How Basel Is Forcing FDIC to Revise Bank Premiums

WASHINGTON — The Federal Deposit Insurance Corp. proposed a slew of changes Tuesday to its insurance-pricing system to correspond with reforms in Basel capital requirements.

Just as banks seek to comply with the tougher Basel III capital accord, the FDIC continues to use institutions' capital levels as one of the risk factors in determining their premiums.

The new proposal would aim to bring the two regimes in line. Alignment is necessary partly to avoid making banks report two different sets of capital ratios.

"It's important that the capital categories that we use for deposit insurance assessments appropriately reflect the changes in the capital rules to maintain consistency in risk measurement and not increase reporting burden for smaller banks," FDIC Chairman Martin Gruenberg said at the agency's board meeting.

While the proposed changes would result in zero premium changes for all but just a handful of banks, one notable reform would seek to ensure that certain complex banks — allowed flexibility under Basel in how they measure capital — do not get any undue advantage in their insurance assessments.

"I believe that the [proposal] will result in a better assessment of risk among banks and carry out the purposes of a risk-based deposit insurance system," Gruenberg said.

The proposal would incorporate the new "leverage" ratio — which U.S. regulators agreed on earlier this year to test big banks' capital strength — into premium pricing, as well as align more general capital measures used to determine assessments with the Basel measures. The FDIC would also revise a technical aspect of premium calculations for custodial banks.

The public comment period is 60 days.

But perhaps the most significant change relates to how counterparty exposures affect premiums for the biggest institutions.

Counterparty risk is among the factors the FDIC uses to charge rates for nine highly complex banks. But some global banks opting for the "advanced approaches" of Basel III — which allow greater use of a bank's own internal models to measure capital — could calculate lower amounts of counterparty exposure and therefore see their premiums decline. Banks using Basel's "standardized" approach — with less emphasis on internal models — could end up paying more.

The proposal would essentially require all nine institutions to report counterparty risk using the "standardized" model for deposit insurance purposes, even those that currently use the advanced approaches to comply with Basel. The change would become effective in the first quarter of 2015.

"Earlier this year, some but not all of the nine highly complex banks received approval to use internal models starting in the second quarter of 2014," Matthew Green, an associate director in the FDIC's insurance division, said at the meeting. "Based on preliminary data, using internal models will significantly change the adopting bank's scorecard results and assessment rates without corresponding changes in risk levels. In staff's view, some action is needed to avoid this outcome.

"The FDIC staff recommends requiring all highly complex banks to report counterparty exposures consistent with the standardized approach in the new capital rules, thus largely avoiding reliance on internal models for assessment purposes."

The core of the proposal, which is not expected to have a direct result on actual premiums, seeks to make the general risk categories the FDIC uses to price assessments reflect changes in the Basel regime.

Typically, the FDIC charges more favorable rates for "well-capitalized" banks, which before Basel had to achieve a minimum 6% Tier 1 risk-based capital ratio. Banks considered "adequately capitalized," which pay a little more, had to meet a 4% minimum.

But to bring those categories in line with the new capital requirements required under Basel, the FDIC proposal would increase that ratio to 8% for well-capitalized banks, and to 6% for adequately capitalized banks. Consistent with Basel, the pricing plan would also incorporate a new minimum capital ratio for common equity, of 6.5% for well-capitalized banks and 4.5% for adequately capitalized banks. The new thresholds would take effect in January 2015.

Meanwhile, starting in January 2018, the FDIC plans to incorporate the new "leverage" ratio — which U.S. regulators have instituted as the toughest indicator yet of capital strength for the largest domestic banks — as part of its pricing plan. Institutions subject to the strict measure must hit a minimum 6% leverage ratio to be well capitalized and 3% to be adequately capitalized.