Most Community Banks Will Pay Lower Premiums under FDIC Assessment Rules

Jim Fuchs , Andrew P. Meyer

Before the passage of the Dodd-Frank Act, FDIC insurance premiums were assessed as a percentage of insured deposits in each banking institution.  Under Section 331 of the act, the assessment base is now defined as average total assets minus tangible equity.  Thus, the new base contains liabilities that did not previously enter into the calculation.  Although the new base is larger, the lower assessment rates are more than enough to offset this effect for more than 99 percent of community banks with less than $10 billion in total assets.

FDIC assessments will be lower for banks under $10 billion in all seven states in the Eighth District.  Community banks will experience a 4.5-basis-point average decrease in assessment fees, which totals approximately $237 million: an $18 million decrease in Arkansas, $76 million in Illinois, $26 million in Indiana, $22 million in Kentucky, $20 million in Mississippi, $46 million in Missouri and $29 million in Tennessee.

Nationally, community banks will experience a more than $1 billion decrease in assessment fees with the FDIC’s new assessment methodology.  In general, the smallest community banks, those with less than $100 million in total assets, will experience the biggest decline (a 5.1-basis-point decrease on average).  The largest community banks, those with between $1 billion and $10 billion in total assets, will experience, on average, a 4-basis-point decline.

Assessment rates before and after passage of the Dodd-Frank Act depend on exam ratings and other risk measures.  Table 1 shows how banks are assigned to one of four risk categories (I, II, III or IV).  The four categories are based on two criteria: capital adequacy and supervisory ratings.  The three capital groups are 1) well-capitalized, 2) adequately capitalized and 3) undercapitalized, consistent with prompt corrective action (PCA) designations.  The three supervisory groups (A, B and C) are based primarily on CAMELS ratings, although the FDIC has the ability to consider other factors as well.  In general, banks with CAMELS ratings of 1 or 2 are assigned to the A category, banks with a CAMELS rating of 3 are assigned to the B category, and banks with a CAMELS rating of 4 or 5 are assigned to the C category.

Table 1

Determination of Risk Category

  Supervisory Group
Capital Category A B C
Well-Capitalized I II III
Adequately Capitalized II III
Undercapitalized III IV

SOURCE: Federal Register, Vol. 74, No. 41 / Wednesday, March 4, 2009

Table 2 shows the initial and total base assessment rates once banks are assigned to the appropriate risk category under the old system.  For example, a bank in Risk Category I would be assigned an initial base assessment rate between 12 and 16 basis points.  A bank could be at the high or low end of this range, depending on the values of various financial ratios from its income statement and balance sheet.  The weights on these financial ratios were determined using a statistical model of bank risk.  Once the initial base rate is set, it can be adjusted upward or downward, depending on the amount of unsecured debt, secured liabilities and brokered deposits, as shown in the next three rows of the table.  (The brokered deposit adjustment would be applied only to a limited number of Risk Category I institutions with very high asset growth funded by a large percentage of brokered deposits.)

Table 2

Initial and Total Base Assessment Rates-Old System

  Risk Category I Risk Category II Risk Category III Risk Category IV
Initial Base Assessment Rate 12-16 22 32 45
Unsecured Debt Adjustment (5)-0 (5)-0 (5)-0 (5)-0
Secured Liability Adjustment

0-8

0-11 0-16 0-22.5
Brokered Deposit Adjustment ... 0-10 0-10 0-10
TOTAL BASE ASSESSMENT RATE 7-24.0 17-43 27-58 40-77.5

SOURCE: Federal Register, Vol. 74, No. 41 / Wednesday, March 4, 2009

NOTE: All amounts for all risk categories are in basis points annually. Total base rates that are not the minimum or maximum rate will vary between these rates.

The final row of Table 2 shows the basis point range for banks in each given risk category.  For all banks and thrifts, the assessment rate varied from 7 to 77.5 basis points (as a percent of total insured deposits).

Table 3 shows the corresponding information for initial and total assessment rates under the new system.  In the final row of Table 3, we see that assessment rates vary from 2.5 to 45 basis points.  Although the assessment rates are considerably lower, they are calculated on a larger base (assets minus tangible capital as opposed to deposits).  Thus, whether an individual bank pays a higher or lower total assessment depends on its risk and liability mix.  In general, the more a bank relies on core deposits to fund its operations, the more it will benefit from the new system.

Table 4 shows some total assessment information aggregated by size class for community banks with less than $10 billion in total assets.  Banks with more than $10 billion in assets are subject to a different, more complex calculation and are not considered in this analysis.

Table 3

Initial and Total Base Assessment Rates-New System

  Risk Category I Risk Category II Risk Category III Risk Category IV Large and Highly Complex Institutions
Initial Base Assessment Rate 5-9 14 23 35 5-35
Unsecured Debt Adjustment (4.5)-0 (5)-0 (5)-0 (5)-0 (5)-0
Brokered Deposit Adjustment ... 0-10 0-10 0-10 0-10
TOTAL BASE ASSESSMENT RATE 2.5-9 9-24 18-33 30-45 2.5-45

SOURCE: Federal Register, Vol. 76, No. 38 / Friday, Feb. 25, 2011

NOTES: Total base assessment rates do not include the depository institution debt adjustment. The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured depository institution's initial base assessment rate; thus, for example, an insured depository institution with an initial base assessment rate of 5 basis points will have a maximum unsecured debt adjustment of 2.5 basis points and cannot have a total base assessment rate lower than 2.5 basis points.

For example, the 2,302 community banks with less than $100 million in assets hold aggregate total assets of $131.6 billion.  Given their current CAMELS ratings, PCA designations and other risk characteristics, their total assessments will decrease from $182.7 million to $116.1 million, a savings of $66.6 million for the group.

As shown in the last row of Table 4, community banks will save approximately $1 billion in FDIC assessments for 2011.  To put this amount in perspective, it represents 4.4 basis points of total community bank assets nationwide.  The benefit measured in basis points is fairly consistent across size classes, ranging from 4 to 5.1, as highlighted in Table 4.

Table 4

Change in Total Assessments for Community Banks

Size Class Old Assess New Assess Change ($) Change (bps)
<$100 $182.7 $116.1 M -$66.6 M -5.1
$100 M - $500 M $1.1 B $704.3 M -$342.6 M -5
$500 M - $1 B $568.1 M $400.8 M -167.4 M -4.6
$1 B - $10 B $1.5 B $1.1 B -$429.6 M -4
TOTAL $3.3 B $2.3 B -$1 B -4.4

Source: FDIC and authors' calculations based on the Reports of Condition and Income for U.S. Commercial Banks

The Dodd-Frank Act could introduce new costs to banks as supporting regulations are implemented.  In the case of the FDIC assessment base, however, community banks will benefit.

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