WASHINGTON — A faster than expected recovery following the financial crisis may mean that banks see a significant reduction in premiums as early as the first quarter of next year.
Under the Dodd-Frank Act, the Federal Deposit Insurance Corp. is required to revamp its insurance assessments once its ratio of reserves to insured deposits reaches 1.15%. But that is now projected to happen much faster than anticipated — potentially by yearend.
If that occurs, a proposal the agency unveiled Thursday to change its assessment system is unlikely to be finalized in time, leaving all banks paying a lower assessment rate for a brief period until a final rule is in place.
"So you may have a period in which you reach 1.15 %, the assessments that are currently in effect automatically ratchet down, and we won't have the surcharge in effect?" asked Richard Cordray, director of the Consumer Financial Protection Bureau and a FDIC board member, during a public agency meeting. FDIC officials acknowledged it was possible.
But any windfall for large banks wouldn't last for long. Under the agency's plan, all banks would see a lower base assessment rate, but banks with more than $10 billion of assets would have to pay an additional surcharge of 4.5 basis points. Community banks are estimated to see their premiums reduced by 30% while two-thirds of larger banks will pay more than their current rate. Overall, the FDIC estimated that large banks will pay roughly $3 billion more per year in assessments over the next two years as a result of the plan.
The quick recovery of the reserve ratio indicates the agency is likely to move quickly on the proposal, which is open for comment for 60 days. As of June 30, the ratio was at 1.06% and FDIC officials said they expect it to reach 1.15% by the end of the first quarter of 2016, while adding that the fourth quarter of 2015 is still a possibility.
"The surcharges would begin the calendar quarter after the reserve ratio of the DIF first reaches or exceeds 1.15% — the same time that lower regular quarterly deposit insurance assessment (regular assessment) rates take effect under the current regulations — or the quarter in which a final rule takes effect," wrote Diane Ellis, director of the agency's division of insurance and research, in a memo to the FDIC's board.
Once in effect, the surcharge is projected to last two years -- when the fund has grown to 1.35%, the statutory target named in Dodd-Frank.
Community bank advocates welcomed the plan.
"We are pleased that they finally got the rule out and we are pleased that the DIF is making quick progress to 1.15%," said Chris Cole, executive vice president of the Independent Community Bankers of America.
Community banks would still pay assessments while the fund's reserve ratio increases to 1.35%, but once it reaches 1.4%, they would start receiving credits for each quarter the ratio is at or above that level. Cole said bankers had hoped to start receiving credits before then.
"I thought that somehow they could take those credits earlier than when the fund reaches 1.40%," he said, adding that banks likely won't be able to use the credit until 2019 or 2020.
But Robert Strand, senior economist at the American Bankers Association, said that what the FDIC has done is "taken a very exacting approach."
"I expect small banks would have liked to have had the money back sooner but this is a really effective way to make sure that they get back everything that they pay in excess of 1.15% without overshooting," he said.
Under Dodd-Frank, the FDIC isn't required to have the fund ratio reach 1.35% until 2020. But the plan would have the DIF ratio hit that level two years earlier. The proposal also provides a backup plan should the fund stall, allowing for an additional shortfall assessment that would be imposed in March 2019 if the fund hasn't reached 1.35% by December 2018.
Regulators said hitting the level early made sense.
"By aiming to reach the minimum reserve ratio ahead of the statutory deadline, this approach reduces risk that the FDIC would have to raise rates unexpectedly in the event of a future period of stress and should allow the FDIC to maintain stable and predictable assessments," said FDIC Chairman Martin Gruenberg.
Comptroller Thomas Curry agreed, saying "achieving this goal by 2018 also strengthens the Deposit Insurance Fund sooner rather than later, and is more likely to avoid achieving it in a countercyclical manner.
"The proposed surcharge would come at a time when the banking industry is experiencing improved health and as a result is in a better position to afford it without significant impact to earnings, capital, and liquidity," he said.
Bert Ely, a financial institutions and monetary policy consultant in Alexandria, Va., suggested that the accelerated timetable to get the fund to 1.35% might be a reason some of the larger banks are unlikely to resist the surcharge.
"This is essentially a two-year deal, so the pain will be over quickly," Ely said. "There is almost a certain sense of resignation among the bigger banks."
But Ely criticized the 4.5-basis-point flat surcharge, saying "there is no risk sensitivity" in it.
"No matter how strong or weak the bigger bank is it is going to get hit with the same surcharge," Ely said.