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The FDIC's Assessment Decision

Dear Community Banker:

As you know, the FDIC’s Board of Directors is scheduled to announce on Tuesday how it proposes to replenish the Deposit Insurance Fund’s critically dwindling reserves. I wanted to let you know that ICBA is fighting just as hard to protect the interests of community banks as we did when the last proposed FDIC special assessment threatened to gut already severely strained community bank capital ratios and profitability.

Today the DIF is experiencing both an equity problem and a liquidity problem. For the second quarter, the FDIC added $11.6 billion to the DIF’s contingent loss reserves, resulting in a total of $32 billion set aside for expected bank-failure losses over the next four quarters (June 2010). As a result, the unallocated DIF balance dropped to $10.4 billion as of June 30, 2009, and the DIF reserve ratio dropped to 0.22 percent of insured deposits. If the problem bank list grows or failure losses are greater than expected in the third and fourth quarters, the DIF reserve ratio may drop below zero and the fund may not have enough unencumbered cash reserves to deal with all the losses.

As a result, the FDIC has no alternative but to act. The agency is considering four assessment options. What’s at stake will affect us all, which is why ICBA leadership community bankers and I and ICBA senior staff have been meeting with FDIC officials, including Chairman Sheila Bair, to discuss the impact of those options on community banks and the challenges of imposing assessments amid the current economic downturn.

At a meeting last week with FDIC officials, I reiterated ICBA’s call for the FDIC to adopt alternatives that would avoid another special assessment on the industry and spread the cost of funding the DIF over time. I strongly urged the FDIC to transfer to the DIF excess premiums paid into the Temporary Liquidity Guarantee Program and to borrow directly from the industry by issuing bonds that healthy banks could purchase—and earn interest from—to support the DIF, as already authorized by law. 

Another option the FDIC is considering that would be preferable to a special assessment is having banks prepay their regular deposit insurance premiums over a period of time. Under that scenario, banks would hold “prepaid premium expenses” as an asset on the balance sheet and expense quarterly premiums as they come due. The FDIC would receive cash up front to bolster its liquidity position and would accrue the quarterly premiums into income over time. Community banks that could not afford to make the prepayment due to capital or liquidity constraints could be exempted and continue to pay on a quarterly basis.  

Tapping the existing $100 billion line of credit at Treasury is another option the agency should consider, but it’s one that risks generating negative public perceptions as a bailout by taxpayers. In addition, if the Treasury line of credit is drawn down by the FDIC, all bankers can expect more aggressive oversight and restrictions imposed on them by Congress in the name of protecting the taxpayer’s money.

Regardless of whichever option is chosen, it is essential that going forward that any assessments under consideration be based on assets, not deposits. As you know, last March, ICBA, along with enormous grassroots support, prevailed in convincing the FDIC to cut its proposed special assessment from 20 basis points to 5 basis points—AND base the assessment on assets, not deposits.

According to our analysis, 98 percent of community banks paid less than if the special assessment had been based on domestic deposits—resulting in community banks saving $3.2 billion over the proposed 20-basis-point assessment, while shifting approximately $300 million to the very biggest banks.

ICBA is also urging community bankers to contact their representatives, if they haven’t already, to cosponsor the Bank Accountability and Risk Assessment Act of 2009 (H.R. 2897) sponsored by Rep Luis Gutierrez (D-Ill.). In addition to requiring a separate systemic-risk premium for too-big-to-fail institutions, the bill would require the deposit insurance assessment base to include total assets (minus tangible equity), rather than domestic deposits.

Whatever the FDIC proposes on Tuesday, your input will be important, so I encourage you to let the FDIC know your views. In the meantime, please feel free to e-mail me or any member of the ICBA staff if you have any questions or comments concerning the DIF fund and how best to recapitalize it. 

ICBA recognizes that this issue has critical bottom-line implications for your community bank. ICBA is putting all of its resources into ensuring that the final decisions are equitable for community banks that had no role in causing the challenges before us. ICBA represents ONLY community banks and will always act in their best interests exclusively. 

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