FDIC Issues Notice Of Proposed Rulemaking That Would Require Banks To Prepay Deposit Issuance Assessments For Three Years (Through 2012)

Profession:Goodwin Procter LLP

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FDIC Issues Notice Of Proposed Rulemaking That Would Require Banks To Prepay Deposit Issuance Assessments For Three Years (Through 2012) FINRA Requests Comments On Proposed Amendments To Rules Governing Communications With The Public ICI And IDC Issue Overview Of Fund Governance Practices ICI And IDC Publish White Paper On Fund Relationships With Intermediaries Update On Report Addressing Harmonization Of SEC And CFTC Regulation Other Items Of Note

Chairman Of House Financial Services Committee Releases Discussion Draft Of Proposed Derivatives Regulation Legislation EU Alternative Investment Fund Managers Directive Has Implication For Non-EU Managers And Funds DEVELOPMENTS OF NOTE FDIC Issues Notice Of Proposed Rulemaking That Would Require Banks To Prepay Deposit Issuance Assessments For Three Years (Through 2012) On September 29, 2009, the FDIC adopted a Notice of Proposed Rulemaking ("NPR") that would mandate that insured depository institutions ("DIs" and each a "DI") prepay their quarterly risk-based assessments to the FDIC for the fourth quarter of 2009, and for all of 2010, 2011, and 2012 on December 30, 2009, when they pay their risk-based deposit insurance assessment for the third quarter of 2009. Further, the FDIC acknowledged that the Deposit Insurance Fund ("DIF") would be negative as of September 30, 2009. Under the plan announced by the FDIC, the DIF will not be solvent again until 2012, and will not reach its statutory reserve ratio of 1.15% until 2017. In addition to the negative balance of the DIF, the FDIC is also facing a more pressing need; the need for liquidity. If the FDIC takes no action regarding its liquidity needs, then the FDIC's projected liquidity needs will exceed its liquid assets in the first quarter of 2010.

In the short term, the proposed prepayment of assessments addresses the FDIC's liquidity needs. Although the FDIC can use the prepaid premiums to help pay resolution costs, the FDIC cannot immediately count such prepayments towards the DIF reserves. Under the proposed plan, each DI would record the entire amount of its prepayment as an asset (a prepaid expense). This is a benefit to DIs, which can count the payments as a depreciating asset, while the FDIC will have more liquid cash available for resolution costs.

Specifically under the NPR, the prepaid assessment base for each institution would be calculated using its third quarter 2009 assessment rate. That assessment base would then be adjusted quarterly with an estimated 5 percent annual growth in the assessment base through the end of 2012. The prepaid assessment rate for the fourth quarter of 2009 and for 2010 would be based on each DI's total base assessment rate for the third quarter of 2009, adjusted as if the assessment rate in effect on September 30, 2009 had been in effect for the entire third quarter. Further, the assessment rate for 2011 and 2012 would be equal to the adjusted third quarter 2009 total base assessment rate plus 3 basis points. As of December 31, 2009, and each quarter thereafter, each DI would record an expense for its regular quarterly assessment for the quarter and a corresponding credit to the prepaid assessment until the asset is exhausted. The FDIC will not refund or collect additional prepaid assessments because of a decrease or growth in deposits over the next three years. However, should the prepaid assessment not be exhausted by December 30, 2014, the remaining amount of the prepayment would be returned to the DI.

The NPR's prepayment proposal was made in lieu of other, possibly more extreme manners of raising funds by the FDIC; a special assessment on DIs or utilizing the FDIC's line of credit with the Treasury Department. The FDIC stated that it has not been the agency's intent to use this line of credit with the Treasury Department as a first source of funding; the line of credit is available in the...

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