FDIC Chairman Bair Warns of Higher Assessment Rates
Source:Remarks by Sheila C. Bair, Chairman, FDIC
Washington, D.C.
www.fdic.gov
FDIC Chairman Sheila C. Bair warned bankers recently that assessment rates for federal deposit insurance most likely will be higher than the base schedule of rates proposed in July 2006 by the FDIC.
In a speech before the New York Bankers Association on July 19, Chairman Bair discussed the implementation of deposit insurance reform signed into law in February 2006 by President Bush. She said Congress has given the FDIC until November 5, 2006, to implement the provisions of the reform legislation.
As its first order of business, the FDIC merged the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) into the new Deposit Insurance Fund (DIF) on March 31.
Next on April 1, the FDIC board adopted interim final regulations that implement the substantive changes to the FDIC’s insurance coverage rules.
On May 9, the FDIC board approved three notices of proposed rulemaking: 1) a proposed system for distributing and using the $4.7 billion one-time assessment credit for eligible institutions in existence on December 31, 1996, and which had paid a deposit insurance assessment before then; 2) allocation of future dividends from the fund; and 3) procedural and operational improvements to the assessment system. The comment period for these three proposed rules ended on August 16.
Chairman Bair said the Reform Act provides the FDIC an opportunity to make improvements to the risk-based assessment system. She discussed two proposed rules the FDIC board approved for public comment on July 11. The first would create a system that would more closely tie what banks pay for deposit insurance to the risks they pose. The second is a proposal for a base assessment rate schedule. The base rate schedule includes the rates the FDIC thinks could be sustained over time, and that appropriately account for risk, but could be adjusted up or down from time to time depending upon revenue needs of the fund.
For smaller institutions in the 1A category (under $10 billion), rates would depend upon a combination of financial ratios and supervisory factors. She said that “higher earnings and capital would tend to lead to lower rates. Higher past-due and non-performing loans, charge-offs, volatile liabilities, and CAMELS component ratings would tend to raise rates.” The FDIC plans to put a pricing calculator on its website that will let a bank calculate its premium rate under the small bank method and simulate the effect of a change in a financial ratio on its premium.
For well-managed, well-capitalized institutions over $10 billion, rates would depend upon financial ratios and supervisory factors, but, as asset size increased, financial ratios gradually would be replaced by market factors, specifically, long-term debt issuer ratings which are usually available for larger institutions. For institutions with $30 billion or more in assets, financial ratios would be phased out entirely.
For the large bank method, lower CAMELS component ratings and better long-term debt issuer ratings would tend to lead to lower rates, while higher CAMELS component ratings and lower long-term debt issuer ratings would tend to raise rates. Bair said that the FDIC would review additional information on banks with over $10 billion in assets to determine where small rate adjustments were appropriate.
On July 11, the FDIC approved a proposed rule that would adopt a new base schedule of rates that the board could adjust uniformly up or down, depending upon the revenue needs of the insurance fund, to determine actual rates. The FDIC has proposed that under the base rate schedule, the 95% of all banks that are well-capitalized and well-managed would be charged a rate between minimum of two and a maximum of four basis points. Initially, in this risk category, roughly 45% of small banks and 45% of large banks (other than new banks) would be charged the minimum rate and roughly five percent of banks (other than new ones) would be charged the maximum rate.
New banks, in business less than seven years, in Risk Category I would be charged the maximum rate applicable to that category.
Bair said “the rates we’ve proposed would be base rates for well-managed, well-capitalized banks, but the FDIC has not yet determined actual rates for 2007. We will wait until later in the year to set actual rates, but you should be aware that, most likely, assessment rates will need to be higher than the base rate schedule initially.”
Finally, Bair said that the proposed rules approved on July 11 would also set the designated reserve ratio (the DRR) at 1.25%, the same level as the current DRR; change the official FDIC sign; and for the first time, require both banks and savings associations to use the same sign and rules for advertising FDIC membership.
