WASHINGTON — The American Bankers Association and Promontory Interfinancial Network are set to announce a new program today that lets banks buy and sell their prepaid assessment credits from the Federal Deposit Insurance Corp.
The agency required banks to prepay the next three years worth of premiums in December, in order to bolster its resources to handle bank failures.
In return, banks received a credit that will decline in value over time as regular assessment bills come due.
ABA officials said it makes sense for banks to be able to trade those credits through its Prepaid Assessment Marketplace.
Institutions that want more liquidity can sell their credit, allowing them to immediately put funds to use for other higher-yielding products. Banks that fear they may end up owing the FDIC more in premiums than their current credit is worth, or who desire a stable, low-yielding government-guaranteed asset, meanwhile, may want to buy credits at a discount.
"Institutions that have to pay more in premiums would have every incentive to buy a credit from those that have excess," said Rob Strand, senior economist with the ABA.
It is unclear how much the market could take off.
The FDIC allowed banks to informally trade assessment credits in 2007, after the deposit insurance reform law granted banks $4.7 billion in credits based on previous payments to the insurance fund.
By contrast, the FDIC has given banks $45 billion worth of credits under its assessment rule last year.
The system will be run by Promontory, which already offers banks a chance to provide full deposit insurance through its certificate of deposit network. Promontory said the new program will be open to any bank, and it will not be charged to use it.
"Based on our experience in managing our large network of financial institutions and our technology platform, we were able to create a marketplace where banks can indicate interest in buying or selling credits," said Mark Jacobsen, the president and chief executive of Promontory.
"We agreed to do so as a service to the industry. Promontory is bearing the full cost of designing and operating the marketplace. It is one of our ways of saying 'thank you' for the industry support we have enjoyed over the past seven years."
The FDIC ultimately must approve each transaction, and will then execute the transfer of a credit from one bank to another. Strand said the ABA and Promontory have fully briefed the FDIC on the service. The agency does not endorse such products, but has not raised objections to it.
How institutions use the service will likely depend on the condition of the bank.
For institutions seeking more liquidity, selling the credit can provide an easy source of cash. Currently, the FDIC credit sits on a bank's books, but does not earn any return.
Banks can use the funds they make from selling the credit to make loans or find other assets with a better rate of return.
"There is a nonearning asset sitting on your books — I wouldn't be surprised if some institution said we can do better to create liquidity and use the money to make good loans," Strand said.
Buying credits may appeal to banks that are likely to run out of their existing credits faster than expected. The FDIC charges assessments based on a formula assessing a bank's risk. For banks whose condition deteriorates or that rapidly increase deposits, they could face higher premium charges that exhaust their credit faster. Rather than paying the FDIC dollar-for-dollar, a bank can buy credits at a discount.
"They can get a discount off the top," Strand said.
Institutions that have excess credits when the prepayment period ends in 2013 will be paid in cash.
Even if few banks end up participating in the program, Strand said it was a good option for institutions to have.
"We don't know how much activity there will be," he said. "Liquidity is of premium interest right now. Even if no bank were to exchange its credit, the fact that there is now an organized market helps support the liquidity of all institutions."