Bill Comes Due for Large Bank Failures as FDIC Adopts Special Assessment for IDIs With Assets in Excess of $5 Billion

The Federal Deposit Insurance Corporation (the “FDIC”) has issued a final rule that imposes a special assessment on insured depository institutions (“IDIs”) to recover losses realized by the Deposit Insurance Fund (the “DIF”) when Silicon Valley Bank (“SVB”) and Signature Bank (“Signature”) were closed by the regulators earlier this year. The special assessment is mandated under the Federal Deposit Insurance Act as a means to recover losses to the DIF when the FDIC exercises its systemic risk authority to provide full deposit protection for otherwise uninsured depositors of a failed bank as was the case with the failures of SVB and Signature.  The statute provides the FDIC with broad authority to determine the design and timeframe for the special assessment and to consider a variety of factors including economic conditions and possible effects on the industry.  The special assessment is in addition to the regular assessments that IDIs make to secure deposit insurance for their customers.

The special assessment is linked directly to the projected cost to the DIF of the protection of uninsured depositors at SVB and Signature.  At SVB, 88 percent of deposits were uninsured when the bank failed, resulting in a projected $15.7 billion loss to the DIF.  For Signature, the projected loss attributable to the protection of uninsured depositors is currently set at $0.6 billion.  These loss estimates will change over time as the receiver of the failed bank sells assets, satisfies liabilities, and realizes expenses, and the special assessment may increase or decrease based on these activities.

The special assessment base is an IDI’s (i) estimated uninsured deposits as of the December 31, 2022 Call Report or FFIEC 002 less (ii) $5 billion.  The $5 billion deduction from the base means that no banks with total assets under $5 billion would be subject to the assessment.  However, according to FDIC staff estimates, the assessment would apply to 48 banks with total assets over $50 billion and 66 banks with total assets between $5 billion and $50 billion.  Special rules apply to the calculation of the special assessment base for a banking organization that has multiple IDI subsidiaries.  Amendments to an IDI’s December 31, 2022 Call Report or FFIEC 002 made after November 2, 2023 that adjust previously reported uninsured deposits will generally not affect the assessment base unless the amendments correct errors or misreporting, in each case to bring the reporting of uninsured deposits into compliance with the applicable form’s instructions.

A special assessment rate of 3.36 basis points quarterly, or approximately 13.4 basis points annually, would apply to the assessment base.  This rate reflects an increase from the 12.5 basis point rate projected in the May 2023 proposed special assessment rule with the change attributable to a shrinking base of uninsured deposits.  As of early November 2023, the aggregate assessment base across all IDIs was $6 trillion. 

The individual assessment for a covered bank will be collected over an eight-quarter period, beginning with the first quarter of 2024.  However, the initial special assessment invoice would be due on June 28, 2024.  The extended collection period will allow the FDIC sufficient time to mitigate the risk of overcollection if actual losses are less than projected levels or to extend the collection period if actual losses exceed projected losses.  If the final loss to the DIF is not determined until after the initial eight-quarter collection period, the new rules authorize a final shortfall special assessment if actual losses exceed the amount deposited in the DIF over the initial collection period.

In the case of a merger or acquisition involving two IDIs, the acquiring (or surviving) company would be required to pay the target’s special assessment.  If the acquisition occurred after December 31, 2022 but before March 12, 2023, the combined entities would have a single $5 billion deduction when calculating the assessment base.  The March 12, 2023 date is the date the FDIC was authorized to use emergency systemic risk powers to complete the resolution of SVB and Signature.  In allowing a single $5 billion deduction, the FDIC determined that the calculation of the assessment base in this manner better reflected the structure of the combined institutions at the time the determination of systemic risk was made.

If an institution’s insured status is terminated and its deposit liabilities are not assumed by another IDI, the obligation to pay the special assessment would also terminate.  If an IDI voluntarily terminates deposit insurance, the IDI must pay the remaining amount of the special assessment at the time the obligation to pay regular deposit insurance assessments ends.

The FDIC rejected modifications to the special assessment base offered by commenters on the proposed rule, including (i) a suggestion that collateralized deposits be excluded from the base; (ii) a proposed adjustment for custody bank deposits, and (iii) a proposed adjustment for “intercompany” deposits of an IDI holding company or other affiliates.

The final rule will directly impact the capital levels and income of IDIs subject to the special assessment.  According to FDIC projections, the Tier 1 capital of IDIs subject to the assessment will be reduced by an estimated 62 basis points.  Assuming that the impact of the full special assessment is realized in one quarter, the FDIC estimated an average one-quarter reduction in income of 20 percent.  Notwithstanding the projected impact on capital and income, the FDIC concluded that, despite multiple challenges from prevailing economic conditions (effects of inflation, rising interest rates and geopolitical uncertainty), the banking industry is “well positioned” to absorb the special assessment.  Nevertheless, institutions subject to the special assessment should evaluate the impact of this additional expense on business plan projections.


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