WASHINGTON — As institutions protest a one-time fee to the Deposit Insurance Fund, they also face more lasting premium changes designed to temper the expensive costs of recent failures.
The FDIC final rule released late last month targets brokered funds and Federal Home Loan Bank advances, which agency officials say have helped increase loss rates at failed banks.
Those rates are significantly higher than they once were. The estimated loss rates for the 16 failures to date this year averaged 23% of an institution's asset size. In 2008, loss rates for 24 failures - excluding the failure of Washington Mutual Inc., which cost the agency nothing - averaged 25%, the agency said.
Some recent failures have produced even sharper losses, with rates as high as 45%. By contrast, the annual average loss rate was roughly 14% from 1990 through 2007.
Agency officials said they are trying to use the premium rule to reduce those costs -- or at least force potentially high cost failures to pay more upfront.
High proportions of brokered deposits and out-of-area construction loans "are almost like a perfect storm - the FDIC ends up with a very high loss rate for the failure," said James Wigand, a deputy director in the FDIC's res
Officials said the loss rates in the current turmoil exceed those endured by the agency during the savings and loan crisis. From 1980 to 1994, the rates averaged about 12%, though officials said that reserves are always under stress in downturns.
Some of the higher loss rates come from smaller institutions. With the exception of IndyMac Bank, a $32 billion-asset thrift in California that cost roughly $10 billion to resolve, small-bank failures typically cost more relative to their size.
"Generally speaking, loss rates have always been higher for smaller banks and get lower the larger the bank is," said Diane Ellis, a deputy director of financial risk management and research in the FDIC's division of insurance and research. "We've had a couple of examples recently — IndyMac being a prime one — that defy the traditional rules of thumb."
To stem the drain on the fund in the current crisis, the agency scheduled a special assessment to be levied — in addition to a bank's regular premium rate — on second-quarter deposits. The FDIC's board initially assessed the industry 20 basis points, but facing loud industry protests, it has indicated it will reduce that by as much as half if Congress raises the cap on the agency's Treasury borrowing authority to $100 billion, from $30 billion.
Several other reforms are also designed to address loss rates, however. As part of a final rule approved by the FDIC on Feb. 27, insurance pricing factors adjusted for holdings of secured debt, brokered deposits, and unsecured debt can either penalize or reward institutions as they calculate their regular premiums.
The agency set standard rates of 12 to 16 basis points for institutions considered well-capitalized and well-managed — most of the industry. But it added a new ratio for such healthy institutions whose brokered deposits exceed 10% of domestic deposits.
If these institutions funded rapid asset growth in recent years, the new ratio could boost their premiums within the 12- to 16-basis-point range. The FDIC did grant a concession — not included in a proposal last year — to exclude from the brokered deposit ratio deposits spread through networks such as the Certificate of Deposit Account Registry Service.
In addition, the agency created levels of premium adjustments that it can add or subtract from a bank's standard rate.
Banks with a high amount of unsecured debt — which saves the FDIC costs in standard resolutions — can have as many as five basis points subtracted from their standard premium rates.
But institutions with secured liabilities — such as FHLB advances — that exceed 25% of domestic deposits can have as many as eight basis points added on.
All told, institutions in the FDIC's least-risky category could potentially pay anywhere between 7 and 24 basis points.
The adjustments could make pricing even steeper for banks not considered well run and well managed, a small but growing number. Institutions with brokered deposits beyond the 10% threshold could have their standard rate boosted as much as 10 basis points, and riskier institutions concentrated in secured liabilities could face an even more dramatic increase. Those institutions could pay as much as 77.5 basis points under the rate structure.
Officials said the adjustments give the agency added layers of risk protection. "The importance of loss severity... is the primary reason for proposing these changes," Ellis said.
Some recent failures have proven particularly costly. On Jan. 30, the agency had to approve a payout for insured deposits of Utah's MagnetBank. The $292 million-asset bank's failure produced an estimated loss rate of 41% because virtually all of its $282 million in deposits were brokered and the agency could not find a buyer.
Wigand said the bank's assets — including a big proportion of out-of-area acquisition and development loans — also made it difficult to offset losses. "Most of the bank's losses resulted from [acquisition and development] loans originated in its Atlanta and Charlotte loan production offices," he said. "The bank was headquartered in Salt Lake City."
On the same day, regulators closed Ocala National Bank in Florida. The $223 million-asset bank had Home Loan bank advances equaling 11% of its total liabilities, and brokered deposits made up 10% of its base. The FDIC's estimated losses are 45% of the bank's asset size.
Ralph F. MacDonald 3rd, a partner at the Jones Day law firm in Atlanta, said bidders looking to raise deposits will simply not offer much to the FDIC — or not bid at all — if the institution has a lot of brokered funding. "The bidders are assuming those … brokered deposits are going to disappear when they reprice them, so they're not looking at a high customer retention level at all," MacDonald said.