Treasury Deposit Insurance Reform Draft Released
On May 12, the Treasury Department, joined by the Federal Reserve, FDIC, OCC and OTS, publicly issued its long-awaited legislative draft on deposit insurance reform. Treasury was asked for its proposal earlier this year by Senate Banking Committee chairman Richard Shelby (R-AL).
As expected, the draft bill has no coverage-related provisions whatsoever. This places it in sharp contrast to the excellent bill, H.R. 522, which passed the House in early April with over 400 votes. That measure contains substantial coverage hikes, including a raise in the general coverage limit to $130,000 per account and indexation for future inflation. Chairman Shelby joins the Treasury in opposing any form of a coverage increase or indexation.
Aside from its lack of coverage-related provisions, the Treasury draft is in many respects similar to H.R. 522. The draft calls for merger of the BIF and SAIF funds into a single deposit insurance fund. It would also effectively replace the existing "hard target" designated reserve ratio (DRR) of 1.25% with a flexible range (1.15% to 1.50%) within which the FDIC could administer the newly-merged fund. This will remove the possibility of a premium "cliff" as high as 23 basis points under existing law. The proposal would remove existing restrictions on the FDIC from assessing risk-based premiums, and it even includes a Sense of the Congress resolution that the FDIC should charge each institution a premium for the benefits of federal deposit insurance.
Should the fund fall below 1.15%, the FDIC will have authority to set premiums high enough to bring the fund back up above that level within a year, or set a recapitalization schedule through regulation that raises the fund above 1.15% within six years. However, if the FDIC has borrowings outstanding with the Treasury or Federal Financing Bank, or a recapitalization schedule is in place, premiums could be no less than 5 basis points, after any assessment credits.
Assessment credits under the proposal would total 9% of the BIF and SAIF assessment base as of December 31, 2002, which is about $4.4 billion. Eligible institutions would be those in existence as of December 31, 1996 that paid premiums prior to that date. The amount of credit for an individual institution would be derived from the assessment base of the institution as of December 31, 1996 compared to the aggregate assessment base for all eligible institutions on that date. These provisions are aimed at preventing "free-riders" like Merrill Lynch and Salomon Smith Barney from receiving assessment credits. The draft also includes provisions that would allow the FDIC to offer additional assessment credits or cash rebates under certain circumstances.
A significant change in the draft bill is a required study by the FDIC, with assistance from the Treasury Department and Federal Reserve, of risks posed to the deposit insurance fund "by the composition of insured depository institution liabilities." This study will clearly focus on Federal Home Loan Bank advances, a key community bank funding source. The draft would also increase the penalties institutions would pay for late premiums from the current $100 per day to 1% of the required assessment for each day payment is late.