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FDIC to Increase Deposit Insurance premiums


On October 7 the FDIC announced plans to increase deposit insurance premiums, and in some cases significantly.  The agency expects losses to exceed $40 Billion over the next five years, which would virtually eliminate the FDIC's current reserves which stand at $45 Billion.
Under the existing matrix most Oklahoma  banks are paying between 5 to 7 basis points in premiums or about 5 - 7 cents for each $100 that bank has on deposit.  The average assessment is 6.5 cents.
Under the new proposal, banks will pay an average of 13.5 cents per $100 of domestic deposits, and it will also factor in a bank's risk to the Deposit Insurance Fund as well as its use of brokerd deposits and Federal Home Loan Bank advances. 
Following the announcement, FDIC board members made it clear to banks that they had no choice at this point other than increasing premiums.
"The situation is what it is," FDIC Chairman Sheila Bair was quoted as saying at the Board meeting.  "We are acutely aware of the challenges the industry is facing right now. 
"But the industry understands from a public confidence perspective that the public needs to know the industry stands behind the fund. That is their moral obligation as well as their statutory obligation."
Bankers know instinctively that it's in their best interests to make certain the FDIC insurance remains solid and healthy.  That having been said, most bankers are not looking forward to a possible doubling of this significant expense. 
Jim Chessen, Chief Economist for the American Bankers Association said:  "The first obligation is to say the industry knows the importance of the FDIC fund and is prepared to make sure it will always be strong. Anything else is just details."
The FDIC has dealt with 13 bank failures so far this year, and revised its problem bank list at the end of June to include 117 banks and thrifts across the nation.  The failures have cost the Deposit Insurance Fund approximately 14 basis points, and the DIF now stands at 1.01 percent of total insured deposits.  By law, that ratio must be brought back to 1.15 percent through assessments of insured institutions within five years.  This action by the FDIC will restore the DIF to 1.26% within the prescribed time frame.  
The assessment base and resulting formula will become a bit more complicated.  Under the new plan banks will pay 12 to 14 basis points beginning in January, 2009.  At the end of the first quarter, the FDIC will add more risk-based elements to the premium calculation.  If a bank has more than 15 percent of its deposits fall into the category of "brokered" deposits or Federal Home Loan Bank advances, then the bank will face a higher assessment in which these elements are included.  That's the first time in history banks have been assessed on FHLB advances. 
The FDIC has in the past expressed significant concerns about banks that have a high level of brokered deposits.  Bokered deposits have been significant in some of the bank failures this year, like ANB in Bentornville, AR and IndyMac FSB in Pasadena, CA.   The FDIC said it would add a surcharge of up to 10 basis points for weaker institutions if their brokered deposits exceed 10% of their domestic deposits.
The proposal will soon be published for public comment in the Federal Register.   
October 8, 2008

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