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A De Novo Strategy for the FDIC: Prepaid Insurance Premiums

Posted by Wendell Brock on Thu, Oct 01, 2009

The ongoing wave of bank failures related to the financial crisis continues to impact the health of the FDIC's Deposit Insurance Fund (DIF). At the end of the second quarter, the DIF balance was down to $10.4 billion. Compared to a year ago, when the DIF amounted to $45.2 billion, this is a decline of some 77 percent.

As at-risk banks continue to deteriorate, the DIF's growing loss provisions have simply outpaced accrued and collected premiums, including a special assessment that was levied on insured institutions at the end of the second quarter. Rather than demand another special assessment, the FDIC is trying a new tactic to deal with the fund's depletion: prepaid premiums.

According to an FDIC press release, the FDIC Board "has adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012." The prepayments should generate roughly $45 billion in cash, a much-needed infusion for the anemic DIF.

Numbers game

Time Magazine is calling the tactic "an accounting trick," (,8599,1926877,00.html?iid=tsmodule ) but FDIC Chair Sheila Bair sees it as a necessary step in the fund's restoration. The move won't impact banks' profitability, since they won't recognize the expenses any sooner under prepayment. It will impact liquidity, but the FDIC's position is that banks have sufficient cash to absorb these prepayments.

The push for prepayments underscores the FDIC's commitment to manage through this crisis without asking the Treasury or taxpayers to foot the bill.

Assessment increase ahead

The aforementioned NPR also included an assessment increase of three basis points across the board, to be made effective on January 1, 2011.

Topics: FDIC, treasury department, Bank Regulators, Bank Capital, Deposit Insurance, FDIC Insurance Fund, Bank Regulations, Deposit Insurance Fund, Bank Liquiditity, Assessment Plan

The FDIC Deposit Insurance Fund

Posted by Wendell Brock on Tue, Apr 07, 2009

With the Deposit Insurance Fund (DIF) reserve ratio at its lowest point since June of 1994, the FDIC is currently moving forward on the Restoration Plan that was announced last year. The plan seeks to restore the reserve ratio to the required amount of 1.15 percent within five years; as of September 30, the reserve ratio was 0.76 percent, down from 1.01 percent three months prior.

The Plan involves overhauling the assessment system so that the riskier financial institutions will bear a greater burden in restoring the DIF balance and reserve ratio. As an immediate measure to increase the fund, the FDIC did initiate a 7-basis-point increase to its assessment rates across the board. This change, which created an assessment range of 12 to 50 basis points, was effective only for the first quarter of 2009. The proposed changes for the second quarter are geared towards implementing assessment-pricing calculations that weight an institution’s risk profile appropriately.   

Second quarter brings more robust pricing formulas

The proposed base assessment rate ranges from 10 to 45 basis points. Risk Category I institutions would begin with an initial assessment rate of 10 to 14 basis points; the corresponding assessment rates for Risk Categories II, III, and IV would be 20, 30, and 45 basis points, respectively. Further adjustments would be made to account for the institutions’ unsecured debt, secured liabilities and brokered deposits. The resulting total assessment ranges in basis points by risk category are:

•  I: 8-21
•  II: 18-40
•  III: 28-55
•  IV: 43-77.5

Some points to note regarding the proposed changes to the pricing calculations include:

•  CAMELS component ratings and financial ratios will still be used to determine assessment rates for most institutions. 
•  An additional ratio will be added to increase the assessment rate for institutions that experience rapid asset growth funded by brokered deposits.
•  The pricing calculation used for large Risk Category I institutions will consider the assessment rate from the financial ratios method and other information, in addition to the bank’s weighted-average CAMELS component rating and long-term issuer rating.
•  The FDIC may increase the assessment rate by up to 10 basis points on Risk Category II, III, and IV institutions, when the institution’s ratio of brokered deposits to domestic deposits exceeds 10 percent.
•  Institutions in any category that rely heavily on secured liabilities, such as Federal Home Loan Bank advances, will face an increased assessment rate.
•  Institutions that carry long-term unsecured debt may have their assessment rate reduced as a result.

Bleak outlook

Under this plan, the FDIC expects 2009 assessments to increase to $10 billion, from $3 billion in 2008. The agency had previously estimated bank failure costs of about $40 billion through 2013, but because the economy has worsened since last fall, this estimate is now believed to be too low.

Topics: FDIC, Restoration Plan, Assessment Plan, changes

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BankNotes© is published by De Novo Strategy as a service to clients and other friends. The information contained in this publication should not be construed as legal, accounting, or investment advice. Should further analysis or explanation of the subject matter be required, please contact De Novo Strategy at