Posted on 25th May 2010 @ 8:50 AM

The major financial reform bill that the Senate passed on May 20 would alter the way deposit insurance premiums are assessed — a change that would generally favor community banks at the expense of large money-center institutions. The bill will now go to a House-Senate conference committee, which will resolve differences between the Senate bill and a similar measure the House approved last December.

Assessment Base Changes

The Senate bill would change the assessment base on which FDIC deposit insurance premiums are calculated. The new base would be defined as the average total assets of the insured institution during the assessment period, reduced by the sum of:

• The institution’s average tangible equity capital during the assessment period, plus
• The institution’s average long-term unsecured debt during the assessment period

In addition, a special provision covering custodial banks and bankers’ banks would allow these institutions to subtract an amount to be set by the FDIC to enable the agency to maintain consistent risk-based assessments.

The Senate bill would also repeal current statutory language that states an institution cannot be denied the lowest risk rating solely because of its small size.

Significance of Changes

The change to an asset-based deposit assessment system, rather than the current system based on insured deposits, would generally favor smaller institutions over the largest ones. Community depository institutions generally are more heavily reliant on insured deposits for their funding, while the largest money-center institutions have easier access to other funding sources. This has led to complaints that smaller banks pay relatively more for deposit insurance coverage, even though larger institutions are equally protected from failure, particularly those deemed “too big to fail.”

By some estimates, the change in deposit assessment methods would reduce the assessments paid by 98 percent of banks with assets below $10 billion. Over the next three years, this change could result in community banks’ retaining as much as $4.5 billion that they would otherwise have paid out in deposit insurance premiums. Larger banks, of course, would face a comparable increase in their share of deposit insurance assessments.

FDIC Escape Hatch

While adopting this new definition of the insurance base, the Senate bill would also allow the FDIC to continue using the current assessment method under certain conditions. The agency could avoid making the change to the new assessment base if, within one year of the bill’s enactment into law, the FDIC notified the appropriate House and Senate committees that it believed that use of the new assessment base would either:

• Reduce the effectiveness of the FDIC’s risk-based assessment system, or
• Increase the risk to the Deposit Insurance Fund.

If the FDIC believed either of these problems would arise, it could continue using the assessment system in effect before the bill was enacted into law.

FDIC Board of Directors

Other portions of the Senate bill would eliminate the Office of Thrift Supervision and create a new Bureau of Consumer Financial Protection. The Director of the Office of Thrift Supervision now holds a seat on the FDIC Board of Directors (as does the Comptroller of the Currency). The Senate bill would give the Director of the Bureau of Consumer Financial Protection the FDIC Board seat now occupied by the Director of the Office of Thrift Supervision.

Conference Committee

Provisions in the House bill, while not identical to the Senate measure, generally provide for similar adjustments in the assessment base. Nonetheless, there is at least one major issue left for the conference committee to resolve.

The House version, unlike the Senate bill, would repeal current statutory language that requires the FDIC to pay dividends to insured banks if the Deposit Insurance Fund achieves a balance equal to 1.35 percent of insured deposits. Instead of the mandatory dividends, the House bill would authorize the FDIC, at its discretion, to eliminate dividends should the fund’s reserves exceed 1.50 percent.