Top Ten Questions and Answers:
Federal Deposit Insurance Reform Act of 2005
Q. The bill increases retirement account coverage to $250,000. When is the increase effective and which accounts are covered?
A. The new coverage limit for retirement accounts will be effective when the FDIC issues final revised regulations. The new law gives the agency up to 270 days--until the end of November--to write the rules. However, a final rule could be adopted sooner depending on how quickly the FDIC acts.
The accounts covered by the increase include IRA, Keogh and “457 plan” accounts, and qualified self-directed pension, profit-sharing, and stock bonus plan accounts, such as 401(k) accounts. These are the same retirement accounts that under current FDIC rules are separately insured from a depositor’s other accounts.
Q. How do the five-year adjustments of coverage limits for inflation work?
A. Every five years, the FDIC can adjust coverage levels for inflation based on the change in the Personal Consumption Expenditures Chain-Type Price Index since 2005. The first calculation will be made in April 2010 with any adjustment effective Jan. 1, 2011. Adjustments will be made in increments of $10,000.
The FDIC must determine whether an inflation adjustment is appropriate considering: the state of the Deposit Insurance Fund (DIF) and economic conditions affecting banks; potential problems affecting banks; or whether the increase will cause the reserve ratio (fund balance/insured deposits) of the DIF to fall below 1.15%.
Q. How does the new law affect the insurance coverage of municipal deposits?
A. Coverage limits for municipal depositors remain at $100,000, subject to the inflation adjustments described above.
Q. When will my bank start paying deposit insurance premiums again?
A. Premiums for banks chartered after 1996 will likely be assessed beginning in January 2007, once the FDIC issues final rules establishing a new risk-based premium system. For banks in existence on Dec. 31, 1996, when they will start paying premiums will depend on a number of factors including the size of the assessment credit they receive (see the following question) and the premium rate they are assessed. The one-time assessment credit is designed to reward banks that built up the fund in the past. It can be used to offset future premium assessments. New or fast growing banks will pay premiums sooner than other banks.
Q. How much will my bank’s assessment credit be?
A. Banks that paid premiums prior to Dec. 31, 1996 (and their successors) will receive a portion of a $4.7 billion one-time assessment credit to offset future premiums. The credit will be allocated based on a bank’s portion of the total assessment base (domestic deposits) of $3.35 trillion as of December 31, 1996. Mergers since 1996 will be taken into account.
For example, if your bank had domestic deposits of $335 million on December 31, 1996, then your assessment credit would be $470,000 ($335 million/ $3.35 trillion x $4.7 billion).
Q. Will there be any restrictions on the use of the one-time credit by banks?
Yes. For fiscal years 2008, 2009 and 2010, a bank cannot offset more than 90% of its premium with the one-time credit. Also, for a higher risk bank (financial, operational, or compliance weaknesses or not adequately capitalized) the amount of the credit it can use is limited to the average premium rate on all banks for that assessment period. Finally, if the DIF is undercapitalized (reserve ratio less than 1.15%), credits can offset only 3 basis points of premium.
Q. How will the new risk-based premium system work and what will my bank’s premium rate be?
A. The FDIC likely will use a scorecard system with a variety of factors to slot banks into risk categories. Your bank’s premium rate will depend on your risk category. Banks that are well-capitalized and well-managed will pay lower premiums than others. Healthy banks can expect to be assessed a small, steady premium, for example 1 to 3 basis points a year. Banks cannot be barred from the lowest risk category solely because of their asset size.
When setting premium rates, the FDIC must consider the operating expenses, failure losses and income of the DIF; the effects of premiums on the capital and earnings of banks; and the risk of bank failures. The FDIC has until the end of November to propose and finalize rules for the new risk-based premium system. The rules will be subject to public comment.
Q. How is the FDIC given more flexibility to manage the fund, so that banks don’t face 23 cent premiums like we did in the early 1990s?
A. The new law eliminates the requirement that the FDIC must maintain the Designated Reserve Ratio at 1.25% and charge as much as 23 basis points to maintain that ratio. Instead, the FDIC has flexibility to set the target reserve ratio anywhere between 1.15% and 1.50% and allow it to float above and below the target to avoid sharp swings in premium rates. If the reserve ratio falls below 1.15%, the FDIC will have up to five years to restore the fund.
Q. Under what circumstances will banks get dividends or rebates of FDIC premiums in the future?
A. When the reserve ratio of the DIF exceeds 1.5% of estimated insured deposits, the FDIC must dividend back to banks 100% of the excess. If the ratio is between 1.35% and 1.5%, the FDIC must dividend 50% of the excess. Dividends will be allocated to banks based their past contributions to the fund, i.e., their portion of the 1996 assessment base, plus premiums paid since then.
Q. When will the BIF and SAIF be merged and how is that significant to my bank?
A. The FDIC has until July 1, 2006 to merge the Bank Insurance Fund and the Savings Association Insurance Fund into the new Deposit Insurance Fund (DIF), but is likely to do so earlier. Merging the funds will help BIF-insured banks since the SAIF reserve ratio is currently higher than BIF’s (1.30% vs. 1.25%). For BIF-insured banks, the merger will mean they no longer have to worry about paying premiums when SAIF-insured banks do not and vice versa.