On November 12, 2009, the Board of Directors of the Federal Deposit Insurance Corporation (“FDIC”) voted to require all FDIC-insured depository institutions to prepay risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid assessments are designed to provide the FDIC with additional liquid assets for the Deposit Insurance Fund, which have been used to protect depositors of failed institutions and have been exchanged for less liquid claims against the assets of failed institutions. The FDIC projects that, if no action is taken, the FDIC’s liquidity needs to resolve failures could exceed its liquid assets beginning in the first quarter of 2010.

Calculation of Prepaid Assessment. Under the final rule, all insured institutions will be required to prepay their estimated risk-based assessments for the fourth quarter of 2009 and for 2010, 2011 and 2012. The prepayment would be collected on December 30, 2009, along with institutions’ regular quarterly deposit insurance assessments for the third quarter of 2009. For the fourth quarter of 2009 and all of 2010, the prepaid assessments would be based on an institution’s total base assessment rate in effect on September 30, 2009. That rate would be increased by three basis points for the 2011 and 2012 prepayments. A quarterly five percent deposit growth rate would also be built into the calculation.

Accounting for Prepaid Assessment. The prepaid assessments would be accounted for as a prepaid expense, which is an asset that would carry a zero risk-weighting for risk-based regulatory capital purposes. As of December 31, 2009, and quarterly thereafter, each institution would expense its regular quarterly assessment and record an offsetting credit to the prepaid assessment asset until the asset is exhausted. Once the asset is exhausted, an institution would record an accrued expense payable each quarter for the assessment payment, which would be paid in arrears at the end of the following quarter. If the prepaid assessments are not exhausted by June 30, 2013 (which is earlier than the December 31, 2014 date provided in the proposed rule), any remaining amount would be returned to the institution. Prepaid assessments could be used only to offset regular risk-based deposit insurance assessments.

Exemptions. The FDIC may exempt specific institutions from having to prepay assessments if it determines that the prepayment would adversely affect that institution’s safety and soundness. The FDIC will notify any affected institution of its exemption by November 23, 2009. An institution could also apply for an exemption by December 1, 2009 if it believed the prepayment would impair the institution’s liquidity or create extraordinary hardship. Applications would be considered on a case-by-case basis and the FDIC has indicated that it expects few to be granted. The final rule also eliminates the possibility of a partial prepayment option.

Summary of Comments. The FDIC received more than 800 comments on the proposal, the vast majority of which supported the FDIC meeting its liquidity needs though requiring prepayments. The commenters generally preferred the prepaid assessment option to the other alternatives proposed by the FDIC, including imposing additional special assessments or borrowing from its line of credit with the U.S. Department of the Treasury. While the prepaid assessment would require an immediate cash outlay, the commenters did not think it would result in a strain on liquidity to the industry. Further, because the prepaid assessment was being treated as a prepaid expense, which is an asset, it would not have any effect on earnings.

The FDIC deemed the borrowing option less desirable than the prepaid assessments since the latter would continue to ensure that the Deposit Insurance Fund remains directly funded by the industry and would not count toward the public debt limit. The borrowing option also would involve interest costs, which is not the case with prepaid assessments. Further, commenters feared that there may be negative public perception of the FDIC borrowing from the Treasury, which would result in decreased depositor confidence, or that Treasury might impose restrictions on the industry similar to those imposed on Troubled Assets Relief Program participants if the FDIC were to draw on its line of credit.

Some commenters questioned the appropriateness of a five percent deposit growth assumption in the current economic environment. The FDIC indicated that the growth assumption was derived from historical data. The FDIC chose to use one growth assumption for all insured institutions for convenience and simplicity. The FDIC noted that the deposit growth assumption is only being used to calculate the prepayment estimates. Actual insurance assessments will be based on the actual amount of deposits.