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Banks, Small Business and Risk

Posted by Wendell Brock on Thu, Sep 16, 2010

In the recently passed legislation, the Dodd Frank Law, the FDIC is given the mandate to change the way it assesses deposit insurance premiums from banks, mostly based on risk. This will greatly impact small businesses, by limiting their access to capital through loans. Perhaps as much or more than the recent health care bill will.

First the Law

The law “defines a risk-based system as one based on an institution’s probability of causing a loss to the Deposit Insurance Fund (the Fund or the DIF) due to the composition and concentration of the institutions assets and liabilities, the likely amount of any such loss, and the revenue needs of the DIF. …allowing the FDIC to establish separate risk-based assessment systems for large and small members of the Deposit Insurance Fund.

“Over the long-term, institutions that pose higher long-term risk will pay higher assessments when they assume those risks. …should provide incentives for institutions to avoid excessive risk.” (the information quoted is found in the following paper about the new score card produced by the FDIC located at:  The new assessments will be based on a performance score, which will be comprised of three main elements: 1) CAMELS Score, 30%; 2) Ability to withstand asset-related stress, 50%; and 3) Ability to withstand funding-related stress 20%. It is the asset-related stress that has the regulators concerned and if an institution has too much risk in that category, it will also affect the CAMELS rating, as the regulators will perceive that management is not doing their job – that of taking care of the bank.

The banker’s number one job now it to make sure that the bank never becomes a problem bank, that may cause the regulators to pay on deposits; everything else is now ancillary to that goal.

Small Businesses

All small businesses are risk rated, based on their credit score, (or the owners credit score), which becomes the basis for easy or difficult access to credit at a financial institution. At times bankers make loans to small businesses, because they understand the business, the risk associated with the business and they know the owner, even though the credit may be simply o.k. (not great, but not terribly bad either).

This new way of assessing deposit insurance will now cause the banker to ask the question – how will this loan affect the bank’s portfolio and ultimately it’s DIF assessment? As bankers ask this question more loans will be turned down. This is not to say, that all loans should be written as applied for, but as the bell curve moves towards safety, it will certainly leave a larger percentage of good small business loans unfulfilled and business owners without the much needed capital to continue in business or to grow. And we all know that when small businesses don’t continue, or fail to grow, then lay-offs occur and unemployment lines increase.

Did Congress and the regulators think this one through completely? Is there a better way to asses risk?

Topics: Bank, FDIC, banks, Regulations, FDIC Insurance Fund, Loan Grading, Risk Management, Bank Regulations, Growth, small business

New Rules for Deposit Insurance Assessments Based on Bank Risk

Posted by Wendell Brock on Wed, Apr 14, 2010

Yesterday the FDIC announced that the formula for how they assess deposit insurance would be changed for large banks (those with $10 billion of assets or more). Below is the notice with the links to the summary and the full document.  While this rule makes changes for "large banks" eventually this methodology will trickle down and become practice for smaller banks too.

Each bank, no matter the size, will need an objective, defensible methodology for analyzing, grading and stratifying their loan portfolio. They will also need the ability to stress test the portfolio beyond the typical raising or lowering of interest rates. Probable loss modeling will become the norm as bankers and examiners look deeper for risks in the portfolio. It will be important for bankers to have this information updated regularly based on current estimates of value of the assets backing the loans.

It is no longer simply how much the bank has on deposit that determines the banks deposit premium, it is centered on the risk the bank is to the bank insurance fund - how likely will the FDIC have to pay out to cover deposits. The loan portfolio that the bank is creating and servicing is where the risks are, which must be fully analyzed, using an objective, defensible method.

As you read this notice of what the regulators are going to start requiring from banks, you will realize that the questions will get tougher and the answers more complex. We are happy to help provide strategies and solutions to some of the tough questions banks will face.

Notice of Proposed Rulemaking
On April 13, 2010, the FDIC Board of Directors (Board) adopted a notice of proposed rulemaking (NPR or proposal) and request for comment that would revise the assessment system applicable to all large insured depository institutions. The NPR would: (1) eliminate risk categories and the use of long-term debt issuer ratings in calculating risk-based assessments for large institutions; (2) use two scorecards -one for most large institutions and another for large institutions that are structurally and operationally complex or that pose unique challenges and risks in the event of failure (highly complex institutions)-to calculate the assessment rates for all large institutions; (3) allow the FDIC to take additional information into account to make limited adjustments to the scores; and (4) use the scorecard to determine the assessment rate for each institution.

The NPR would also alter assessment rates applicable to all insured depository institutions to ensure that the revenue collected under the new assessment system would approximately equal that collected under the existing assessment system and ensure that the lowest rate applicable to small and large institutions would be the same.

On September 29, 2009, the Board adopted a uniform increase in assessment rates effective January 1, 2011. As a result of the Board's earlier action, assessment rates in effect on January 1, 2011, will uniformly increase by 3 basis points.


In less time than you take for a lunch break Silverback Portfolio Analytics can show you how to, analyze your loan portfolio with real-time asset valuations, use objective loan grading, provide stratification analysis, probable loss modeling and stress test simulations.

The full summary:

The full text of the proposed rule:

Topics: Loans, Regulations, FDIC Insurance Fund, Loan Grading, Asset Valuation, Probable Loss Modeling, Stress Test Simulation, Portfolio Analytics, Bank Risk

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

Quarterly Banking Profile Shows Profit Rebound amid Continuing Problems with Troubled Loans; DIF Shrinks

Posted by Wendell Brock on Thu, May 28, 2009

In the first quarter of 2009, the banking industry rebounded from a net loss in the prior quarter-an improvement that masked mixed performance. The first quarter cumulative net profit of $7.6 billion, the highpoint of the previous four quarters, was more than 60 percent below 2008's first quarter performance. Further, this year's profitability was largely fueled by strong trading revenues and realized gains on securities at large banks. Nearly one-quarter (21.6 percent) of banks reported a net loss, and a majority of banks reported quarter-over-quarter net income declines.  

A $7.6 billion increase in trading revenues boosted noninterest income, with additional contribution coming from increased servicing fees and gains on loan sales. The industry also benefited from an improved net interest margin (NIM), driven primarily by a lower cost of funds. The average NIM of 3.39 percent was slightly higher on a sequential and quarter-over-quarter basis.

Bad loans still a factor

First quarter charge-offs notched a slight sequential decline, but are still outpacing last year's level by almost 100 percent.

C&I loans accounted for most of the year-over-year increase in charge-offs, but credit cards, real estate construction loans and closed end 1-4 family residential real estate loans were also problematic. Net charge-offs in all major categories were higher than a year ago. The total annualized charge-off rate was 1 basis point below the fourth quarter's record-high level.

Noncurrent loans are still on the rise. The percentage of noncurrent loans and leases to total loans and leases rose 81 basis points during the first quarter to 3.76 percent, with the increase being led by real estate loans. Nearly three-fifths (58 percent) of banks indicated that their noncurrent loan balances increased during the first quarter.

Banks added to their reserves again this quarter, pushing the ratio of reserves to total loans up to the record level of 2.5 percent. This reserve building was outpaced by the rise in noncurrent loans, however, such that the ratio of reserves to noncurrent loans declined to 66.5 percent, a 17-year low.

Balance sheets shift

The industry's equity capital rose substantially, partially driven by reduced dividend payments and TARP infusions. The paring down of loan portfolios and trading accounts led to an industry-wide decline in total assets of $302 billion. As a result, the ratio of total deposits to industry assets rose to 66.1 percent, despite a slight decline in total deposits.

Failure rate high, DIF decreasing  

At quarter-end, there were 8,246 FDIC-insured commercial banks and savings institutions, down from 8,305 at year-end. Twenty-one banks failed in the first quarter. The problem list grew in number from 252 to 305, while the assets managed by problem banks increased 38 percent to $220 billion.

Loss provisions (for actual and anticipated failures) drove a 24.7 percent in the DIF during the quarter, bringing the balance to about $13 billion. The 21 failures during the first quarter are estimated to have cost the DIF $2.2 billion. At quarter-end, the reserve ratio was 0.27 percent, its lowest level in 16 years.

New charters approved during the first quarter of 2009 numbered 13, the lowest level since the first quarter of 1994.  There were 50 bank mergers during the quarter.

Topics: FDIC, Bank Failure, FDIC Insurance Fund, Quarterly Banking Profile, equity capital, De Novo Banks

The $700 Billion Bailout Passes the Senate

Posted by Wendell Brock on Wed, Oct 01, 2008

In a major sweeping vote the senate passed the Wall Street Welfare bill this evening providing $700 billion to the street to help solve their problems in three easy steps, first $250 billion up front; another $100 billion upon presidential approval (which will be granted I am sure) and the last $350 pending congressional approval. And, the taxpayers pick up the tab! It is like going to a fancy restaurant with 20 friends and everyone ordering the top end meal; then the hat is passed. But, in the end there isn't enough for the bill and tip, and since you were closest to where the waiter laid the down the bill you get the opportunity to figure out how to pay - while everyone is leaving with their date!

One small bright spot is that the FDIC insurance will be raised temporarily (when does the government do something temporarily?) to $250,000 from the $100,000 current limit. This will give depositors more confidence in the banks. Regional banks worked hard to get the increase in deposit insurance limit. They hope this will give consumers more confidence in the smaller banks. The banks felt that consumers believed that the bigger banks were safer places for their savings - which is untrue.

This will also increase insurance premiums the FDIC can charge the banks; so for the extra $150,000 of deposit insurance the FDIC will charge the banks approximately $105 per account (depending on the bank's premium rate of course).  This will bring in billions of additional insurance premiums into the FDIC insurance fund.

The bill also gave the FDIC the unlimited ability to borrow from the Treasury, which is a major increase from the current limit of $30 billion.  The unlimited borrowing, again, is temporary - it expires in 2009.

Maybe it is time to call your congressman!!

Topics: Bailout, FDIC, Bank Regulators, FDIC Insurance Fund

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