WASHINGTON — The Federal Deposit Insurance Corp. assessment plan released Tuesday was a mixed bag for bankers as the agency canceled a planned 2011 premium increase but proposed a record high target for federal reserves.
In light of the beating the Deposit Insurance Fund took during the financial crisis, the agency plans to raise its target ratio of reserves to insured deposits to 2%, 65 basis points above the statutory minimum. The move was designed to ensure that the fund does not go broke again if another banking crisis arises.
But on the flip side, FDIC officials sounded willing to take their time in building the fund to such a level, rather than charging dramatically high premiums in the short term. They said the fund would not reach the 2% threshold until 2027, at the earliest, based on projected assessment rates.
The FDIC also scrapped its plan to raise premiums by 3 basis points next year, noting that Congress had allowed it more time to rebuild the battered fund and that projected losses from bank failures had dropped.
FDIC officials said they will seek to reduce premiums — most banks now pay 12 to 16 basis points — over time and settle at a small, steady premium.
"The notion of a long-term, moderate, stable rate is certainly a sensible thought," said John Walsh, the acting comptroller of the currency, who sits on the FDIC board.
Under the plan, the agency proposes keeping premiums largely steady until about 2018, allowing reserves to replenish, but would begin to reduce the assessments thereafter.
The agency said it does not plan to pay rebates when the fund gets too high, but instead would begin to trim rates so they hover around an average of 8.5 cents per $100 of domestic deposits.
"This will help with our planning purposes. It will help the banks with their planning purposes as well," FDIC Chairman Sheila Bair said at the board meeting.
FDIC premiums have changed dramatically in recent years. Until 2006, the FDIC could not charge a premium to most institutions if the DIF was at or above 1.25%.
But Congress gave the FDIC more flexibility on rate-setting, and policymakers have been wrestling over the right funding level.
Under a previous DIF restoration plan, the agency had planned to build the reserve ratio — which was minus-0.28% at June 30 — back to the congressionally mandated minimum of 1.15% by the end of 2016. As part of the plan, which at that time projected $60 billion of losses from failed banks in 2010 through 2014, every bank's premium would automatically rise 3 cents per $100 of domestic deposits, starting next year.
But two things happened. The Dodd-Frank law enacted in July increased the minimum fund ratio to 1.35% but gave the FDIC 10 years to hit that mark. Furthermore, the agency said Tuesday, its five-year loss projection has improved to $52 billion. Officials said a smaller failure burden, coupled with a longer reserve restoration period, meant the minimum ratio would be reachable without next year's increase.
"I am pleased that we are able to provide some assessment rate relief now in light of our lower loss projections," Bair said in a press release.
Industry representatives hailed the news. "Simply put, the FDIC's decision to forgo the premium increase means that banks will have $2.5 billion every year that can now be used for loans in their communities," said James Chessen, the chief economist of the American Bankers Association.
But the FDIC said the Dodd-Frank changes give it an opportunity to ensure that future crises do not put the agency in the position it has been in since 2008 with rapidly dwindling reserves.
For years, agency officials have sought the authority to expand the fund in good times to provide a cushion for downturns, but they were challenged by lawmakers and bankers who felt higher premiums were unnecessary during periods of few failures.
The agency traditionally has targeted a "designated reserve ratio" of 1.25% to guide fund planning and maintain reserves amid changing economic cycles.
But the Dodd-Frank law removed a cap of 1.5%, allowing the agency greater leeway to raise the target ratio. In the first time this new authority has been used, the FDIC released a proposal calling for the ratio to go to 2% (The plan is open for comment for 30 days.) "It is certainly better grounded than 1.25%, which obviously proved to be woefully inadequate," Bair said.
Under the proposal, the FDIC would start lowering rates when the fund reached 1.15%. The range of rates for most banks, now 12 to 16 basis points, would fall to between 8 and 12 points. After the fund reached 2%, the FDIC said the base assessment rate should drop by 2 cents, to between 6 and 10 basis points. If the fund reaches 2.5%, the FDIC called on premiums to fall another 2 basis points, to between 4 and 8 cents per $100 of domestic deposits.
To be sure, the proposal leaves the FDIC free to change its mind.
"I would note that anything we say with respect to the" proposal "is somewhat aspirational, since we're talking about features that will take effect in 2019," said Walsh. "Given that the current restoration plan has been amended now three or four times, it seems quite possible that future boards may decide that they would like to set … a different course. And since the 2% ratio under this plan won't be reached until 2027, I think we're talking about plans for the next generation."
But Bair said it was important to give both the industry and the FDIC a sense of the long-term picture. "We are going very far into the future," she said. "Obviously, these projections are imperfect because we don't know exactly what the future will hold."
The agency must also complete other rulemakings that will affect assessments, including a plan to ensure that the increase of the mandatory minimum to 1.35% does not burden community banks.
The FDIC also is expected to issue a rule this year that would charge assessments based on an institution's total liabilities, instead of just its deposits. It said the effect of that rulemaking would probably change the amount banks pay in coming years.
Chessen said that, though the industry agrees with much of what the agency did Tuesday, it remains to be seen what the actual premium impact will be. "Everyone agrees the premiums should be low and steady over time," he said. "Everyone agrees the fund should be larger than it was coming into a crisis. The debate is going to be over how large the fund should be and how many resources are really needed."
