FDIC Takes the Long View in New Rate Plan

American Banker  |  Wednesday, October 20, 2010 | By Joe Adler 

WASHINGTON — The Federal Deposit Insurance Corp. assessment plan released Tuesday was a mixed bag for bankers as the agency canceled a planned 2011 premium increase but proposed a record high target for federal reserves.

In light of the beating the Deposit Insurance Fund took during the financial crisis, the agency plans to raise its target ratio of reserves to insured deposits to 2%, 65 basis points above the statutory minimum. The move was designed to ensure that the fund does not go broke again if another banking crisis arises.

But on the flip side, FDIC officials sounded willing to take their time in building the fund to such a level, rather than charging dramatically high premiums in the short term. They said the fund would not reach the 2% threshold until 2027, at the earliest, based on projected assessment rates.

The FDIC also scrapped its plan to raise premiums by 3 basis points next year, noting that Congress had allowed it more time to rebuild the battered fund and that projected losses from bank failures had dropped.

FDIC officials said they will seek to reduce premiums — most banks now pay 12 to 16 basis points — over time and settle at a small, steady premium.

 "I am pleased that we are able to provide some assessment rate relief now in light of our lower loss projections," Bair said in a press release.

Industry representatives hailed the news. "Simply put, the FDIC's decision to forgo the premium increase means that banks will have $2.5 billion every year that can now be used for loans in their communities," said James Chessen, the chief economist of the American Bankers Association.

Under the proposal, the FDIC would start lowering rates when the fund reached 1.15%. The range of rates for most banks, now 12 to 16 basis points, would fall to between 8 and 12 points. After the fund reached 2%, the FDIC said the base assessment rate should drop by 2 cents, to between 6 and 10 basis points. If the fund reaches 2.5%, the FDIC called on premiums to fall another 2 basis points, to between 4 and 8 cents per $100 of domestic deposits.

The agency must also complete other rulemakings that will affect assessments, including a plan to ensure that the increase of the mandatory minimum to 1.35% does not burden community banks.

The FDIC also is expected to issue a rule this year that would charge assessments based on an institution's total liabilities, instead of just its deposits. It said the effect of that rulemaking would probably change the amount banks pay in coming years.