The Federal Deposit Insurance Corporation (FDIC) has proposed significant changes to its risk-based deposit insurance assessment system. The proposal is primarily directed at insured banks and thrifts with $10 billion or more in total assets (large institutions). The amendments are designed to better measure the risk posed by large institutions to the Deposit Insurance Fund (DIF), including how the institutions would perform in times of stress, and to adjust the deposit insurance assessment accordingly. The proposal would also adjust the current assessment range for all insured institutions to ensure that the income the FDIC derives from assessments is approximately the same.

Currently, all insured institutions are assessed based primarily on their risk category, which is based on examination ratings, capital levels and supervisory evaluations, along with certain other factors. The FDIC is proposing to eliminate the existing risk categories entirely for large institutions. Instead, the FDIC is proposing to include CAMELS examination ratings and certain financial measures into two scorecards. One would be designed for most large institutions and the other for large institutions that are deemed to be highly complex in operation or structure or to present unique risks in the event of failure. Each scorecard would include a performance component to measure the institution’s financial performance and ability to withstand stress, and a loss severity component, to assess the level of potential losses in a failure scenario. The scores from the two components would be combined to produce a total score, upon which the assessment would be based.

The performance component would combine CAMELS ratings and financial measures into a performance score between 0 and 100.  The performance score would be the weighted average of: (1) the weighted average CAMELS ratings, (2) certain “ability to withstand asset related stress measures” (e.g., common equity capital ratio, concentration measures, core earnings to average total assets and classified assets ratios) and (3) certain “ability to withstand funding related stress” measures (e.g., core deposits to total liabilities, unfunded commitments to total assets, liquid assets to short-term liabilities). The performance score could be adjusted, up or down, by up to 15 points, by the FDIC based upon significant risk factors that the FDIC determines are not adequately reflected in the scorecard.

The loss severity score would measure the relative magnitude of potential losses to the DIF in the event of failure. That score would be the weighted average of two measures: (1) the potential losses to the FDIC in the event of failure (calculated based on a standardized set of assumptions) compared to total domestic deposits and (2) the ratio of secured liabilities to total domestic deposits. The loss severity score could also be adjusted, up or down, by up to 15 points, by the FDIC based on factors not reflected in the scorecard.

The FDIC is proposing a separate formula for “highly complex institutions.” Such institutions would include insured depository institutions with greater than $50 billion in total assets that are directly or indirectly owned by a parent company of more than $500 billion in assets or a processing bank or trust company with greater than $10 billion in total assets. Highly complex large institutions would be evaluated based on the same methodology as large institutions, but additional measures would be built into the calculation.

The FDIC’s proposal includes changes to the assessment rates for all insured institutions regardless of size. The changes are intended to ensure that the revenue collected under the new system will approximate that collected under the old and also make the lowest rate applicable to both small and large institutions identical. The proposed rule contains a range of rates, of 10 to 50 basis points for small institutions and insured branches of foreign banks, prior to adjustment for unsecured debt, secured liabilities and brokered deposits. That compares to the existing range of 12 to 45 basis points.  With the possible adjustments, the range would be 5 to 85 basis points, compared to the current range of 7 to 77.5 basis points. Large institutions would also be subject to a range of 5 to 85 basis points under the proposed methodology. Those ranges would continue to be subject to adjustment by the FDIC by up to three basis points without further rulemaking. The range is currently scheduled to increase by three basis points on January 1, 2011 pursuant to the Restoration Plan for the DIF adopted by the FDIC in September, 2009. 

The proposed rule provides for a 60 day comment period.     

The FDIC’s proposed rule is important for all insured institutions. The proposal would directly impact large institutions.  However, there is likely reason to believe that the FDIC would widen the applicability of the methodology, or a modified version of the methodology, in the future. The agency is continually seeking to improve the measurement of risk posed to the DIF by individual institutions for assessment purposes. To the extent that the methodology is adopted for large institutions and deemed by the FDIC to be successful, there is every reason to believe that the agency will seek to apply it more broadly. Consequently, the proposed rule may well be the beginning of a process that will eventually result in a new assessment scheme for all insured institutions.

One of the issues raised by the proposed rule is whether it is too complicated and places too much discretion in the FDIC.  Comptroller of the Currency John Dugan, who is also a member of the FDIC’s board of directors, voiced that concern at the FDIC’s board meeting at which the proposed rule was considered. The Comptroller, although voting to publish the proposed rule for comment, expressed reservations about the level of subjectivity that may be involved, as well as the degree of complexity. He indicated that he believed that the comments received about how the proposal would work in practice would be very important in determining whether the proposed rule represents an improvement that should be adopted.

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