WASHINGTON The Federal Deposit Insurance Corp. is set to slash deposit insurance premiums for most small banks under a plan unveiled Tuesday.
The agency issued a proposal that would change the calculation of insurance assessments in an effort to force riskier banks to pay more while safer banks pay less. If the plan were to be implemented under current assessments, 60% of eligible banks would see a premium reduction, 20% would pay the same and the remainder would face increased assessments.
The proposal, which would apply to institutions that are at least five years old and hold less than $10 billion in assets, would rejigger the premium calculation, adding additional measurements while eliminating others in an effort to better estimate the risk of failure. Overall, the change-up is revenue neutral, but is designed to shift the premium assessment.
Industry representatives have reacted cautiously to the plan while they take a deeper look at it.
"I was glad to hear that overall assessment rates are not going to go up it is net neutral so that is a good thing," said Christopher Cole, executive vice president at the Independent Community Bankers of America. "What we have to do at the ICBA is study the issue to see if there are any parts of our membership are going to experience increases in premiums that might be considered unfair."
The proposal would be the first major update to deposit insurance assessments for small banks since 2007. FDIC officials said it incorporates what they learned from the financial crisis.
"This proposal updates the data and methods that we use to determine risk-based assessments for small banks to reflect the experience during the recent financial crisis and make assessment rates more forward looking in how they capture risk," said FDIC Chairman Martin Gruenberg.
For example, the FDIC is adding a "loan mix" category in its risk assessment that takes into account the types of loans that a bank has on its books. Loans that tend to have higher charge-off rates like construction and development and commercial and industrial credits would be heavily penalized relative to safer categories of loans.
The new calculus also changes the ratio used to measure brokered deposits from using an "adjusted brokered deposit ratio" to a core deposits over total assets ratio, which would result in a more favorable measure for core deposits.
"It appeared that what experiences the FDIC got from the recent downturn was that those banks that had the highest concentrations of [commercial real estate loans] and brokered deposits were the riskiest. So it looks like they are directing the premium to those kinds of banks," Cole said.
Robert Strand, senior economist at the American Bankers Association, noted that "if you change the formula there will be winners and there will be losers," but said the FDIC appeared to have developed "more of a forward look to see what the risk to the FDIC is over the next several years."
However, Bert Ely an independent consultant based in Alexandria, Va., said the assessment proposal is mainly a reshuffling of the deck chairs rather than a fundamental shift.
"Many of the measures that they have here are themselves lagging measures of banking risk," Ely said.
The timing of the proposal also aligns with what will likely be a more contentious rulemaking.
The small bank assessment proposal would go into effect one quarter after the DIF reaches 1.15%. The DIF's ratio of reserves to insured deposits stood at 1.03% at the end of the first quarter. Once it reaches 1.15%, the Dodd-Frank requirement kicks in and requires the largest banks to bear the burden of increasing the DIF's reserve ratio to 1.35% by 2020. The FDIC has said that it will unveil a proposal on how they plan to do that later this year.
"The big thing is how much more they want to stick on the large banks," Ely said. "The second piece is going to be more controversial."
Importantly, the big bank proposal would effectively mean that even more small banks would pay less than they currently do. In total, 92% of small banks would pay less in premiums if both plans are finalized as conceived.
Cole said that "the question I have is as soon as the reserve ratio reaches 1.15% then the larger banks are supposed to indemnify [small banks], so it will be interesting to see the next proposal when it comes down the road."
Along with the release of the proposal on Tuesday, the FDIC posted a calculator with the adjusted assessment calculations so banks could see what their assessments would be.
Cole said the ICBA will be encouraging its members to use the calculator and provide feedback so the association can get a better idea of the proposal's impact.