WASHINGTON — Even as the Federal Deposit Insurance Corp. board completed a rule Friday charging banks a 5-basis-point premium based on assets, it warned that another such charge is likely before yearend.
Under the rule, adopted 4 to 1, the FDIC gave itself flexibility to charge another special assessment in the third and fourth quarters — and said at least one further special assessment is "probable."
"We think there is a good probability that we will have to do another special assessment in the fourth quarter," FDIC Chairman Sheila Bair told reporters.
The agency's action came a day after the BankUnited failure, the most expensive collapse this year, and as the ratio of federal reserves to insured deposits continues to plummet.
Even with the special assessment approved Friday, the Deposit Insurance Fund is likely to be close to zero by yearend — necessitating another premium levy, the FDIC said.
Bair said the decision to charge a premium now and wait until later to determine whether more is needed was a response to industry arguments that payments to restore the fund should be spread out. "We got a lot of comment about: 'Can you try to spread this out?' " she told reporters. "The 5 basis points … should keep us positive, but it is low." She said she hopes a later special assessment would be smaller, adding, "I can't imagine it would be more than 5 basis points."
Bair urged banks to "plan for that" subsequent assessment "accordingly."
"We won't know until the fourth quarter," she said. "We'll have updated loss projections. We'll know exactly whether and how much at that point. We thought that, as opposed to doing a bigger hit up-front, that it would be better to try and spread it out over a couple of quarters."
Under the rule, the agency will charge banks a one-time premium in the second quarter of 5 cents per $100 of an institution's assets minus its Tier 1 capital. But for banks and thrifts with large asset portfolios, the assessment will be capped at 10 basis points of their domestic deposits.
Both the current premium and the hint of another assessment still to come concerned Comptroller of the Currency John Dugan, who argued that basing the premium on assets was inappropriate. FDIC premiums are typically based on domestic deposits, and Friday's final rule was the first agency assessment based on assets.
Dugan said the FDIC had changed the manner of assessment with little justification and was contemplating charging the industry far too much. He argued that the FDIC could charge 15 basis points per assets under the rule, which would equate to roughly 22 basis points charged on deposits. That would be higher than the charge the FDIC originally proposed in February of 20 basis point on deposits, which it pledged to reduce if Congress passed a law giving the agency more borrowing authority. Such a law was enacted last week. "The total amount of the three special assessments contemplated by the rule without further comment from the public is too high, with the significant potential for pro-cyclical consequences," Dugan said.
In response, the FDIC later said that the final rule still levies a significantly lower assessment than the proposal. The original proposal would have charged banks an initial 20 basis points and allowed the agency to charge subsequent 10-basis-point premiums.
Dugan said the increased borrowing authority should allow for a smaller premium even when the fund's reserve ratio approaches zero. The ratio is at its lowest point in decades, 0.40% at yearend, and an updated figure for the first quarter is expected this week. The change of the assessment base unfairly penalizes large banks that have not directly contributed to the fund's losses, Dugan said.
The "result" of the rule "is perverse because the overwhelming share of increased actual and projected costs to the deposit insurance fund have been caused by actual and projected failures of smaller banks, not larger ones," he said.
"The board case for making this change is exceptionally thin," Dugan added. "It refers to the many commenters that supported such a change — but they were nearly all smaller banks that would reap the most benefit."
But Bair countered that the federal bailout has primarily benefited big banks. "I do feel that the massive government aid we have provided to support primarily larger institutions places the smaller ones at a disadvantage," she said. "If these policies lead to more small bank failures, this will in turn increase our resolution costs. The hundred of billions — if not trillions — of government assistance that has been provided in the form of capital investments, debt guarantees, and … liquidity facilities have overwhelmingly benefited large institutions and averted many big-bank failures."
Though Bair said the added borrowing authority may one day be needed, she added, "I hope to avoid that at all costs."
"Keep it as a backstop," she told reporters. "There are some that would just say: 'We need to start borrowing now.' That's really just creating another taxpayer subsidy. … I don't want to go there."
Still, she said, the extra leeway benefited the industry.
Typically, the assessments build in a "margin of error," she said, if failures exceed the agency's projections. The original $30 billion Treasury line of credit required a higher contingency built into the premium. Under the new law, which expands the line to $100 billion, there is greater flexibility.
"That gives us more flexibility to reduce that margin of error," she said. "The assessment is still based on keeping the Deposit Insurance Fund in positive territory. … But knowing that these projections are … imprecise and judgment-based, we have that backstop available."
Though the final rule would hit the largest banks the hardest, it would also cost extra at banks that depend heavily on noncore funding, such as Home Loan Bank advances and foreign deposits. Such liabilities let banks rapidly expand assets without a corresponding increase in domestic deposits and were not directly captured by a straight deposit-based assessment.