Working It Out
Thomas, Karen, Independent Banker
Eyes turn to FDIC as deposit insurance reform is implemented
Six years of lobbying and advocacy by ICBA paid off as Congress passed comprehensive legislation to modernize and reform the deposit insurance system. Now all eyes are turned to the FDIC as it writes the rules that will implement the new law. ICBA is watching closely-and looking out for community bank interests- as the FDIC proposes rules in key areas covered by the reforms, likely this month.
Community bankers won important victories in the new Federal Deposit Insurance Reform Act of 2005. These include:
* an increase to $250,000 in insurance coverage for retirement accounts;
* future inflation adjustments on all deposit accounts;
* smoothing of premium payments;
* premium credits to banks that built the fund in the past; and
* dividends to banks when the fund exceeds certain levels.
The law also merges the bank and thrift insurance funds and gives the FDIC more flexibility in the risk-based premium system.
The FDIC has moved quickly on these measures-merging the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) to form the Deposit Insurance Fund (DIF) on March 31 and implementing the higher retirement account coverage effective April 1. The new, merged fund means that BIF-insured banks need no longer worry about paying premiums when SAIF-insured banks do not and vice versa. Merging the funds was also advantageous to BIF-insured banks since the SAIF reserve ratio at yearend 2005 was higher than that of the Bank Insurance Fund. Higher insurance coverage for retirement accounts provides community banks with a safe and stable retirement product for their customers that can help attract long-term deposits.
On the Clock
The agency has until November 2006 (nine months from the bill's enactment) to issue final regulations regarding: how banks will be categorized and assessed under a new risk-based premium system and how the $4.7 billion one-time assessment credit will be allocated. Within that time frame, the FDIC must also set a target reserve ratio (between 1.15 percent and 1.50 percent of insured deposits) for the DIF, establish the system of dividends (rebates) when the fund balance exceeds 1.35 percent and 1.50 percent of insured deposits, and write rules to implement the five-year inflation adjustment for coverage limits.
Risk-Based Premiums. Regulations revising the risk-based premium system are expected out for comment in late May or June. They will likely reflect recommendations the FDIC issued in 2001. These include establishing more risk categories, basing each bank's premium rate on its assigned risk category, and using a scorecard system with a variety of factors to slot banks into risk categories.
The FDIC's 2001 recommendations included risk factors such as: CAMELS ratings; asset growth rate; and ratios such as equity to assets, net income to assets, non-core funding to assets and non-performing loans to assets. However, Congress made explicit in the new law's legislative history-as advocated by ICBA-that the FDIC should not charge higher premiums to banks simply because they use Federal Home Loan Bank advances. In addition, under the new law, banks cannot be barred from the lowest risk category solely because of their asset size.
ICBA expects premiums for the highest rated banks to be set in the range of 1 to 3 basis points-a 'small steady premium'-before applying assessment credits. …