Marginal Cost of Advances vs. Deposits under the FDIC's New Insurance Assessment Schedule

Revised FDIC Insurance Assessment Status
On February 27, 2009, the FDIC announced its amended plan for restoring funding levels for the Deposit Insurance Fund. The FDIC had already increased base premiums by seven basis points, as of January 1, 2009. Part-and-parcel to the announcement of a proposed special assessment of 10 to 20 basis points1 on deposits and promulgated changes to the risk-based assessment system, the FDIC also announced supplemental rates on insured institutions that employ secured liabilities beyond a certain threshold.

The supplemental premium assessment for usage of secured liabilities has been set with the threshold level of 25% of insured deposits versus the original FDIC proposal, which called for a threshold of 15% of insured deposits.

By way of background, prior to April 1, 2009, the FDIC’s operative assessment schedule, shown in Table 1, was based on a risk-category classification (1 – 4) that was based on an institution’s CAMELS rating and capital position.

Table 1. FDIC Risk-Based Assessment Schedule prior to April 1, 2009

Risk Category1234
FDIC Base Assessment (basis points) 12 – 14173550

Under the final FDIC rule for baseline assessments, an institution’s assessment categories will also be based upon certain financial ratios, with baselines as designated in Table 2 below. In addition to revised assessments assigned to each of the four initial categories, there will be potential assessments assigned to the amount of secured liabilities and/or brokered deposits that exceed a threshold level of insured deposits. Also, to the extent that unsecured liabilities compose a portion of domestic deposits, total assessment levels can actually decrease.

Table 2. FDIC Risk-Based Assessment Schedule subsequent to April 1, 2009

Risk Category1234
FDIC Base Assessment (basis points) 12 – 16 22 32 45
Secured Liability Adjustment (basis points) 0 – 8 0 – 11 0 – 16 0 – 22.5
Brokered Deposit Adjustment (basis points) n/a 0 – 10 0 – 10 0 – 10
Unsecured Liability Benefit (basis points) -5 – 0 -5 – 0 -5 – 0 -5 – 0
Total Base Assessment Rate 7 – 24 17 – 43 27 – 58 40 – 77.5

The New Secured Liabilities Assessment
Under the new supplemental charges, institutions with a ratio of secured liabilities-to-total deposits exceeding 25% will be subject to the secured liabilities adjustment. The secured liabilities adjustment cannot exceed 50% of the FDIC Base Assessment.

Formulaically, Secured Liabilities Adjustment = (FDIC Base Assessment) * (Amount By Which Secured Funding Exceeds 25% of Total Insured Deposits)

Example Calculations

Scenario One: Consider a federally insured institution that is below the 25% threshold, with a funding structure as described below:

Base Case:

Total Deposits: $500,000,000 (annual baseline insurance = (.0012 * $500,000,000) = $600,000
Secured Liabilities:
Seattle Bank Advances $40,000,000
Fed Funds Purchased (secured) $40,000,000
Reverse Repurchase Agreements $20,000,000
Total Secured Liabilities: $100,000,000
Total Secured Liabilities/Total Deposits: 20.00% (no secured liability adjustment would be required)

Scenario Two: Now consider a case of increased funding requirements for the same institution if it was to expand by $50,000,000 – either via increased advances or deposits.

Option A: Fund with $50 million in advances:

Total Deposits: $500,000,000 (annual baseline insurance) = (.0012 * $500,000,000) = $600,000
Secured Liabilities:
Seattle Bank Advances $90,000,000
Fed Funds Purchased (secured) $40,000,000
Reverse Repurchase Agreements $20,000,000
Total Secured Liabilities: $150,000,000
Total Secured Liabilities/Total Deposits: 30.00%

Assuming that the institution was “Risk Category 1,” the secured Liability Adjustment would be: (.0012) * (0.30-0.25) = .0001; or (.0001 * $500,000,000) = $50,000

Total Assessments would be: $600,000 + $50,000 = $650,000

Option B: Fund with $50 million in deposits:

Total Deposits: $550,000,000 (annual baseline insurance) = (.0012 * $550,000,000) = $660,000
Secured Liabilities:
Seattle Bank Advances $40,000,000
Fed Funds Purchased $40,000,000
Reverse Repurchase Agreements $20,000,000
Total Secured Liabilities: $100,000,000
Total Secured Liabilities/Total Deposits: 18.18% (no secured liability adjustment required)

Assuming that the institution was “Risk Category 1,” the total assessment would be $660,000, or $10,000 higher than in the case of Option A, where the incremental $50 million in funding was obtained by increased advances, versus deposits.

To summarize, at the margin, the incremental addition of advances or, wholesale funding into the funding mix will not necessarily generate significantly higher assessment costs. Indeed, incremental FDIC insurance expense may actually be lower relative to incremental funding via deposits.

1 Initially proposed at 20 basis points, but now contingently proposed at 10 basis points if legislation passes allowing the FDIC to borrow as much as $100 billion from the U.S. Treasury.

By John P. Biestman CFA, Vice President/Director of Business Development