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FDIC Proposes Assessment Changes for Community Banks

on Monday, 27 July 2015 in Banking Update

In another sign that the 2008 financial crisis is fading into memory, the Federal Deposit Insurance Corporation (FDIC) has proposed changes likely to reduce deposit insurance premiums for most community banks.

The FDIC’s proposal would revise the factors used to determine deposit insurance assessments so that banks with less than $10 billion in assets would pay higher premiums if they hold riskier assets than comparable banks.

“These contemplated improvements would allow assessments to better differentiate riskier banks from safer banks and allocate the costs of maintaining a strong Deposit Insurance Fund (DIF) accordingly,” FDIC Chairman Martin Gruenberg said in a statement.

To help replenish the DIF after the financial crisis, the FDIC established risk-based categories to determine deposit insurance premiums. Under this regime, most community banks fall into what is referred to as “Risk Category I” because they are both well-capitalized and have achieved CAMELS ratings of 1 or 2.

Within Risk Category I, institutions that pose the least risk of failure are charged a minimum assessment, whereas those that pose the greatest risk of failure are charged assessments that are at least four basis points higher. A bank’s total assessment rate may vary from these baseline rates due to adjustments based on factors like the institution’s unsecured debt and brokered deposits.

The “financial ratios method” currently in use determines the assessment rates for banks in Risk Category I using a combination of weighted CAMELS component ratings and a series of financial ratios and metrics. According to the FDIC, the proposal would revise the factors used to better assess risk-based premiums based on data collected from bank failures during the financial crisis.

The following table compares factors currently used and the new factors that FDIC proposes to use to determine deposit premiums for small banks.

Current Financial Ratios Method

  • Weighted Average CAMELS Component Rating
  • Tier 1 Leverage Ratio
  • Net Income Before Taxes/Risk-Weighted Assets
  • Nonperforming Assets/Gross Assets
  • Adjusted Brokered Deposit Rating
  • Net Loan Charge-Offs/Gross Assets
  • Loans Past Due 30-89 Days/Gross Assets

Proposed Financial Ratios Method

  • Weighted Average CAMELS Component Rating
  • Tier 1 Leverage Ratio
  • Net Income Before Taxes/Total Assets
  • Nonperforming Loans and Leases/GrossAssets
  • Other Real Estate Owned/Gross Assets
  • Core Deposits/Total Assets
  • One-Year Asset Growth

The FDIC has provided a calculator so banks can determine just how the proposal will affect their deposit assessments. The rule would take effect after the DIF reserve ratio reaches 1.15 percent, which is not expected to occur until 2016.

Jonathan J. Wegner

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