WASHINGTON — The Federal Deposit Insurance Corp. proposed a raft of assessment changes Tuesday that would likely hit big banks hardest.
The key reform is a shift from using domestic deposits for calculating premiums to using assets minus capital. The new base, mandated by the Dodd-Frank Act and roughly equal to total liabilities, is meant to raise prices for large banks that rely heavily on noncore funding. "It's a sea change in that it breaks the link between deposit insurance and deposits for the first time. This is quite significant," said John Walsh, an FDIC board member and the acting comptroller of the currency.
Partly as a result of that change, the agency proposed several other adjustments. A new base would mean a new range of assessment rates across the industry, as well as tweaks to the FDIC's risk-based rating system for all banks. The agency also revised an earlier proposal overhauling risk factoring for large institutions.
Under the new assessment base, the industry would face a range of rates from 5 to 35 basis points per average total assets minus Tier 1 capital. (Institutions now pay from 12 to 45 basis points per domestic deposits.)
"We have tried very hard to make" the new assessment base "revenue-neutral," said FDIC Chairman Sheila Bair.
The agency will keep its complex risk formula, first established in 2006, to determine where an institution falls in that range, but proposed changes to that calculation as well.
Since the new assessment base would include secured borrowings like Federal Home Loan bank advances, the proposal would remove the current risk factor that penalizes institutions with a lot of such borrowings. Yet it adds a new charge for institutions that hold long-term unsecured debt that had been issued by another bank.
Also, to ensure it is consistent with the various premium rulemakings the FDIC must complete under Dodd-Frank, the agency reissued a separate proposal to reshape the risk formula for banks with assets of more than $10 billion. The proposal was first released in April, before the law passed.
(Both the proposal changing the assessment base and the new proposal on the large-bank formula have 45-day comment periods. The new rules would take effect in the second quarter of next year.)
The agency has used domestic deposits to calculate premiums more or less since the 1930s. But small banks for years have pushed for a base more reflective of large institutions' other types of funding, which, they argue, allow the industry's giants to grow their balance sheets without being properly assessed.
Under Dodd-Frank, the FDIC is required to multiply an institution's risk-based rate by its average total assets minus average tangible equity, capturing all the subordinated debt, foreign deposits and other types of liabilities that before now have not impacted a large institution's premium.
Speaking to reporters after the FDIC meeting, James Chessen, the American Bankers Association's chief economist, said the new base will affect funding.
"The costs are so large it drives new business decisions for how you fund. That's the unknown here," Chessen said. "It is a benefit to smaller institutions."
Even though Dodd-Frank required a new assessment base, it left certain definitions vague. For example, there is currently no exact call-report entry for average tangible equity. The FDIC said institutions with assets of more than $1 billion would use average monthly balances of their Tier 1 capital, with smaller institutions simply reporting their Tier 1 capital at the end of a quarter.
Officials said they intended to keep the new rule simpler by limiting the assessment base to data already reported. "The decision to use definitions that already exist in the call report is a good idea, reducing the burden," Walsh said.
Bankers' banks and trust banks, which have few if any retail deposits, would receive more favorable treatment than other large institutions in the new assessment base. A bankers' bank could deduct both its average Federal Reserve balances and its average sales of federal funds from its assessment base. A trust bank could deduct certain highly liquid, short-term assets. In both cases the deductions would be capped at a limit, the FDIC said.