Brian J. Mischel

The Federal Deposit Insurance Corporation (FDIC) has adopted a notice of proposed rulemaking and request for comment that would require insured depository institutions to prepay their estimated risk-based assessments for the fourth quarter 2009 and for all of 2010, 2011, and 2012.  The prepaid assessment for these periods would be collected on December 30, 2009, along with the regular third quarter 2009 risk-based assessment.

Calculation

An institution’s prepaid assessment rate for the fourth quarter 2009 and 2010 would be the total base assessment rate in effect on September 30, 2009.  The 2011 and 2012 rate would be the institution’s third quarter 2009 total base assessment plus three basis points.  For purposes of calculating the prepaid amount, the third quarter 2009 assessment base would be increased each quarter by an estimated 5% annual growth rate through the end of 2012.

Accounting

The entire prepaid assessment would be recorded as a prepaid expense (asset) as of December 30, 2009. Starting with the expensing of the fourth quarter assessment at December 31, 2009, and each subsequent quarter, each institution would record an expense for its regular quarterly assessment for the quarter until there is no remaining asset. Once there is no remaining asset, the institution would record an accrued expense payable for the assessment payment each quarter. This amount would be paid in arrears to the FDIC at the end of the following quarter. Examples of situations that would lead to an early depletion of the prepaid assessment are (1) deposit base growth exceeding the estimated annual 5% growth assumed in the calculation; (2) an increase in the institution’s assessment rate because of a decline in CAMELS (capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk) ratings and/or (3) an increase in the assessment rate by the FDIC.

Risk weighting

Because the federal banking agencies’ risk-based capital rules allow an institution to apply a 0% risk weight to claims on U.S. government agencies, the FDIC believes the prepaid assessment would qualify for a 0% risk weight for purposes of calculating the institution’s risk-weighted assets

Restrictions on use and implementation

Prepaid assessments would be used only to offset regular quarterly risk-based deposit insurance assessments.  For example, prepaid assessments could not be used to offset any future special assessments.  The FDIC would begin to offset prepaid assessments on March 30, 2010, representing payment for the regular fourth quarter 2009 risk-based assessment.  Any amount of prepaid asset remaining by December 30, 2014, would be returned to the institution.

Exemption

An institution could apply to the FDIC for an exemption of all or part of the prepayment requirement.  The FDIC would exercise its judgment as supervisor to exempt an institution if it is determined the prepayment would adversely affect the safety and soundness of the institution.  Exemption requests would be considered on a case-by-case basis and the FDIC expects only a few would be needed.  The FDIC would make this decision in consultation with the institution’s primary federal regulator.  An institution would be notified of its exemption from the FDIC by December 24, 2009.

Transfer

The unused portion of a prepaid assessment may be transferred into a surviving or resulting institution in the event of a merger or consolidation.  An institution would need to notify the FDIC’s Division of Finance and submit a written agreement signed by legal representatives of both institutions.

Effective date

A final rule following this proposed rule would become effective immediately upon adoption.

Consideration of alternatives

The FDIC considered other options such as imposing additional special assessments, borrowing from the U.S. Treasury and borrowing from the Federal Financing Bank.  Ultimately, the FDIC determined the prepaid assessments provided the appropriate liquidity, while keeping the Deposit Insurance Fund (DIF) directly industry-funded.

Request for comments

The FDIC seeks comment on every aspect of the proposed rule.  Comments must be received on or before October 28, 2009.  See the link below for the complete notice of proposed rulemaking and request for comment published in the Federal Register on October 2, 2009.  Contact your BKD advisor if you have additional questions.

http://edocket.access.gpo.gov/2009/pdf/E9-23803.pdf