FDIC Proposes Changes to Deposit Insurance Assessments
Author: Brian Mischel
On June 16, 2015, the Federal Deposit Insurance Corporation (FDIC) issued a proposal that would refine the deposit insurance assessment system for small banks. For purposes of this proposal, small banks are those with less than $10 billion in assets that have been federally insured for at least five years.
Among other items, the proposal changes the factors relevant to determining a bank’s total assessment rate. Assessment rates would be determined using financial measures and supervisory ratings derived from a statistical model estimating the probability of failure over three years. The FDIC has indicated it expects the proposal to be revenue-neutral in that the total increase in assessments collected in aggregate from small banks would not increase; some banks would pay more and some less under the proposal. The purpose of the changes is to better reflect the actual risk to the FDIC based on data from recent bank failures and employ more forward-looking measures. Banks that take greater risks will, in theory, pay more for deposit insurance, which would greatly reduce the subsidization of high-risk institutions by others with less risk.
Changes from the Current System
Under the current system, small banks are assigned to one of four risk categories based on their capitalization and CAMELS ratings. The chart below focuses on those institutions currently in Risk Category I, which includes most small banks. The proposal would apply to all small banks and would eliminate the currently used risk categories.
The proposed assessment formula has updated parameters and some new factors. Significant differences from the current formula include:
- Separation of the parts of the nonperforming assets ratio into separate elements for nonperforming loans and OREO
- Inclusion of a core-deposits-to-total-assets ratio in lieu of an adjusted brokered deposit ratio
- Addition of a one-year asset growth factor
- Inclusion of a loan portfolio concentration in lieu of ratios for net loan charge-offs and loans past due 30 to 89 days to gross assets
All data needed for the proposed assessment formula already is in the Call Report, meaning no reporting adjustments would be needed. All proposed measures were found relevant by the FDIC in predicting bank failures over a three-year period using statistical analysis of recent years. Several of the new measures are intended to be more forward-looking and more accurately reflect risk. The one-year asset growth ratio will tend to raise assessment rates for banks that grow significantly over a one-year period. The loan mix index is a measure of the extent a bank’s total assets includes higher-risk loan categories. Each loan category in the bank’s portfolio would be multiplied by that category’s historical weighted average industrywide charge-off rate over a sufficient time period to determine a loan mix index value. Loans with high weighted average charge-off rates would have an appropriate impact on assessment rates.
The proposed revisions would take effect after a final rule is adopted and the quarter after the Deposit Insurance Fund reaches 1.15 percent of insured deposits. Comments on the proposal are due 60 days after it is published in the Federal Register.
For more information on how this issue could affect your institution, contact your BKD advisor.