FDIC approves ABA-opposed increase in deposit insurance assessment rate

The FDIC board today unanimously voted to raise deposit insurance assessment rates for banks by two basis points beginning with the first quarterly assessment period of 2023. The change will amount to a 54% increase in the current average assessment rate and remain in effect until the Deposit Insurance Fund reserve ratio to insured deposits meets the FDIC’s long-term goal of 2%. The increase was opposed by ABA, financial industry groups and some members of Congress, all of whom warned that the decision would put further strain on an already stressed economy.

When the DIF reserve ratio fell from 1.41% in 2019 to 1.30% in 2020 due to the surge of deposits into banks in reaction to the pandemic, the FDIC approved a restoration plan to restore the fund to the statutory minimum of 1.35% by 2028. However, a sustained inflow in deposits and major unrealized losses in its securities portfolio caused the reserve ratio to decline to 1.23% as last March. In remarks during the board meeting, Acting Chairman Martin Gruenberg said the rate increase is now necessary because the banking industry faces significant downside risks from inflation, slowing economic growth and geopolitical uncertainty. “It is better to take prudent but modest action earlier in the statutory eight-year period to reach the minimum reserve ratio than to delay and potentially have to consider a procyclical assessment increase,” he said.

Critics of the rate hike pointed to FDIC data showing that declines in deposit levels—including insured deposit levels—are already well underway. In a letter Monday, Rep. Blaine Luetkemeyer (R-Mo.) and four other House members also cited a recent FDIC study that concluded that raising deposit insurance assessment rates during the 2008-09 financial crisis led to a significant drop in bank lending growth, which disproportionately affected smaller community banks.

In a joint statement after the FDIC vote, ABA and four banking associations said they were disappointed the board voted to increase the rate based on assumptions “that are demonstrably incorrect.”

“The latest data indicates that the deposit insurance fund will likely return to its statutory minimum level next year and that banks are in excellent financial condition, so the FDIC’s action is a preemptive strike against a nonexistent threat,” the groups said. “This significant, unjustified rate increase could exacerbate the stress of a slowing economy, instead of enabling resilient banks to support economic growth.”

Other actions

The board revised the assessment scorecards for banks with at least $10 billion in assets to account for phase-out under Accounting Standards Update No. 2022–02 of reporting troubled debt restructurings for institutions that have adopted current expected credit losses. The change, which will go into effect next year, replaces TDRs in the scorecards with a new item to be reported under ASU 2022-02: “modifications to borrowers experiencing financial difficulty.” Banking agencies are considering how the “modifications” item will be reported in Call Reports for this purpose.

The board also voted to open public comment on possibly drafting new requirements for large banks to alleviate the economic effects should the banks fail. The agency joins the Federal Reserve, which approved the same measure on Friday. The proposed rulemaking would apply to large banking organizations in Categories II and III, which generally exceed a threshold of $250 billion in total consolidated assets.

Finally, board members voted to extend public comment on proposed amendments to its Guidelines for Appeals of Material Supervisory Determinations. The amendments would expand and clarify the role of the agency’s ombudsman in the supervisory appeals process, require that materials considered by the Supervision Appeals Review Committee be shared with both parties to the appeal, subject to applicable legal limitations on disclosure, and allow insured depository institutions to request a stay of a material supervisory determination while an appeal is pending.