.  (The FDIC, however, always has the authority to propose a new premium for quarterly risk-based assessments).  FDIC Chairman Sheila C. Bair stated that while it is “probable” that one additional special assessment will be necessary, in the fourth quarter of 2009, a third special assessment is unlikely.  The FDIC must set aside by year-end reserves for possible bank failures for all of 2010. 

The original proposal, which was outlined in an interim rule with request for comment adopted by the FDIC on February 27, 2009, provided for a one-time special assessment of 20 basis points of domestic deposits and allowed additional special assessments of 10 basis points.  The FDIC received over 14,000 comments on the interim rule.  The vast majority of comment letters stated that the proposed 20 basis point assessment could have a significant adverse effect on the industry at a very difficult time, and many letters from smaller institutions and their trade groups noted that it would be particularly hard for community banks to absorb.  Recognizing that assessments are a significant expense, particularly when bank earnings are under pressure, and that assessments reduce funds banks have available to lend in their communities, the FDIC sought ways to reduce the amount of the assessment. 

The reduction is possible primarily because of an increase in the FDIC’s borrowing authority included in the Helping Families Save Their Homes Act signed into law by President Barack Obama on May 20, 2009.  The new law extends the temporary increase in the standard maximum deposit insurance amount to $250,000 per depositor (from the permanent limit of $100,000 for deposit accounts other than retirement accounts) through December 31, 2013.  It also increases the FDIC’s authority to borrow from Treasury from $30 billion to $100 billion, and authorizes a temporary increase in the FDIC’s borrowing authority above $100 billion (but not to exceed $500 billion) until December 31, 2010.  The FDIC expects this increase in borrowing authority to provide a sufficient cushion against unforeseen bank failures to allow it to reduce the special assessment significantly, while continuing to assess at a level that maintains the DIF through industry funding.

The FDIC also imposed a surcharge on senior unsecured debt guaranteed under the Temporary Liquidity Guarantee Program (TLGP), with the revenue from the surcharge to be channeled to the DIF.  Broadening the assessment base also permitted a smaller special assessment.  However, this aspect of the Final Rule was not without controversy.  Not only did several large banks object to the change, Comptroller of the Currency John Dugan also objected to the asset-based assessment.  At the FDIC Board meeting Comptroller Dugan argued that the FDIC insures deposits, not assets, and that losses in the DIF were caused by “actual and projected failures of smaller banks.”  Chairman Bair responded that some large banks would have failed if not for special government programs designed to help them. 

The reduction in the special assessment and the passage of the new law followed an intense lobbying effort by trade groups.  The Final Rule will produce an immediate savings of approximately $9 billion for banks compared to the interim rule.  (Because of the cap, all banks will pay less under the Final Rule than they would have under the interim rule.)  How an individual bank will fare using the expanded assessment base compared to the regular assessment base, however, depends on its balance sheet.  Banks that are largely deposit funded would pay less than average, while banks that rely on non-deposit sources of funding, such as Federal Home Loan Bank Advances, repos, foreign deposits and other non-deposit liabilities, may pay more.  About two-thirds of the largest 20 banks would pay more, and generally so would bankers’ banks and trust institutions.  The majority of mid‑sized and community banks would pay less. 

For the industry as a whole, the FDIC projects that the 5 basis point special assessment in 2009 would result in March 31, 2010 equity capital that would be approximately 0.2 percent lower than in the absence of a special assessment, and for profitable institutions, pre-tax income that would be approximately 5.1 percent lower.  For unprofitable institutions, pre-tax losses are projected to increase by an average of approximately 2.0 percent.

In response to concerns expressed in many comment letters, all the bank regulators have indicated that they would instruct examiners to assign component and composite CAMELS ratings without regard to the payment of the special assessment.  The FDIC also noted that it excluded Tier 1 capital from the assessment base to ensure no institution would be penalized for holding large amounts of capital.  The effective date of the Final Rule is June 30, 2009.