WASHINGTON — The Federal Deposit Insurance Corp. unveiled several options for how it would provide rebates to banks once it has excess reserves.
Though rebates are unlikely anytime soon, with the Deposit Insurance Fund's reserves still well below their target level, the plan, which the FDIC board put out for comment during a meeting Tuesday, is almost certain to reignite a fight between older banks that have paid millions in premiums in the past and newer institutions that are bearing the brunt of new assessments.
FDIC board officials acknowledged that no option is likely to leave everyone satisfied.
"No matter what we do, we're going to make some folks unhappy," said John Reich, the director of the Office of Thrift Supervision.
The deposit insurance reform law enacted last year requires the agency to return a portion of excess money once the fund's ratio of reserves to insured deposits exceeds 1.35%.
Under two of the options unveiled Tuesday, the rebates would be based in part on a bank's share of domestic deposits at the end of 1996 — a starting point that benefits older institutions. But under another option, the FDIC eventually would phase out its use of the 1996 data and put more emphasis on future premium payments, eventually giving new institutions more equal footing with the older ones.
The issue of fairness has long been central to the debate over the implementation of deposit insurance reform. From 1996 to 2006 the vast majority of banks paid no premiums as long as the agency's reserves remained well capitalized. Older banks complained that the premiums they paid before 1996 benefited newer institutions, which in most cases never paid assessments.
So when Congress revamped the system last year, it rewarded older banks by giving them a credit for payments made before 1996. Many banks have used the credit to offset new premiums the FDIC began charging this year, and as a result new banks have paid most of the current assessments.
But the FDIC — and Congress — did not spell out exactly how rebates would be distributed when the fund's ratio exceeded 1.35%.
Older institutions have argued that the rebate system should continue to benefit them, because they paid such high premiums before the end of 1996. But newer ones have said the one-time credit already restored balance to the system.
The older institutions are "very sensitive to the fact that they built up that fund," said Jim Chessen, the American Bankers Association's chief economist. "On the other hand, you have new institutions … feeling like they're contributing currently to the fund balance and also deserve some return."
Some of the new institutions "felt like the credits were the answer to all the fairness" questions, Mr. Chessen said.
Most of the options outlined by the FDIC use the December 1996 assessment base as a starting point. Under the "fund balance option," a bank's portion of the rebate, or dividend, would be based on its share of domestic deposits at that time.
The rebate would then fluctuate depending on the size of the fund's reserves, and increase as the bank paid "eligible" premiums; the board would have to define which premiums are eligible. This option would give older banks a noticeable advantage in the dividend allotment for the foreseeable future.
"It would take a lot of fund growth for the new amounts to equal or get close to the older amounts," Diane Ellis, an associate director in the agency's division of insurance and research, said after the board meeting.
By contrast, another option, the payments method, could give newer banks a more immediate benefit.
One version would include eligible premiums paid before and after 1996 in determining a bank's rebate. This version would still benefit older banks, since those chartered after 1996 have paid relatively few premiums.
But another version would phase the December 1996 base out of the equation altogether over time. Under an example presented by the FDIC staff, only premiums paid 15 years before a rebate is calculated would apply.
The fact that multiple options were put out for comment could set the stage for an extensive finalization process. Recognizing the complexity of finding a proper allocation process, the agency finalized a bare-bones dividend rule in October to give it time to implement other major aspects of deposit insurance reform, including the credits and a new pricing system based on banks' relative risk.
Board members expressed a willingness to hear the industry out on all the possible methods for distributing rebates.
"I'm pretty open-minded to looking at all of the options," said FDIC Chairman Sheila Bair.
But the questions about a proper dividend allocation may simply not be relevant to today's discussion, since the day when the fund will have excess reserves is likely a long way off.
The law mandated that the FDIC generally declare a dividend of half the amount needed to return the reserve ratio to 1.35%. (When the ratio exceeds 1.5%, all the excess is declared as a dividend to reduce the fund.)
But in final second-quarter figures released Tuesday, the FDIC said the fund held $51.2 billion on June 30 — after $1.06 billion of income during the first half. In its quarterly banking review last month, the agency pegged the reserve ratio at 1.21%.
Thomas Curry, an FDIC board member, said any discussion of rebates is "an academic exercise" at this point. "It would have to be an extreme situation that we would be overreserved."
The agency anticipates raising about $650 million of premiums this year and $2.5 billion next year, when the assessment credits will begin to wear off. Under the new pricing system, healthy banks are charged a premium between 5 and 7 basis points, and the actual price is determined by a complex risk-based formula.
Agency officials said more variations of the payments method could be considered.
"There are many variations they could adopt that could even come out somewhere in the middle of the variations that we laid out," said Matthew Green, the chief of the agency's fund analysis section.
Mr. Chessen stressed that a theory of fairness should drive the FDIC's policy.
"The theory is you should get some return commensurate with the contributions paid to capitalize the insurance fund," he said. "Obviously, we have members on both sides. They're going to have differences of opinion, just as they did during the bill, and just as they had with credits."
