WASHINGTON -- The Federal Deposit Insurance Corp. is poised to abandon.its 60-year-old system-of basing' insurance rates on a bank's total domestic deposits.
The changes under consideration range from the simple to the wrenching. At one extreme, the FDIC could just remove the deductions for float that banks currently make from domestic deposits. At the other, it could decide to assess assets instead of deposits.
The FDIC Improvement Act of 1991 gave the FDIC the power to change the way it charges for deposit insurance. Last week, the agency released a 44-page proposal laying out various ways the assessment base may be reconfigured.
The FDIC insisted it has not decided which changes to make. Indeed, the agency said it wants as much input as possible from interested parties.
The project is being headed by FDIC chief financial officer Steven A. Seelig and his assistant A1 Long.
"Help us come to grips with a lot of competing issues," Mr. Seelig entreated the industry at the agency's Sept. 27 open meeting.
He said the huge jump in the price of federal deposit insurance over the last few years prompted, in part, the agency's decision to review the assessment base.
Depositor preference, the August 1993 law that puts uninsured depositors ahead of other creditors when a bank fails, also is figuring into the FDIC's proposal.
Finally, the FDIC is motivated by the fact that many banks are avoiding insurance premiums by converting deposits to off-balance-sheet liabilities.
The FDIC likewise is tired of watching banks skirt premium assessments by temporarily moving deposits at the end of a quarter.
This foreshadows a switch to a system of averaging rather than using quarter-end totals.
"Increased rates have caused some institutions to take deliberate steps to decrease their assessments by temporarily reducing their deposits at quarter end," the proposal states.
"Fairness may suggest that the assessment base should be defined in terms of averages."
But the FDIC is unlikely to stop there.
The "primary alternatives" the FDIC is considering range from retaining the status quo to completely changing the base by founding it on assets rather than deposits.
The FDIC is insisting that it does not intend to make money off the changes. "It is not the FDIC's intent to change the total dollar amount of assessments collected," the proposal states. But the agency admitted "there is a potential for significant change in the assessments paid on an institution-by-institution basis."
How much a particular bank's premium is affected will depend on what changes are made and what types of products and services it offers.
Until 1993, insurance premiums paid by banks were the product of a simple calculation: total domestic deposits, with a few adjustments, multiplied by a flat fee.
In 1993, the agency changed to a risk-based system. A bank's domestic deposits were multiplied by insurance rates that varied from 23 cents per $100 of domestic deposits for the safest banks to 31 cents for the riskiest. Currently, the FDIC does make a couple of adjustments to total domestic deposits. But the agency may eliminate these "float deductions," which allow banks to subtract 16.66% of demand deposits and 1% of time and savings deposits.
Since being established 30 years ago, "there have been dramatic changes in the payments system... that may have caused the current float deductions to become obsolete," the FDIC proposal states.
Ending these deductions would simplify calculation of the assessment base and reduce the industry' s reporting burden, FDIC said.
The FDIC also is considering expanding the base beyond domestic deposits to include other secured liabilities such as secured notes.
Creditors with secured claims are repaid before the FDIC when a bank fails, the agency noted in its proposal, so these liabilities increase the FDIC's loss.
The FDIC also suggested adding foreign deposits to the base, but listed a number of reasons why that would be a bad idea.
FDIC said the argument for assessing foreign deposits was weakened when Congress eliminated the too-big-to-fail policy, which resulted in protection for all depositors of large failed banks.
Foreign deposits are not insured and they are not likely to be reimbursed if a bank fails, the agency explained.
Including foreign deposits also could make it harder for U.S. banks to compete for this money, the FDIC noted. Besides, banks could get around the assessment by converting foreign offices to subsidiary institutions.
That said, the FDIC did propose assessing all liabilitiesdomestic deposits, foreign deposits, and nondeposit liabilities.
"FDIC experience with depository institution failures supports the premise that all types of an institution's liabilities are used to fund the activities that cause depository institution failures and, thereby, produce losses for the FDIC," the proposal said.
The FDIC also proposes narrowing the base to insured deposits, but the agency criticizes this option as posing "significant reporting problems."
The last option listed in the proposal is the most dramatic: substituting assets for deposits in the assessment base.
"Conceptually, an argument can be made for charging premiums against those items which pose a risk of loss to the deposit insurance funds, such as an institution's assets," the proposal reads.
The FDIC said an asset assessment base would be easier to understand, measure, and report. It also would be harder to dodge and be more predictable than deposits, the agency said. "While conceptually appealing, this approach would be a substantial departure from tradition," the FDIC noted, "and there would be no direct relationship between those items assessed and those items insured."
The FDIC is accepting comments on its proposal for the next four months.
If the agency decides to go ahead, it will spell out the exact changes and put that plan out for another round of public comments.
