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FDIC Premium Assessments
Issue
ABA supports fair and objective premium assessments that maintain adequate FDIC resources. FDIC should set rates low and keep them steady over time to avoid excessive premiums and spikes in premium rates. ABA believes the 2007 assessment rates were set far too high, and ABA supports a reduction (or series of reductions) of these rates as the Deposit Insurance Fund (DIF) approaches the 1.25 percent Designated Reserve Ratio target set by the FDIC. This will help avoid accumulation of surplus resources in the DIF and mitigate concerns about how dividends will be distributed should the fund rise above 1.35 percent (the trigger point for dividend distributions).
Explanation Due to a provision that ABA promoted in legislation in 1996, well-capitalized, CAMELS I & II rated banks paid no premiums from 1997-2006. Major reform legislation in 2006 gave the FDIC authority to charge all banks premiums every year and to do so using an improved risk-based system. FDIC has greater latitude in managing the fund within a normal operating range of 1.15 percent to 1.35 percent, and it set a long-term target level, called the Designated Reserve Ratio (DRR), at 1.25 percent. Due to rapid deposit growth prior to 2007, the reserve ratio has trended downward, falling to 1.21 percent at year-end 2006. In order to reverse that trend and rebuild the fund, the FDIC set an aggressive premium schedule ranging from 5 to 43 basis points, with healthy banks paying between 5 and 7 basis points (see table below).The insurance fund's reserve ratio grew faster than expected in 2007, as insured deposit growth slowed dramatically in the second and third quarters. Combined with $600 million in expected premium income in 2007 and $2.5 billion in 2008 (under current rates), the FDIC is likely to reach the 1.25 percent DRR well before year-end 2008. The difference in premium income for the two years is a result of most institutions using assessment credits to offset premium charges. These credits (which totaled $4.7 billion) were provided by Congress to those institutions that had contributed to the full capitalization of the FDIC in 1996. These credits will be largely exhausted by the end of 2008.
ABA has pointed out to the FDIC that with slowing deposit growth and increasing revenue the FDIC can lower premiums and still reach the 1.25 percent DRR by mid-year 2009 as originally intended. Moreover, we have encouraged the agency to avoid assessing premiums to the point where it must pay dividends (at 1.35 percent of insured deposits). In the long-term, ABA believes that maintaining premium rates at low levels is the best way to assure that there are adequate reserves to protect insured depositors without imposing undo costs on the industry and banks' communities. Excessive premiums serve only to reduce the resources available for banks to meet the credit and financial needs of their communities.
The 2006 legislation also requires the FDIC to pay cash dividends if the reserve ratio rises above 1.35 percent – a provision strongly supported by the ABA supports development of a fair system for allocation of any future dividends. Keeping premium rates low and steady should help keep the fund below the 1.35 percent level and avoid any question of a fair distribution to the banking industry.
Background
In November 2006, the FDIC Board finalized a rule to revise the risk-based premium system, and set the assessment schedule as follows:
|
Assessment Rate Schedule |
Risk Category* | ||||
| I | II | III | IV | ||
|
Base |
Ceiling | ||||
| Annual Rate in Basis Points | 3 | 5 | 8 | 26 | 41 |
|
* I: CAMELS 1 or 2 and well capitalized. | |||||
This change was authorized by the Federal Deposit Insurance Reform Act of 2005. Assessments for the first quarter of 2007 will be billed in arrears by June 15th, to be paid on June 30. Banks chartered before 1996 will have credits that should offset premiums for several quarters.
ABA believes that this schedule is excessive given FDIC's needs, the strength of the banking industry, and transitioning onto a new risk-based premim system. We will urge FDIC to reconsider the schedule as soon as insured deposit growth resumes a more normal level, based on historical experience.
Risk Classification
The new rule consolidates the current nine-box grid based on supervisory evaluation (CAMELS rating) and capitalization into four groups. The top category (CAMELS 1 or 2 and well capitalized) stay the same. However, there is a new system to discriminate among the 95 percent of the industry now in that group. The information to determine premiums is built on a two-tier system: one for banks below $10 billion in assets, and another for those above $10 billion. Banks in this category will pay premiums between a base and ceiling rate, depending on the risk scoring.
Small Bank System: Premiums are based on a risk score calculated from an equation that uses a combination of financial ratios and supervisory ratings, including:
- Tier 1 leverage ratio,
- loans past due 30-89 days/gross assets,
- nonperforming loans/gross assets,
- net loan charge-offs/gross assets,
- net income before taxes/risk-weighted assets, and
- a weighted average of the components of the CAMELS rating (weighted 25 percent for Capital, 20 percent for Asset quality, 25 percent for Managment, and 10 percent (each) for Earnings, Liquidity and Sensitiity to risks).
Large Bank System: CAMELS ratings count for half of the risk score, with the remainder a combination of financial ratios and market information. The use of market data – principally long-term debt ratings of S&P, Moody's and Fitch – is the most significant difference between the proposed large and small bank systems.
For large banks, FDIC has the ability to move classification up or down one subgroup based on additional market information (e.g., subordinated debt prices or credit default swap spreads), financial performance ratios, and "stress" considerations (e.g., ability of the bank to withstand financial stress and the potential for loss severity, including funding structure).
Distribution in the Grid: FDIC expects the distribution of risk scores and premium rates to be similar for large and small banks. About 45 percent of banks (large and small) are expected to be in the base premium rate for category I and 5 percent in the ceiling rate. In between the base and ceiling rates, there will be a continuous schedule of rates.
Click here to download the FDIC's small or large bank risk-based premium calculator.
Base Schedule
The base schedule of assessment rates is as follows:
|
Base Rate Schedule |
Risk Category* | ||||
| I | II | III | IV | ||
|
Base |
Ceiling | ||||
| Annual Rate in Basis Points | 2 | 4 | 7 | 25 | 40 |
|
* I: CAMELS 1 or 2 and well capitalized. | |||||
The FDIC can increase or decrease this base schedule up to three basis points as necessary to meet funding needs. It raised the scheduel by one b.p. in 2007, so that "Group I" banks (well-capitalized and CAMELS 1 and 2) will pay between 5 and 7 b.p.
Questions? Please contact Rob Strand, (202) 663-5350, for more information.
