FDIC Sees Less Risk, Lower Assessments for Some Banks

WASHINGTON — Improvements in the banking industry continue to ease demands on the Federal Deposit Insurance Corp., and are translating into lower assessment rates for some institutions.

Although the FDIC's general pricing scheme for the industry is unlikely to change anytime soon, a bank's exact price is based largely on its risk level. Since many banks are safer these days, the agency has reduced projected 2013 premium income by 9%, to $10 billion.

Rates have "declined as the performance and condition of banks have improved," John Conneely, the acting deputy director in the FDIC's New York regional office, said Tuesday at a meeting of the agency's board of directors.

The meeting included a semiannual update about projected costs for the Deposit Insurance Fund. The agency continues to report a downward trend in expected failure losses. During the five-year period from this year through 2017, the agency projects $4 billion in failure-related costs, which is 20% below an earlier projection in April for the same five-year stretch.

FDIC "staff expects that the pace of both examination rating downgrades and failures of troubled banks will continue to slow, and that ratings upgrades will outpace downgrades over the 2013-2017 period," the agency said.

But despite the prolonged improvement in the DIF's condition, the agency has had to extend a target deadline — from 2018 to 2019 — for building up the fund's reserves to 1.15% of insured deposits, due to lower projected assessment income. The $10 billion in projected income for this year is below the agency's April projection of $11 billion, and the fund's $12.4 billion in income earned in 2012. Officials said the agency is still on track to meet a statutory deadline of 2020 for hitting a 1.35% reserve ratio. The fund's reserve ratio stood at 0.63% at the end of June, which was up from 0.44% at the end of 2012.

To meet revenue needs, the FDIC charges prices for most banks within a range of 2.5 and 9 cents per $100 of a bank's total assets minus its tangible equity. The agency calculates a bank's actual price within that range based on numerous risk factors, including supervisory ratings and certain financial ratios.

The agency said the lower income projection resulted in part from "a larger-than-expected reduction in the industry average risk-based premium rate, which reflects improvement in banking industry performance and conditions."

"The DIF projections assume that the average risk-based premium rate will continue to decline gradually over several years as the banking industry continues to strengthen," the FDIC said in the fund update.

FDIC Chairman Martin Gruenberg reiterated that the agency plans to stay the course on its basic pricing scale for the near future. Even though premiums are unlikely to go up, the industry should also not expect pricing cuts, he said.

"Notwithstanding this improvement" in projected DIF costs, "the FDIC still has a long way to go to meet the statutory minimum target of 1.35% by the 2020 deadline," he said in a prepared statement. "We are only about halfway there."

"The likely course," he added, "appears to be a gradual and steady buildup of the DIF to the statutorily required level, which has the virtue of providing bankers some predictability of outlook on which to base their planning decisions."

In providing an update about the DIF's condition, agency staff noted two risks facing the economy which could change the fund's future outlook. They include uncertainty over the U.S. fiscal situation, as well as economic concerns about Asia, emerging markets and Europe.

"Our projections for the fund are subject to considerable uncertainty arising in part from the economic and fiscal outlook," Conneely said. "A slowdown in the recovery could result in bank failures rising above projections and failed-bank assets declining in value."