FDIC finalizes rule hiking deposit insurance assessment rate

The Federal Deposit Insurance Corp. has finalized a rule to raise deposit insurance assessments on U.S. banks.

Following the 3-0 vote by the FDIC's board, the amount banks must pay for deposit insurance will rise by 2 basis points, beginning in the first quarter of 2023. The decision came after the FDIC in September 2020 adopted a plan to restore the deposit insurance fund to its statutory minimum of 1.35% before the deadline of Sept. 15, 2028.

"It is better to take prudent but modest action earlier than the statutory eight-year period to reach the minimum reserve ratio than to delay and potentially have to consider a procyclical assessment increase," acting Chair Martin Gruenberg said during a public meeting.

The FDIC Board will also keep its ability to raise the deposit insurance assessment rate again without future notices of proposed rulemaking and comment periods, Gruenberg said. The FDIC estimates that the increase will cost the banks an average of 1.2% of annual income, which Gruenberg said was an "insignificant" increase that the banking industry could absorb fairly easily.

Banks stridently opposed the proposal. Industry trade groups in an Oct. 11 letter to the FDIC said second-quarter data showed deposits decreasing, making an assessment increase "unwarranted at this time." The regulator's staff during the board meeting said second-quarter declines are typical and have happened in six of the last nine years.

Superregional bank resolvability

The FDIC Board also approved the publication of an advanced notice of proposed rulemaking to request comment on whether another layer of capacity to absorb losses could "improve optionality in resolving a large banking organization."

The Federal Reserve issued a similar proposal on Oct. 14, in conjunction with its approval of U.S. Bancorp's pending acquisition of MUFG Union Bank NA. The notice seeks input on extending single point of entry and total loss-absorbing capital, or SPOE and TLAC, rules to large regional banks, which would require them to hold tens of billions of dollars in long-term debt, in addition to existing capital requirements.

"There are currently no comparable requirements for large non-G-SIB banks, which pose significant resolution challenges to the FDIC," Gruenberg said. "These challenges are distinct from those posed by G-SIBs and from smaller community banks as well, where the purchase and assumption transaction by another institution is, in most cases, a practicable and least costly option."

Large banks continue to grow, both organically and through M&A, the acting chair said. Most of them have increased reliance on uninsured deposits for funding operations, often making up more than 40% of all deposits.

Other measures

The board further proposed amendments to guidelines for when banks appeal their rankings from an examiner.

The amendments would clarify the role of the agency's ombudsman in the appeal process, require that materials considered by the Supervision Appeals Review Committee be shared with both parties to the appeal and allow insured depository institutions to request a stay of a material supervisory determination while an appeal is pending.

Lastly, the board adopted a rule that would require banks with $10 billion or more in assets to begin using "modifications to borrowers experiencing financial difficulty" in their calculations for Deposit Insurance Fund assessment rates. The language would replace troubled debt restructurings, or TDRs, in the underperforming assets ratio and higher-risk assets ratio in the scorecards for large and highly complex banks.

While the industry applauded the exclusion of TDRs from the calculation, it called on the FDIC to either leave loan modifications for financially troubled borrowers out of large banks' calculations for deposit insurance assessments or limit the way in which those modifications must be used.

The rule is effective Jan. 1, 2023.