Coming off 2008's particularly grueling fourth quarter in which commercial banks and savings institutions insured by the Federal Deposit Insurance Corp. (FDIC) reported a net loss of $26.2 billion, the regulator's board of directors has voted to amend the restoration plan for the Deposit Insurance Fund.
In an effort to strengthen the fund, the board has decided to impose a special assessment on insured institutions of 20 basis points, implement changes to the risk-based assessment system and set rates beginning in the second quarter of 2009.
The fourth quarter, which saw 12 FDIC-insured institutions fail, represented the industry's first quarterly loss since the savings and loan crisis. For all of 2008, insured institutions earned $16.1 billion – a decline of 83.9% from 2007 and the lowest annual total since 1990
More than two-thirds of all insured institutions were profitable in the fourth quarter, but their earnings were outweighed by large losses at a number of big banks, the FDIC says. Total deposits increased by $307.9 billion – the largest percentage increase in 10 years – and at year-end, nearly 98% of all insured institutions met or exceeded the highest regulatory capital standards.
The FDIC's amended restoration plan was accompanied by a final rule that sets assessment rates and makes adjustments that improve how the assessment system differentiates for risk. Currently, the FDIC says most banks are in the best risk category and pay anywhere from $0.12 per $100 of deposits to $0.14 per $100 for insurance. Under the final rule, banks in this category will pay initial base rates ranging from $0.12 per $100 to $0.16 per $100 on an annual basis, beginning April 1.
‘Deposit insurance remains a good value,’ says FDIC Chairman Sheila Bair. ‘Public confidence in the FDIC guarantee has helped assure a stable source of funding for banks in these troubled times.’
The adopted interim rule imposes the 20-basis-point emergency special assessment on the industry on June 30, and the assessment is to be collected Sept. 30. The interim rule would also permit the board of directors to impose an emergency special assessment after June 30 of up to 10 basis points if necessary "to maintain public confidence in federal deposit insurance."
Changes to the assessment system include higher rates for institutions that rely significantly on secured liabilities, which may increase the FDIC's loss in the event of failure without providing additional assessment revenue. Under the final rule, assessments will be higher for institutions that rely significantly on brokered deposits but, for well-managed and well-capitalized institutions, only when accompanied by rapid asset growth.
Brokered deposits combined with rapid asset growth have played a role in a number of costly failures, the FDIC says. The final rule also would provide incentives in the form of a reduction in assessment rates for institutions to hold long-term unsecured debt and, for smaller institutions, high levels of Tier 1 capital.