ABA’s Response to FDIC’s Proposal Regarding Assessment Credits

The American Bankers Association is pleased to respond to the Notice of Proposed Rulemaking (NPR) from the Federal Deposit Insurance Corporation (FDIC) regarding revisions to 12 CFR §§327.11 and 12 CFR §327.33, which govern the use of assessment credits.

Some 5,212 banks, 98.3 percent of the industry, were due assessment credits totaling $764.4 million as of mid-year 2019. These balances were allocated last September per 12 CFR §327.11 (§327.11 credits). Two banks had credits amounting to $300,000 that were allocated in 2006 per 12 CFR §327.33 (§327.33 credits).

ABA supports the intent of the NPR, to make application of credits against quarterly assessments more predictable while maintaining the reserve ratio of the Deposit Insurance Fund (DIF) no lower than the statutory minimum of 1.35 percent. However, we recommend that the FDIC return the credit funds as expeditiously as is feasible to those banks to which they are due. The credits will serve a better purpose when disbursed to these banks where these funds can support the institutions’ lending and liquidity. Accordingly, we believe that the objectives of the NPR can be better achieved with certain refinements:

• §327.11 credits should be applied against assessments when the DIF is at least 1.35 percent of insured deposits (as proposed).
• §327.11 credits remaining after they have been applied for four quarters should be remitted in the next quarter that the DIF reserve ratio is at least 1.35 percent.
• The amount of §327.11 credits applied against a prior quarter’s assessments should be recalculated to correspond with adjustments to the Call Report (as proposed).
• §327.33 credits should be refunded without delay.

Following 12 CFR §327.11(c)(i), the FDIC commenced allocating §327.11 credits against assessments when the DIF reserve ratio rose above 1.38 percent to 1.40 percent in second quarter 2019 (from 1.36 percent in the first quarter). Bankers appreciate the promptness of the FDIC in applying credits last month against second quarter assessments, demonstrating responsiveness to the value of these funds for the banks.

Discussion of the above recommendations and analysis of the NPR follow. ABA recommendsthat the proposed changes go into effect immediately (as proposed).

§327.11 credits should be applied against assessments when the DIF is at least 1.35 percentof insured deposits.

Under the current rule, application of credits against assessments would be suspended if thereserve ratio were to decline below 1.38 percent. As proposed, the suspension level would bereduced to 1.35 percent. ABA supports this change.

While we feel that the credit funds would be put to better purpose if they are applied withoutlimit against assessments, we respect the FDIC’s statutory obligation to maintain the DIF reserveratio no lower than 1.35 percent. The FDIC has evaluated that this change “would not materiallyimpair the ability of the FDIC to maintain the required minimum reserve ratio of 1.35 percent.” Therefore, it is appropriate to revise “1.38 percent” in 12 CFR 327.11(c)(11)(i) to “1.35 percent.”

§327.11 credits remaining after they have been applied for four quarters should beremitted in the next quarter that the DIF reserve ratio is at least 1.35 percent.

As proposed, any §327.11 credits left after such credits have been applied for eight quarterswould be remitted to their owners in the next quarter in which the DIF reserve ratio is at least1.35 percent. ABA recommends that the period be reduced in 12 CFR §327.11(c)(13) to fourquarters. In this case, residual §327.11 credits would be refunded in July 2020, after first quarter2020 assessments (net of credits) are paid at the end of June 2020, provided the DIF’s reserveratio remains no less than 1.35 percent through that time.

According to the NPR, the FDIC rejected a plan to remit residual credits after four quarters tominimize volatility of the DIF. However, there is no statutory mandate to keep the DIF reserve ratio stable, only to maintain it at or above 1.35 percent. Therefore, when the credit funds are notneeded to maintain 1.35 percent, they should be distributed to the banks.

Approximately $451 million of §327.11 credits remain after they were applied against secondquarter 2019 assessments. The FDIC estimates that approximately $1.75 million would be left ifthese credits apply for the next seven quarters. Accordingly and conservatively, by straight-lineextrapolation there will be less than $260 million of credits outstanding after three more quarters.Ignoring insured deposit growth, disbursing this amount in the succeeding quarter would reducethe DIF reserve ratio by no more than ⅓ of a basis point. Short of a dramatic turnaround, whichthe FDIC does not foresee, the DIF reserve ratio would remain comfortably above 1.35 percent.Therefore, the FDIC can safely prepare to remit residual credits next July.

The amount of §327.11 credits applied against a prior quarter’s assessments should berecalculated to correspond with adjustments to the Call Report.

Under current 12 CFR §327.11(c)(11)(iii), recalculation of the amount of §327.11 credits appliedfor a prior quarter’s assessment resulting from subsequent amendments to a bank’s quarterlyregulatory reports is impermissible. ABA supports the NPR’s proposal to delete this paragraph.

With this change, revision of a prior Call Report that calls for a higher assessment would beoffset by more credit applied, neutralizing the effect on an institution with a credit balance. Arevision that lowers an earlier assessment would similarly be offset by less credit applied. Insum, for banks with credit balances this amendment would mitigate the impact on assessmentsdue from Call Report revisions, limiting the impact on bank earnings.

§327.33 credits should be refunded without delay.

The FDIC has had the remaining §327.33 credits for over 13 years. If the $300,000 had beenpaid out to its owners last June, the DIF reserve ratio would be 0.0004 basis points lower – trulyan immaterial amount for the DIF. There is no clear justification for the FDIC to hold onto thesefunds for two more years. It is long past time that these funds be remitted to the two banks, and12 CFR §327.35 should be amended accordingly.