Bryan Cave Leighton Paisner Banking Blog

Bank Bryan Cave

Deposit Insurance

Main Content

How the New FDIC Assessment Proposal Will Impact Your Bank

In June, the Federal Deposit Insurance Corp. (FDIC) issued a rulemaking that proposes to revise how it calculates deposit insurance assessments for banks with $10 billion in assets or less. Scheduled to become effective upon the FDIC’s reserve ratio for the deposit insurance fund (DIF) reaching a targeted level of 1.15 percent, these proposed rules provide an interesting perspective on the underwriting practices and risk forecasting of the FDIC.

The new rules broadly reflect the lessons of the recent community bank crisis and, in response, attempt to more finely tune deposit insurance assessments to reflect a bank’s risk of future failure. Unlike the current assessment rules, which reflect only the bank’s CAMELS ratings and certain simple financial ratios, the proposed assessment rates reflect the bank’s net income, non-performing loan ratios, OREO ratios, core deposit ratios, one-year asset growth, and a loan mix index. The new assessment rates are subject to caps for CAMELS 1- and 2-rated institutions and subject to floors for those institutions that are not in solid regulatory standing.

Read More

The New Deposit Insurance Proposal

A Quick Overview and a Note on Construction Lending

On June 16, 2015, the FDIC issued a notice of proposed rulemaking to revise its calculations for deposit insurance assessments for banks with under $10 billion in assets (excluding de novo banks and foreign branches).  The rules would go into effect the quarter after they are finalized but by their terms would not be applicable until after the designated reserve ratio of the Deposit Insurance Fund reaches 1.15%.

At almost 150 pages, there are many facets to the proposed rule that must be carefully analyzed.  At the outset, we give credit to the FDIC for attempting to fine tune deposit insurance assessments beyond the blunt instrument that they have always been.  We have long held the position that the FDIC should adopt more careful underwriting procedures, similar to private insurers, in order to better serve its function in the industry.

Under the proposal, a number of factors are used in a model to calculate a bank’s deposit insurance assessment rates:  CAMELS ratings, Leverage Ratio, net income, non-performing loan ratios, OREO Ratios, core deposit ratios, one year asset growth (excluding growth through M&A, thankfully), and a loan mix index.  All of these factors are intended to predict a bank’s risk of future failure, and all are worthy of discussion.
Putting aside our overall hesitancy to fully support faceless numerical models to draw important conclusions (anyone remember subprime lending?), we were initially drawn to the proposed implementation of the “loan mix index” as a factor for calculating deposit insurance assessment rates.  As we have previously discussed, construction lenders have recently been disadvantaged by the new HVCRE rules under the Basel III capital standards.  Once again, construction loans are the focus of regulatory scorn.

Read More

The Future of Unlimited Deposit Insurance Coverage for Noninterest-Bearing Transaction Accounts

The Dodd-Frank Wall Street Reform and Consumer Protection Act codified a form of the Transaction Account Guarantee (TAG) program initiated by the FDIC that extended unlimited deposit insurance coverage to certain no- or low-interest transaction accounts.  Under the Dodd-Frank version, which expires on December 31, 2012, there is no cap on FDIC insurance for “noninterest-bearing transaction accounts.”  As we have explained, qualifying accounts must meet the statutory definition and cannot have even the potential to be paid interest.  Congress modified this definition at the end of 2010 in order to extend coverage for IOLTA accounts (which may pay interest).

The industry is beginning to draw attention to the statutory expiration of this unlimited coverage.  As originally initiated by the FDIC in 2008, the program was intended to stabilize large deposits in a time of crisis within the financial system.  The Dodd-Frank extension of TAG was completely paid for by financial institutions under the general deposit insurance assessment framework.  Community banks have arguably benefitted the most from the unlimited coverage provisions because the corporate, non-profit, and government depositors holding most of the affected accounts may have more concerns (real or imagined) about the continued solvency of small banks than of big banks.  Without the guarantee, smaller banks may have to rely more on pricing in order to retain these depositors, potentially exposing the insurance fund to greater risk.

By one industry estimate, more than half of all TAG account balances (over $500 billion) are already held by just 19 banks over $100 billion in assets.  According to the FDIC, more than three-quarters ($191.2 billion) of Q4 2011 growth in domestic deposits was attributable to account balances subject to the guarantee.  The 10 largest insured banks accounted for 73.6 percent ($140.7 billion) of the growth in these balances during this period.  As of December 31, 2011, the average institution with less than $1 billion in assets had 15 covered accounts worth an average of $713,000.  Although liquidity is generally less of a concern than it was in 2008, these large depositors are more likely to seek loans and otherwise bank with institutions holding their TAG-size accounts.

The questions, then, are whether the industry and its regulators are unified around this issue and whether legislators will have the stomach to extend the program in an environment where initiatives seens to benefit banks are politically sensitive.  The original FDIC manifestation was optional, with participating banks paying for the coverage.  Although the Dodd-Frank version is universal, again, banks have picked up the tab through the assessment process.  Nonetheless, it is always possible that an extension of the program will be marred as a boon to banks and a burden to taxpayers.

Notwithstanding the position of former Chairman Sheila Bair and some currently within the agency that the program should only be further extended by Congress, the FDIC stands at the center of the issue and could always extend the program administratively.  FDIC’s 2008 program was authorized under the FDI Act by a determination by the Secretary of the Treasury in consultation with the FDIC and the Federal Reserve that conditions of “systemic risk” justified an exception to the least-cost-resolution requirements of the Act.  It was extended by the FDIC in 2009 as a continued response to this finding, although at that time the agency also cited as “additional authority” more general statutory language relating to its mission.  We believe there is footing for a similar, transitional extension of the program under this broader authority.  In fact, when the FDIC extended the program in 2010 through the end of that year, it reserved the right to extend the program through 2011 without additional rulemaking.  This was ultimately not necessary in light of Dodd-Frank, and we think an additional regulatory extension is unlikely to occur here without significant advocacy for it.  The Independent Community Bankers of America and the American Bankers Association, for their part, have recently outlined their views on the issue.

Meanwhile, examiners are beginning to ask how banks are planning for the expiration of the program.  Many institutions are balancing this expiration with Dodd-Frank’s repeal of the prohibition on the payment of interest on business checking accounts (and by extension Regulation Q).  Challenging as this may be in a time of regulatory uncertainty, these considerations should also be evaluated along with Regulation D’s reserve requirements (where restructured accounts may become demand deposits).

Read More

Unlimited FDIC Insurance for Non-Interest Bearing Transaction Accounts

On November 15, 2010, the Federal Deposit Insurance Corporation (FDIC) issued a final rule to implement Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). Section 343 of the Act provides for unlimited deposit insurance for “noninterest-bearing transaction accounts” through December 31, 2012.

In the months since the FDIC issued its final rule, we have observed some confusion in the banking industry as to exactly what kinds of accounts will be considered to be “noninterest-bearing transaction accounts.” It is not the case, as some seem to have believed, that the definition covers only accounts offered to businesses. Consumer accounts can qualify for the unlimited deposit insurance, if properly structured. For some banks, this may mean a change to their existing deposit agreement terms.

FDIC regulation now defines “noninterest-bearing transaction account” as any deposit or account maintained at an FDIC insured bank or other depository institution with respect to which all three of the following are true:

(i) no interest may be paid or accrued on the account;

(ii) the depositor must be able to make withdrawals by using a negotiable or transferable payment instrument, payment order of withdrawal, telephone or other electronic media, or other similar items for the purpose of making payments or transfers to third parties; and

(iii) The depository institution may not reserve the right to require advance notice of intended withdrawal.

Read More
The attorneys of Bryan Cave Leighton Paisner make this site available to you only for the educational purposes of imparting general information and a general understanding of the law. This site does not offer specific legal advice. Your use of this site does not create an attorney-client relationship between you and Bryan Cave LLP or any of its attorneys. Do not use this site as a substitute for specific legal advice from a licensed attorney. Much of the information on this site is based upon preliminary discussions in the absence of definitive advice or policy statements and therefore may change as soon as more definitive advice is available. Please review our full disclaimer.