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FDIC Finalizes New Assessment System to Take Effect in Q2

Posted on 2/8/2011

The FDIC Board at its meeting this afternoon approved a final rule that changes the assessment base from domestic deposits to average assets minus average tangible equity, adopts a new large-bank pricing assessment scheme, and sets a target size for the Deposit Insurance Fund.

The final rule combines November's proposals on the assessment base and large-bank assessment pricing scheme, and an October proposal on the DIF. The changes will go into effect beginning with the second quarter and will be payable at the end of September.

The rule -- as mandated by the Dodd-Frank Act -- finalizes a target size for the Deposit Insurance Fund at 2 percent of insured deposits. It also implements a lower assessment rate schedule when the fund reaches 1.15 percent (so that the average rate over time should be about 8.5 basis points) and, in lieu of dividends, provides for a lower rate schedule when the reserve ratio reaches 2 percent and 2.5 percent.

Also as mandated by Dodd-Frank, the rule changes the assessment base from adjusted domestic deposits to a bank's average consolidated total assets minus average tangible equity. The rule defines tangible equity as Tier 1 capital. The rule requires banks under $1 billion in assets to report average weekly balances during the calendar quarter, unless they elect to report daily averages.

The rule lowers overall assessment rates in order to generate the same approximate amount of revenue under the new larger base as was raised under the old base. The assessment rates in total would be between 2.5 and 9 basis points on the broader base for banks in the lowest risk category, and 30 to 45 basis points for banks in the highest risk category.

The FDIC noted that "[w]hile the rule is overall revenue neutral, it would, in aggregate, increase the share of assessments paid by large institutions, consistent with the express intent of Congress." Based on Sept. 30, 2010, data, the FDIC said that the share of overall dollar assessments paid to FDIC would increase from 70 to 79 percent for banks over $10 billion and from 48 percent to 57 percent for banks over $100 billion.

The FDIC also acknowledged that "many large institutions would experience a significant change in their overall assessment." The FDIC reported that, under the combined effect of both the assessment base change and the new large bank risk-based formula, 51 banks over $10 billion would pay more and 59 would pay less. The FDIC also noted that only 84 banks under $10 billion would pay higher assessments.

The rule eliminates the adjustment to the rate paid for secured liabilities, including Federal Home Loan Bank advances, since these will be part of the new assessment base. The proposal also creates a new depository institution debt adjustment that increases the assessment rate of an institution that holds long-term unsecured debt issued by another insured depository institution. This adjustment amounts to 50 basis points for every dollar of long-term unsecured debt held in excess of 3 percent of Tier 1 capital.

The rule also changes the amount of, and cap on, the unsecured debt adjustment to the assessment base and eliminates Tier 1 capital from the definition of unsecured debt.

The final rule also creates a scorecard-based assessment system for banks with more than $10 billion in assets. The scorecards include financial measures that the FDIC believes are predictive of long-term performance. In a change from the earlier proposals, the brokered deposit adjustment will not apply to banks over $10 billion that are well-capitalized and CAMELS 1 or 2, consistent with the treatment for smaller banks. Also, the "noncore funding to total liabilities" ratio is eliminated from the loss severity score and the liability run-off rates have been recalibrated. The FDIC will consider changes in the brokered deposit adjustment after completing a study on brokered deposits due in July, as mandated by Dodd-Frank.

The FDIC has issued revised assessment calculators to help banks budget for premiums under the new system. Go to the calculators.

Read more. Read the final rule.

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