Alert October 26, 2010

FDIC Adopts Restoration Plan and Proposes Comprehensive Deposit Insurance Fund Management Plan

The FDIC adopted a revised restoration plan (the "Restoration Plan") for the Deposit Insurance Fund ("DIF") and has issued a Notice of Proposed Rulemaking (“NPR”) in furtherance of its proposal to charge steady and predictable assessment rates and maintain a positive fund balance in the DIF.

The Restoration Plan

The FDIC Board of Directors approved the Restoration Plan to ensure that the DIF minimum designated reserve ratio reaches 1.35% of estimated insured deposits by September 30, 2020, as required by The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).  See the July 28, 2010 Special Edition of the Alert.  This revised Restoration Plan is effective immediately and supersedes the plan amended in September 2009, which was intended to restore the reserve ratio to 1.15% by the end of 2016 in compliance with the Helping Families Save Their Homes Act of 2009.  See the May 26, 2009 and October 6, 2009 Alerts.  

The Restoration Plan further provides that the FDIC will maintain the current schedule of assessment rates for all insured depository institutions and forego the three basis point uniform increase in initial assessment rates scheduled to be effective in January 2011.  The decision to maintain the current assessment rates reflects lower than expected losses estimated through 2014 and estimates that the DIF reserve ratio will reach 1.15% by the end of 2018, even without the three basis point increase. 

In accordance with the Dodd-Frank Act, the Restoration Plan must also offset the effect of the increase in the minimum reserve ratio on insured depository institutions (“IDIs”) with total consolidated assets of less than $10 billion (“Smaller IDIs”).  However, the FDIC indicates that it will pursue further rulemaking in 2011 regarding the method that will be used to reach the requisite 1.35% DIF minimum reserve ratio by September 2020 and how related burdens on the Smaller IDIs will be offset. 

The Restoration Plan further provides that the FDIC will update loss and income projections for the DIF semiannually and, as necessary, will modify assessment rates following notice-and-comment rulemaking. 

The NPR

Under the NPR, the FDIC proposes to amend its regulations to: (1) implement dividend provisions; (2) set assessment rates; and (3) set the DIF minimum designated reserve ratio at 2%.  These regulations would be intended to reduce pro-cyclicality in the existing system and achieve moderate, steady assessment rates through economic and credit cycles while also maintaining a positive fund balance even during a banking crisis, by setting an appropriate target DIF size and a strategy for assessment rates and dividends. 

Dividends Pursuant to the Dodd-Frank Act, the FDIC has the authority to declare dividends when the DIF reserve ratio at the end of a calendar year is at least 1.5% and to suspend or limit declaration or payment dividends from the DIF.  Accordingly, the NPR provides that dividends be suspended permanently when the DIF reserve ratio exceeds 1.5%, which would increase the probability that the DIF will reach a level sufficient to withstand a future crisis.  As discussed in further detail below, as an alternative to declaring dividends to prevent the DIF from becoming unnecessarily large, the FDIC would adopt progressively lower assessment rate schedules when the reserve ratio exceeds 2% and 2.5%.    

Assessment Rates.  Currently, the assessment rate for an IDI is contingent upon the IDI’s designated risk category, which turns on the IDI’s supervisory ratings and capital levels.  Under the NPR, assessment rates would also be based on the DIF reserve ratio as follows:

  • When the DIF reserve ratio reaches 1.15%, assessment rates would be lowered significantly.  Risk Category I institutions, for example, would pay initial assessment rates between 8 and 12 basis points;
  • When the DIF reserve ratio reaches 2.00%, assessment rates would be lowered by approximately 25%.  Risk Category I institutions, for example, would pay initial assessment rates between 6 and 10 basis points; and
  • When the DIF reserve ratio reaches 2.50%, assessment rates would be lowered by approximately 50% below the rates that will take effect when the reserve ratio reaches 1.15%.  Risk Category I institutions, for example, would pay initial assessment rates between 4 and 8 basis points.

The NPR indicates that the progressively lower assessment rate schedules would serve to provide more stable and predictable assessment rates.  The secured liability adjustment and brokered deposit adjustment would also be subject to change based on the DIF reserve ratio.  In addition, the FDIC’s Board of Directors would retain its current authority to uniformly adjust the total base rate assessment schedule by 3 basis points without further rulemaking. 

In the NPR, the FDIC further indicated that in a future notice of proposed rulemaking it will amend the determination of an IDI’s assessment base pursuant to the Dodd-Frank Act’s requirement that the assessment base generally be defined as the average consolidated total assets of the insured depository institution during the assessment period minus the sum of the average tangible equity of the insured depository institution during the assessment period.  The NPR acknowledged that this amended definition will require some revision to the proposed assessment rates set forth therein. 

Minimum Designated Reserve Ratio .  As discussed above, the Dodd-Frank Act requires that the FDIC set the DIF minimum designated reserve ratio at 1.35%, and the Restoration Plan has been enacted pursuant to this requirement.  However, the FDIC must set and publish a designated reserve ratio annually, and in the NPR, proposes setting the ratio at 2.00% of estimated insured deposits.  In accordance with statutory requirements, the FDIC considered the following factors in determining the proposed 2% ratio: (1) risk of losses to the DIF; (2) economic conditions generally affecting IDIs; (3) preventing sharp swings in assessment rates; and (4) other factors that the FDIC deemed appropriate, which as noted in the NPR, included maintaining the DIF at a level that can withstand substantial losses.

Comments on the NPR are due no later than November 26, 2010.