FDIC Votes to Require Prepayment of Assessments

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter, Nov. 12, 2009.

With the pace of resolutions continuing to put downward pressure on its cash balances, the Federal Deposit Insurance Corp. voted November 12 to require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. Annual assessment rates will also rise by three basis points starting in 2011.The move is expected to yield approximately $45 billion.

The FDIC will return any unused portion of the prepaid assessment on June 30, 2013, rather than Dec. 30, 2014, as originally proposed. A bank can seek an exemption from the prepayment requirement if it can show that the prepayment would significantly impair its liquidity or otherwise create significant hardship. The FDIC does not believe that the exemptions that will be granted will prevent it from meeting its current liquidity needs.

As of September 30, the Deposit Insurance Fund’s level of cash and marketable securities had fallen to approximately $23 billion from a level of close to $55 billion in June 2008. If the FDIC took no action to increase its liquidity, its projected liquidity needs would exceed its liquid assets on hand beginning in the first quarter of 2010.

According to the FDIC, the majority of public comments, including those from the major trade groups, supported the prepaid assessment funding option over one or more special assessments, borrowing from the Treasury Department, or borrowing from the industry as a means of providing immediate liquidity to the DIF.

James Chessen, chief economist at the American Bankers Association, said that while the prepaid assessment does come at a cost to the industry, “this approach is preferable at this time to the other options available for meeting the costs of bank failures and rebuilding the Deposit Insurance Fund.”

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