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ICBA Urges FDIC to Keep Assessments Low

Recommends Changes to New Risk-Based System

Washington, D.C. (Sept. 25, 2006)—The Independent Community Bankers of America (ICBA) asked the FDIC to ensure a smooth transition to its revised risk premium assessment system by gradually building reserves in the Deposit Insurance Fund (DIF).

"ICBA urges the FDIC to use the maximum flexibility it has under the recently passed Federal Deposit Insurance Reform Act to build up reserves to meet the target reserve ratio in the Deposit Insurance Fund steadily and gradually over a three-to-five year period and to establish actual assessment rates for 2007 close to the proposed base schedule of rates," Karen M. Thomas, ICBA executive vice president and director of the Government Relations Group.

The FDIC has proposed to set base rates for the lion's share of banks - as many as 90 percent of banks - from two-to-four basis points. But the agency has said that actual assessments for 2007 may be significantly higher. While commending the FDIC proposal, ICBA suggested the following changes:

  • Revise the base schedule of rates for Risk Category I institutions so that the floor is one basis point and the ceiling is three basis points. The proposed two-to-four basis point range is too high, penalizing banks that could qualify for an assessment of less than two basis points;

  • With respect to the use of financial ratios for small Risk Category I institutions, weight tier one leverage ratio the highest and the volatile liabilities ratio the lowest;

  • Exclude deposits greater than $100,000 from the definition of volatile liabilities;

  • Exclude Federal Home Loan Bank advances from the volatile liabilities ratio since that discourages banks from borrowing from the FHLBs and is counterproductive to reducing risks to the DIF;

  • Increase the proposed weight for the capital component of the CAMELS ratings to 30 percent and the earnings component to 15 percent and reduce the management component weighting to 15 percent; and

  • Ensure that most small institutions in Risk Category I are at or near the minimum rate since their capital is well above the tier one leverage ratio, posing little risk to the DIF.

ICBA said that new institutions, which FDIC proposes pay the ceiling rate, should be defined as those that have been in existence for no more than three years, rather than seven years as proposed. After three years, a new institution's operations should be seasoned enough to assess risks based on the bank's financial ratios and CAMELS ratings, in the same manner as other institutions.

With respect to the FDIC's proposal to differentiate large institutions in Risk Category I, ICBA recommended avoiding too much reliance on long-term debt issuer ratings and instead using a combination of financial ratios, supervisory ratings, long-term debt issuer ratings, and other information to assess all large institutions.

Read the comment letter at www.icba.org.