FDIC’s Decisions on Premiums and Extension of the TLGP Debt Guarantee Program
On Feb. 27, the FDIC finalized the changes to premium assessments it proposed last year – adding a one-time 20 b.p. assessment in the second quarter – and augmented the Debt Guarantee Program under the Temporary Liquidity Guarantee Program (TLGP). The two are summarized below. FDIC Premiums Past bank failures and reserving against future failures lowered the FDIC insurance fund to 0.40 percent of insured deposits last December, from 1.22 percent a year prior. In response, the FDIC has proposed a 20 b.p. assessment in second quarter 2009 and raising the risk-based assessment schedule still higher than was proposed last year.
FDIC Problem Bank List
# Institutions Assets ($B 2008: 252 Institutions With $159 Billion of Assets
$Billions
Deposit Insurance Fund and Reserves
Reserves
1600
$900 $750 $600
$60 $50 $40 $30 $20 $10 $0 2006 2007 2008 Source: Federal Deposit Insurance Corporation
$20 bil
1200
800
$450 $300
Fund Balance
400 $150 0 1991 1994 1997 2000 2003 2006 2008 Source: Federal Deposit Insurance Corporation $0
$19 bil
The proposed 20 b.p. assessment is intended to keep the insurance fund from falling to a level that could undermine public confidence. This assessment would be billed at the end of June to be paid at the end of September.1 The FDIC said that it may charge additional 10 b.p. special assessments as needed in the future. Comments on the proposal are due to comments@fdic.gov within 30 days. Last November, the FDIC raised the assessment schedule for first quarter 2009 by 7 b.p., such that at the end of June “Category I” banks2 will pay 12-14 b.p., compared to 5-7 b.p. last year (annual rates). Starting in the second quarter, for premiums to be paid in September, base assessment rates for Category I banks will be 12-16 b.p. – not 10-14 b.p. as proposed last year – with some new adjustments (see below). The FDIC projects that the special assessment along with raising the assessment schedule will recapitalize the insurance fund to 1.15 percent in seven years, yielding to ABA’s request to extend the recapitalization period from five years. Higher quarterly premiums under a new risk-based premium classification system will go into effect in the second quarter. There were some important changes in the adjustments, reflecting requests by ABA and many bankers: • Credit for unsecured debt and high capital. Banks will get up to a 5 b.p. reduction in assessment rate, depending on the level of their unsecured debt and (for banks under $10 billion) Tier 1 capital. The change reflects ABA’s insistence that the proposed 2 b.p. maximum was too low.
The assessment base is end-of-quarter deposits for smaller banks and quarterly average of daily closing deposit balance for larger banks. 2 To be Category I, a bank must be “well capitalized” and CAMELS rated I or II. Most banks are Category I.
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Brokered deposits and rapid growth. The FDIC had proposed higher premiums if brokered deposits exceed 10 percent of deposits and the bank’s assets grew more than 20 percent over the prior four years (adjusted for mergers). The FDIC acceded to ABA’s objection that the surcharge should not apply to deposits derived through a deposit placement network on a reciprocal basis,3 such as CDARS; it did not concede that broker-dealer sweep funds should also be excluded from the brokered deposits surcharge, as ABA argued. Also reflecting ABA’s arguments, the FDIC raised the asset growth trigger to 40 percent and lowered the marginal increase in the surcharge as asset growth increases. Collateralized liabilities. ABA strongly objected to the proposed surcharge premiums on collateralized borrowing, including Federal Home Loan Bank advances. The FDIC did not remove the surcharge, which can raise the assessment rate up to 50 percent. However, it did raise the threshold at which higher premiums from collateralized funds are triggered from 15 percent of deposits, to 25 percent. Large-banks. For banks over $10 billion, risk classification will be based not just on CAMELS ratings and unsecured debt ratings, as before, but also financial ratios (the same as those applied to smaller banks). Despite ABA’s objection, supervisors will be able to raise or lower the assessment rate from the formula calculation by up to 1 b.p., as compared to ½ b.p. previously. FDIC estimates that 32 percent of banks will pay between 7 b.p. and 12 b.p. after all the adjustments.
Dodd Bill and a 10 b.p. Special Assessment On March 5, Senate Banking Committee chairman Chris Dodd (D-Conn.) proposed a bill, “The Depositor Protection Action of 2009,” to raise the limit on FDIC’s borrowing from Treasury from $30 billion to $100 billion. Jointly, FDIC Chairman Sheila Bair announced that the FDIC intends to cut the special assessment from to 10 b.p., provided that the legislation is enacted. These announcements were a result of extensive meetings and conversations between ABA and the policymakers TLGP Debt Guarantee Program The FDIC proposed to add mandatory convertible debt (MCD) to the types of debt guaranteed under the Program. The intent is to provide banks participating in the Program more flexibility in obtaining funding from longer-term investors and to reduce the amount of debt that will roll-over when the Program ends. To be eligible, the MCD must convert to common stock by the end of June 2012. Moreover, a bank must apply to the FDIC and its federal regulator to issue guaranteed MCD. Comments on the proposal were due to comments@fdic.gov by March 17. Three items that have been discussed recently related to the TGLP were not included in the proposal. On February 10, Treasury Secretary Geithner said that the Program would be extended by four months, meaning that participating banks would be allowed to issue guaranteed unsecured debt through October. (The current cutoff is the end of June.) Second, FDIC Chairman Sheila Bair has mentioned extending the Program to include collateralized debt. Third, ABA has asked the FDIC to increase the limit on the amount of guaranteed debt that a participating bank can issue. None of these elements were included in the proposal.
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Only Category I banks can deduct “reciprocal deposits;” such deposits count as brokered for other banks.