November 2, 2006
Summary of FDIC Final Rules Implementing the Federal Deposit Insurance Reform Act of 2005 Premium Rates
Premium Assessment Schedule for 2007 The following is the tentative assessment schedule for 2007. The FDIC Board retains the authority to raise or lower premiums each quarter. Risk Category I* (Well Capitalized, II CAMELS 1 or 2) Minimum Maximum
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Annual Rate** (in 5 7 10 28 43 b.p.) *Category I is for well-capitalized institutions with a CAMELS composite rating of 1 or 2. The premiums banks will pay (within this range) are determined under separate models for small and large banks (see Risk-Based Premiums below). **Quarterly rates will be one-fourth of the annual rates. Base Assessment Schedule The FDIC set a base assessment schedule of 2-4 b.p. for Category I, up to 40 b.p. for Category IV. The above schedule represents a 3 b.p. upward adjustment from the base schedule. The FDIC can adjust the base rate schedule up or down by as much as 3 b.p. annually without prior public notice and comment. ABA suggested this as a more reasonable approach than the 5 b.p. adjustment originally proposed by FDIC. FDIC will bill for premiums in arrears under the new rule. Thus, the final assessment rates that will be applied for the first quarter of 2007 will be determined by the FDIC Board on May 15. Invoices will be sent to institutions via FDICconnect by June 15, with payment due by June 30, 2007. FDIC will bill each quarter and can adjust the rate schedule each quarter. Institutions that were chartered before 1996 and made payments to the FDIC are entitled to assessment credits. The FDIC will apply credits to offset the entire premium charge until the bank’s credits are exhausted. In 2008, 2009 and 2010, federal law stipulates that credits can only offset 90 percent of assessed premiums per bank. All institutions should have received notification of a credit and have until December 18, 2006 to challenge the calculation. (See Credits section below.) American Bankers Association 1
Timing of Billing
Quarterly Billing Use of Credits to Offset Premium Assessments
De Novo Bank Risk Category
FDIC proposed that all banks younger than 7 years old (i.e., chartered after March 2000) be assessed premiums at the Category I ceiling rate. ABA strongly objected, arguing that de novo banks should instead be judged based on their risk to the insurance fund. FDIC changed the provision so that it will not take effect until 2010. At that time, banks that are less than 5 years old (rather than 7) will be assessed at the Category I ceiling rate. FDIC will also treat banks that are part of holding companies or credit unions that convert to mutual savings banks as established banks for purposes of the risk-based premiums, provided the holding company or credit union is greater than 5 years old.
Proportion of Industry Initially in the Base Rate of Category I. No Consolidated Treatment of Banks Within a Holding Company Assessment Base
FDIC determined that 45 percent of banks will pay the lowest premium (5 b.p.) initially. ABA argued that the strong health of the industry justifies a much higher percentage of banks in this top-risk-rated category. When assessing premiums, FDIC will consider banks within a holding company separately. ABA suggested a consolidated approach, pointing out the complexity of the system for bank holding companies with many bank subsidiaries. FDIC believes that there are differences in risk among banks even within a holding company. Banks with over $1 billion of assets will report and use the quarterly average of daily closing deposit balances. (ABA recommended $1 billion rather than the proposed $300 million.) Banks under $1 billion can elect to use a quarterly average, or can continue to report and use the end-of-quarter balance and net out unposted debits and credits. Banks chartered in the future will be required to use the over-$1-billion rule. The float adjustment is eliminated for all banks.
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Risk-Based Formula
Small Bank Model (< $10 bil. in assets) The small bank Risk Scoring Model will use a bank’s CAMELS component ratings and current financial ratios to determine the risk assessment and premium. The Pricing Calculator (with definitions and weight given to each financial variable) can be found at www.fdic.gov/deposit/insurance/rule.html. The financial ratios are: • Tier 1 Leverage Ratio; • Loans past due 30–89 days/gross assets; • Nonperforming loans/gross assets; • Net loan charge-offs/gross assets;* and • Net income before taxes/risk-weighted assets.* *These two ratios will be averaged over 4 quarters to reduce volatility. The CAMELS ratings (a weighted average of the individual component ratings) are included as a sixth variable with the financial ratios in determining the premium. ABA urged FDIC to weight the components equally, rather than overweighting Management and Capital, as it proposed. CAMELS component Weighting (percent) C 25 A 20 M 25 E, L & S 10
Institutions with assets between $5 billion and $10 billion can request treatment as a large bank. Large Bank Model (> $10 bil. in assets) For large institutions within Risk Category I that have long-term debt issuer ratings, the risk model will be based on the weighted average of CAMELS component ratings and the debt rating. The model assigns values for different weighted CAMELS ratings (weighted as in the small bank model) and debt ratings, then weights these two equally to determine premiums. For institutions that do not have rated debt, the small bank model will apply. FDIC did not adopt ABA’s recommendation that a holding company’s rating be used if available and there is none for the bank. This system will be on a continuous scale, as opposed to six rate subcategories (as proposed). ABA recommended against the six-bucket system, which could have meant large jumps in premiums due to small changes in risk. The Pricing Calculator (with definitions and weight given to each financial variable) can be found at www.fdic.gov/deposit/insurance/rule.html.
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Effective Date of Ratings Changes Warning of Downgrades
Responding to ABA’s request, ratings changes will be effective following notification of a change, not when the examination began (as proposed). The FDIC did adopt a procedure for warning large banks that a downgrade is imminent unless action is taken before the next assessment period. ABA had supported this concept as it provides the right incentives to improve and avoids an unnecessary penalty on banks that are taking corrective actions. FDIC stated that it will not over-ride the examiner ratings of the primary regulator. However, FDIC retains authority – in consultation with the primary regulator – to raise or lower the premium based on additional information relating to the risk of failure or cost in failure of the institution. FDIC did retain the authority to move up or down the premium generated by the large bank model by 0.5 b.p. based on additional information (such as loss given default and ability of the institution to deal with “stress”). However, the FDIC delayed implementation of this authority until it adopts guidelines for how such a determination would be made. It is expected that the FDIC will seek public comment on the guidelines before the Board considers any final rule on this authority. As expected, the FDIC did not include Federal Home Loan Bank advances in the risk-based formula. ABA made the case even before the proposals were released for comment that advances help the funding of banks, lower the interest rate risk, and lower the risk to the FDIC. The FDIC dropped the use of a volatile liabilities category, which had included deposits over $100,000. ABA opposed the use of this factor, arguing that these are considered core deposits by most banks, particularly those that were well-capitalized.
FDIC will Not Overrule Examiner Ratings of Primary Regulator Ability to Move Premium Up or Down in Large Bank Model Retained, but Implementation Delayed Until Guidance is Issued Federal Home Loan Bank Excluded
Liabilities Over $100,000 Excluded
CAMELS Review and Appeals Process
Commitment to Refine Process Several FDIC Board members expressed the need to have an effective appeals process for examiner rating given that there will be a cost associated with the examiner ratings under the new risk-based system. ABA had urged such a review of the appeals process.
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Insurance Fund Target
Designated Reserve Ratio FDIC set the designated reserve ratio (DRR) for the merged Deposit Insurance Fund as 1.25 percent of insured deposits. Unlike the old law, there is no timeframe under which the insurance fund has to attain this ratio. The FDIC stated that the rate schedule for 2007 indicates a desire to achieve 1.25 percent within three years.
Assessment Credits
$4.7 billion of credits As required in the new law, on Oct. 10 FDIC adopted a rule for applying the $4.7 billion of assessment credits which will be used to offset premium assessments. Approximately 86 percent of banks, those in existence and had paid premiums by year-end 1996, are entitled to premiums. The credits, which are equivalent to about 8 b.p of premiums on average, should cover premiums for 2007 and into 2008 for most banks. In 2008, 2009, and 2010, credits can only offset (by law) 90 percent of any assessment. The credits were distributed relative to banks’ deposits at year-end 1996. (Find credit allocation at www.fdic.gov/deposit/insurance/reform.html.) FDIC ruled that the claim on credits stayed with banks that sold deposits/branches because they paid the premiums on them. The credits were transferred to acquiring banks only in cases where the acquirer obtained at least 90 percent of the assets and liabilities of the selling bank (i.e., de facto mergers). As requested by ABA, FDIC extended to 60 days (until Dec. 18) the period in which banks can challenge their allocation of credits. Banking firms can transfer credits within a holding company and can market them to unaffiliated banks. In the final rule, the FDIC states that it concurs “that the determination and allocation of the one-time assessment credit to eligible insured depository institutions does not result in the recognition of an asset or income by these institutions, for accounting purposes.” It goes on to say that “the one-time credit does not represent a cash inflow to the institution, but rather represents contingent future relief from future cash outflows.”
Allocation of Credits
Transferability of Credits Accounting Treatment of Credits
Insurance Coverage
Coverage for Retirement Accounts FDIC raised the insurance coverage for retirement accounts to $250,000 at the beginning of April (as requested by ABA).
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Merger of Insurance Funds
Merged Fund FDIC merged the Bank and Savings Association Insurance Funds at the end of March. The Deposit Insurance Fund now holds $50 billion.
New FDIC Seal
FDIC Logo FDIC adopted a new gold-and-black logo that recognizes the merged insurance fund and increase in insurance coverage for retirement accounts. FDIC acceded to ABA’s request that banks be allowed to use alternative colors under certain circumstances. Also responding to ABA’s request, FDIC will allow a one-year transition period for banks to make changes and to use up their current stocks of materials.
Dividends
Temporary Rule The rule adopted by the FDIC Board on Oct. 10 is a temporary rule, which will be redeveloped with additional analysis next year. In the unlikely case that dividends are due before 2009, they will be allocated on the same basis as the assessment credits. The redeveloped rule will also factor in premiums paid in 2007 and thereafter. Consistent with the new law, FDIC will pay cash dividends to banks if, at the end of any year, the insurance fund exceeds 1.35 percent of insured deposits. Above 1.35 percent, FDIC will pay out half of the excess; above 1.50 percent, FDIC will pay out all of the excess. However, FDIC is authorized to forgo a dividend under unusual circumstances – but must justify its decision to do so to Congress. When the insurance fund rises above 1.35 percent, FDIC will pay cash dividends within 45 days of the declaration of a dividend. FDIC had proposed to make the payment more than 300 days after the declaration, which ABA strongly opposed.
Cash Dividends
Timing
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