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The Federal Deposit Insurance Corp.'s Quarterly Banking Profile described an industry gaining health, but it still faces several key challenges to maintaining growth.
February 26 -
Despite the drop in failure predictions, officials warn that the condition of the economy remains uncertain and give no signs of premium reductions.
October 11
WASHINGTON — The Federal Deposit Insurance Corp. will return to banks nearly $6 billion that the agency says it no longer needs.
The refund, announced at the FDIC's twice-a-year update on the Deposit Insurance Fund, was a positive turn three years after the agency took the bold step of asking banks to prepay more than $45 billion in assessments to deal with accelerating failures.
"It's a watershed event that we are in a position to refund the remaining amounts of the prepaid assessments," Comptroller of the Currency Thomas Curry, who holds an FDIC board seat, said at the agency's public meeting. "That was a creative idea that insured that the fund had liquidity in some of the darkest moments of our recent financial crisis."
FDIC staff also announced the agency has again lowered cost projections from future failures. Total failure costs from 2012 through 2016 are estimated to be $7 billion, down from an October projection of $10 billion, with an even lower figure for the five-year period starting this year.
During the crisis, the prepayment — essentially a loan — was a novel approach to solving the FDIC's financial problems without taking the unpopular step of borrowing funds from the Treasury Department. A bank could report its share of the total payment — based on its estimated assessment over 13 quarters — as an asset to be written down over time as the institution paid actual premiums.
But in a 2009 rule, the FDIC said it would refund amounts that were not assessed by June 30 of this year. Officials said the agency has estimated the total amount to be returned as $5.7 billion. Since the agency assesses actual premiums separate from the prepayment amounts, the refund will not affect the DIF balance.
"While the refund of remaining prepaid assessments will reduce cash held by the fund, the staff projects that remaining cash along with future assessment receipts and receivership dividends will be sufficient to meet the FDIC's obligations over the next five years," Matthew Green, an official in the FDIC's insurance and research division, said in a brief presentation to the agency's board.
The agency said overall assessment income in the DIF has been somewhat lower as improved conditions in the industry have affected financial ratios and other factors used in the agency's risk-based formula that determines a bank's premium rate. The fund is projected to earn $11 billion this year, down from $12.4 billion in 2012 and $13.5 billion in 2011.
The FDIC said factors contributing to the reduced projections for failure-related costs include positive trends in supervisory ratings and an overall decline in failure rates.
"We expect bank failure rates and the downgrades to continue declining, while the pace of rating upgrades should increase over time," Green said.
Yet the DIF still has significant ground to cover to return to its pre-crisis levels, and senior officials have given no hint they plan to set lower revenue targets. Under law, the DIF must hold enough capital to cover 1.35% of insured deposits by the fall of 2020. At yearend, that ratio was 0.45%, with a total balance of $33 billion in the fund.
"Notwithstanding this improvement, we still have a long way to go to meet our statutory minimum target of 1.35% by the 2020 deadline," said FDIC Chairman Martin Gruenberg.
The agency said the DIF's reserve ratio is expected to get an 11-basis-point bump as a result of the expiration of temporary coverage of all transaction deposits in checking accounts.
