FDIC OKs Plan to Lift Insurance Fund to Dodd-Frank Minimum

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By Jeff Bater

Oct. 22 — Bigger banks would have to pay a surcharge under a Federal Deposit Insurance Corporation plan meant to satisfy a Dodd-Frank requirement to increase the agency's fund for insuring customer deposits.

FDIC directors approved a proposed rule Oct. 22 to lift the deposit insurance fund to the statutorily required minimum level of 1.35 percent. The proposal would impose on banks with at least $10 billion in assets a surcharge of 4.5 cents per $100 of their assessment base, after making certain adjustments.

Under the Dodd-Frank law, the deadline for attaining the 1.35 percent reserve ratio for the fund is Sept. 30, 2020. With the proposed charge, the insurance fund will likely reach 1.35 percent by 2018, FDIC board members said.

Stable Insurance Premiums 

“By aiming to reach the minimum reserve ratio ahead of the statutory deadline, this approach reduces the risk that the FDIC would have to raise rates unexpectedly in the event of a future period of stress and should allow the FDIC to maintain stable and predictable assessments,” FDIC Chairman Martin Gruenberg said in a statement.

Likewise, Thomas Curry, who is comptroller of the currency as well as an FDIC board member, said in a statement that, while it is difficult to predict the future, achieving the goal by 2018 strengthens the insurance fund “sooner rather than later,” and is more likely to avoid achieving it in a countercyclical manner. “The proposed surcharge would come at a time when the banking industry is experiencing improved health and as a result is in a better position to afford it without significant impact to earnings, capital, and liquidity,” Curry said.

The FDIC is projecting that under the current assessment rate schedule, the reserve ratio is most likely to reach 1.15 percent in the first quarter of 2016—but said the ratio could reach the desired mark in the fourth quarter of this year. The agency expects that eight quarters of surcharges would be required to bring the reserve ratio to 1.35 percent. If the charges begin in 2016 as expected, the added fees should be able to raise the reserve ratio to 1.35 percent before the end of 2018, according to the FDIC.

Rising Fund 

The deposit insurance fund (DIF), depleted during the financial crisis amid an epidemic of bank failures, has grown over the last five years and, as of the end of June, totaled $67.6 billion; the reserve ratio was 1.06 percent. To feed the fund, banks pay premiums; in exchange, the FDIC insures their deposits. The reserve ratio is equal to the fund's balance divided by estimated insured deposits. A higher minimum level of the ratio reduces the risk that losses from bank failures during an economic downturn will dry up the fund, and lowers the risk of large, procyclical increases in deposit insurance assessments to maintain a positive fund balance.

The FDIC's board adopted current assessment rates in 2011, while also providing for lower regular assessment rates for all institutions when the reserve ratio reaches 1.15 percent. Under that 2011 rule, Gruenberg said, average assessments for banks with less than $10 billion in assets will be reduced by nearly 30 percent.

“This proposal takes a balanced approach,” Gruenberg said. “A large majority of institutions will have substantially reduced assessments according to the 2011 rule. The assessment surcharges on large institutions would be spread out over time and should be fully manageable for the institutions.”

Analysis of Surcharge 

An FDIC analysis found that as of June 30, there were 108 banks that would be subject to a surcharge. The analysis examined the effects of the surcharge over one year. “The FDIC projects that the net effect of lower assessment rates that go into effect when the reserve ratio reaches 1.15 percent and the imposition of the surcharge would result in lower assessments for nearly a third of all large banks,” the agency said in its notice of proposed rulemaking. “Specifically, the analysis estimates that 34 of the 108 large banks would pay lower assessments in the future.”

The FDIC said its analysis revealed no significant capital effects from the surcharge. “All large institutions would continue to maintain a 4 percent leverage ratio, at a minimum, both before and after the imposition of the surcharge,” it said, adding that the annual surcharge would represent only a small percentage of bank earnings for most banks subject to the fee. “In the aggregate, the annual surcharge would absorb 2.39 percent of total large bank adjusted earnings and 2.42 percent of total large bank current earnings,” the FDIC said.

The Independent Community Bankers of America (ICBA) said in a statement the FDIC proposal “more fairly funds” the DIF. ICBA said the policy requires larger banks to pay “their fair share” for deposit insurance in the wake of the financial crisis. “It also will result in lower deposit-insurance assessment premiums for community banks, which will help local institutions reinvest deposits in their communities,” the group said.

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Seth Stern at sstern@bna.com

The FDIC materials on the proposal can be found at http://src.bna.com/Hl.