Concur: _____________________ 

 Michael Bradfield 

 General Counsel 

November 6, 2009 

MEMORANDUM TO: The Board of Directors 

FROM: Arthur J. Murton 

 Director 

 Division of Insurance and Research 

 Sandra L. Thompson 

 Director 

 Division of Supervision and Consumer Protection 

SUBJECT: Final Rule on Prepaid Assessments 

SUMMARY OF RECOMMENDATIONS

Staff recommends that: 

1. The FDIC Board of Directors (FDIC or Board) authorize publication of the attached 

Final Rule on Prepaid Assessments (final rule) that would require insured institutions 

to prepay, on December 30, 2009, their estimated quarterly risk-based assessments for 

the fourth quarter 2009 and for all of 2010, 2011 and 2012. Staff estimates that total 

prepaid assessments would amount to approximately $45 billion. 

2. The Board delegate to the Director, Division of Supervision and Consumer 

Protection, with the concurrence of the Director, Division of Insurance and Research, 

the authority to: (1) exempt an insured institution from the prepayment requirement 

if staff determines that the prepayment would adversely affect the safety and 

soundness of the institution; (2) act on an application for exemption filed by an 

insured institution if staff determines that the prepayment would significantly impair 

the institution’s liquidity, or would otherwise create extraordinary hardship; (3) 

postpone determination of exemption applications if necessary beyond the deadlines 

imposed under the final rule but no later than January 14, 2010, and postpone the due 

date for the required prepayment; and (4) act on an application requesting that the 

FDIC withdraw an exemption. 

BACKGROUND AND PROJECTIONS

On September 29, 2009, the Board adopted an Amended Restoration Plan to 

allow the Deposit Insurance Fund (Fund or DIF) to return to a reserve ratio of 1.15 
2

percent within eight years, as mandated by statute. At the same time, the Board adopted 

higher annual risk-based assessment rates effective January 1, 2011.1

Liquidity Needs Projections

 While the Amended Restoration Plan and higher assessment rates address the 

need to return the DIF reserve ratio to 1.15 percent, the FDIC must also consider its need 

for cash to pay for projected failures. In June 2008, before the number of bank and thrift 

failures began to rise significantly and the crisis worsened, total assets held by the DIF 

were approximately $55 billion and consisted almost entirely of cash and marketable 

securities (i.e., liquid assets). As the crisis has unfolded, liquid assets of the DIF have 

been used to protect depositors of failed institutions and have been exchanged for less 

liquid claims against the assets of failed institutions. As of September 30, 2009, although 

total assets had increased to almost $63 billion, cash and marketable securities had fallen 

to approximately $23 billion. The pace of resolutions continues to put downward 

pressure on cash balances. While most of the less liquid assets in the DIF have value that 

will eventually be converted to cash when sold, the FDIC’s immediate need is for more 

liquid assets to fund near-term failures. 

 Staff’s projections of the Fund’s liquidity include assumptions concerning failedinstitution resolution strategies, such as the increasing use of loss sharing -- especially for 

larger institutions -- which reduce the FDIC’s immediate cash outlays, as well as the 

anticipated pace at which assets obtained from failed institutions can be sold. If the FDIC 

took no action under its existing authority to increase its liquidity, staff projects that the 

FDIC’s liquidity needs would exceed liquid assets on hand beginning in the first quarter 

of 2010. Through 2010 and 2011, liquidity needs could significantly exceed liquid assets 

on hand. 

Proposed Rule

On September 29, 2009, the FDIC, using its statutory authority under sections 

7(b) and 7(c) of the FDI Act (12 U.S.C. 1817(b)-(c)), adopted a notice of proposed 

rulemaking with request for comment to amend its assessment regulations to require all 

institutions to prepay, on December 30, 2009, their estimated risk-based assessments for 

the fourth quarter of 2009, and for all of 2010, 2011, and 2012, at the same time that 

institutions pay their regular quarterly deposit insurance assessments for the third quarter 

of 2009 (the proposed rule or NPR).2, 3 Under the NPR, an institution would initially 

account for the prepaid assessment as a prepaid expense (an asset). The Fund would 

initially account for the amount collected as both an asset (cash) and an offsetting liability 

(deferred revenue). An institution’s quarterly risk-based deposit insurance assessments 

 

1

 74 FR 51063 (Oct. 2, 2009). 

2

 Section 7(b)(3)(E) of the Federal Deposit Insurance Act (12 U.S.C. § 1817(b)(3)(E)); Section 7(b)(2) of 

the Federal Deposit Insurance Act (12 U.S.C. § 1817(b)(2)). 

3

 74 FR 51063 (Oct. 2, 2009). 
3

thereafter would be paid from the amount the institution had prepaid until that amount 

was exhausted or until December 30, 2014, when any amount remaining would be 

returned to the institution. 

Under the proposed rule, the FDIC would exercise its supervisory discretion to 

exempt an institution from the prepayment requirement if the FDIC determined that the 

prepayment would adversely affect an institution’s safety and soundness. In addition, an 

institution could apply to the FDIC for an exemption from the prepayment requirement if 

the institution demonstrated that the prepayment would significantly impair the 

institution’s liquidity, or otherwise created significant hardship. The FDIC requested 

comment on all aspects of the proposed rule. 

FINAL RULE

 The FDIC received more than 800 comments on the NPR, of which 

approximately 680 were form letters. The vast majority of the commenters supported the 

FDIC meeting its upcoming liquidity needs by requiring prepaid risk-based assessments. 

The FDIC also received comments on a number of other issues. Section V of the 

attached final rule contains a summary of the comments and staff’s proposed responses. 

 The final rule is similar to the proposed rule but contains modifications to benefit 

institutions. The final rule would: 

1. Amend the assessment regulations to require insured institutions to prepay their 

estimated quarterly regular risk-based assessments for the fourth quarter of 2009, 

and for all of 2010, 2011, and 2012 on December 30, 2009 (prepayment period); 

2. Allow the FDIC to exercise its discretion as supervisor and insurer to exempt an 

institution from the prepayment requirement if the FDIC determines that the 

prepayment would adversely affect the safety and soundness of the institution; 

3. Permit an insured depository institution to apply to the FDIC for an exemption 

from the prepayment requirement if the prepayment would significantly impair 

the institution’s liquidity, or otherwise create extraordinary hardship; 

4. Permit an institution that has been exempted on the FDIC’s initiative to file an 

application requesting that the FDIC withdraw the exemption; 

5. Allow the FDIC to postpone determination of exemption applications, if 

necessary, beyond the deadlines imposed under the final rule, but not later than 

January 14, 2010, and postpone the due date for the required prepayment; and 

6. Return to the institution any amount of the prepaid assessment not exhausted after 

collection of the amount due from the institution on June 30, 2013. 
4

Calculation of Estimated Prepaid Assessment Amount

For purposes of estimating an institution’s assessments for the prepayment period 

and calculating the amount that an institution would prepay on December 30, 2009 

(prepaid amount), the institution’s assessment rate would be its total base assessment rate 

in effect on September 30, 2009.4 Since the FDIC has already increased annual 

assessment rates uniformly by 3 basis points beginning in 2011, an institution’s total base 

assessment rate for purposes of estimating its assessments for 2011 and 2012 would be 

increased by an annualized 3 basis points beginning in 2011.5 Again for purposes of 

calculating the prepaid amount, an institution’s third quarter 2009 assessment base would 

be increased quarterly at a 5 percent annual growth rate through the end of 2012. 

Changes to data underlying an institution’s September 30, 2009, assessment rate or 

assessment base received by the FDIC after December 24, 2009, would not affect an 

institution’s prepayment amount.6, 7 The FDIC would collect the prepaid assessments for 

the prepayment period on December 30, 2009, along with the institution’s regular 

quarterly deposit insurance assessments for the third quarter of 2009.8

 

An institution’s prepaid assessment would be set as described in the previous 

paragraph and would be applied to the institution’s risk-based assessments beginning 

with the fourth quarter of 2009. Events during the prepayment period, such as slower 

deposit growth or changes in CAMELS ratings, could cause an institution’s actual 

assessments to differ from the estimated assessments used to determine the prepaid 

amount. Assessment billing would account for events that occur during the prepayment 

period and could result in an institution either paying assessments in cash before the 

prepayment period has concluded or ultimately receiving a rebate of unused amounts. An 

institution’s quarterly certified statement invoice would include (1) the regular quarterly 

risk-based assessment due for the corresponding quarter based on the assessment base 

and assessment rate applicable to that quarter, (2) the amount of the prepayment that 

would be applied toward the risk-based assessment for that quarter, and (3) the amount (if 

 

4

 An institution’s risk-based assessment rate may change during a quarter when a new CAMELS rating is 

transmitted, or a new long-term debt-issuer rating is assigned. 12 CFR 327.4(f). For purposes of 

calculating an institution’s prepaid assessment, the FDIC would use the institution’s CAMELS ratings and, 

where applicable, long-term debt-issuer ratings, and the resulting assessment rate in effect on September 

30, 2009. 

5

 74 FR 51063 (Oct. 2, 2009). 

6

 Thus, for purposes of calculating the prepaid assessment, the FDIC would take into account mergers and 

consolidations that are recorded in the FDIC’s computer systems as of December 24, 2009. If a merger is 

recorded by this date, the assessment for the acquired institution would be paid by the acquirer at the 

acquirer’s rate. 

 

7

 An institution’s failure to file its third quarter of 2009 report of condition would not exempt it from the 

requirement to prepay under this rulemaking. 

 

8 The amount and calculation of each insured depository institution’s prepaid assessment would be 

included on its quarterly certified statement invoice for the third quarter of 2009, which will be available on 

FDICconnect no later than 15 days prior to the December 30, 2009, payment date. 
5

any) of any remaining prepaid amount. An insured depository institution could continue 

to request review or revision (as appropriate) of its regular risk-based assessment each 

quarter under sections 327.4(c) and 327.3(f) of the FDIC regulations. 

Requiring prepaid assessments would not preclude the FDIC from changing 

assessment rates or from further revising the risk-based assessment system during 2009, 

2010, 2011, 2012, or thereafter, pursuant to notice-and-comment rulemaking under 12 

U.S.C. § 1817(b)(1). Prepaid assessments made by insured depository institutions would 

continue to be applied against quarterly assessments as they may be so revised until the 

prepaid assessment is exhausted or the prepayment is returned, whichever comes first. 

Implementing Prepaid Assessments

 The FDIC would begin to offset prepaid assessments on March 30, 2010, 

representing payment of the regular quarterly risk-based deposit insurance assessment for 

the fourth quarter of 2009. Any prepaid assessment not exhausted after collection of the 

amount due on June 30, 2013, would be returned to the institution (rather than December 

30, 2014, as provided in the proposed rule). If the FDIC determines its liquidity needs 

allow, it could return any remaining prepaid assessment to the institution sooner. 

Accounting and Risk-Weight for Prepaid Assessments

1. Accounting for Prepaid Assessments 

Under the final rule, each institution should record the entire amount of its prepaid 

assessment as a prepaid expense (asset) as of December 30, 2009. Notwithstanding the 

prepaid assessment, each institution should record the estimated expense for its regular 

risk-based assessment each calendar quarter. However, the offsetting entry to the 

expense for a particular quarter would depend on the method of payment for that 

quarter’s expense. As of September 30, 2009, each institution should have accrued an 

expense (a charge to earnings) for its estimated regular quarterly risk-based assessment 

for the third quarter of 2009, which is a quarter for which assessments would not have 

been prepaid, and a corresponding accrued expense payable (a liability). On December 

30, 2009, each institution would pay both its assessment for the third quarter of 2009, 

thereby eliminating the related accrued expense payable, and the entire amount of its 

prepaid assessments, which it should record as a prepaid expense (asset). 

As of December 31, 2009, each institution should record (1) an expense (a charge 

to earnings) for its estimated regular quarterly risk-based assessment for the fourth 

quarter of 2009, and (2) an offsetting credit to the prepaid assessment asset because the 

fourth quarter assessment of 2009 would have been prepaid.9

 

 

9

 Some institutions record the estimated expense and an accrued expense payable for their regular riskbased assessments monthly during each calendar quarter rather than quarterly as of quarter-end. On 

December 30, 2009, when such an institution would pay under the final rule both its assessment for the 

third quarter of 2009 and the entire amount of its prepaid assessments, it should eliminate the accrued 

expense payable recorded for the third quarter 2009 assessment as well as the accrued expense payable 

recorded for the first two months of its estimated fourth quarter 2009 assessment and it should record the 
6

Each quarter thereafter, an institution should record an expense (a charge to 

earnings) for its regular quarterly risk-based assessment for that quarter and an offsetting 

credit to the prepaid assessment asset until this asset is exhausted. Once the asset is 

exhausted, the institution should record an expense and an accrued expense payable each 

quarter for its regular assessment payment, which would be paid, in cash, in arrears at the 

end of the following quarter. 

2. Risk Weighting of Prepaid Assessments 

The federal banking agencies’ risk-based capital rules permit an institution to 

apply a zero percent risk weight to claims on U.S. Government agencies.10 Staff believes 

the prepaid assessment imposed under this rule qualifies for a zero percent risk weight. 

 For the same reasons, staff believes that Temporary Liquidity Guarantee Program 

(TLGP) nondeposit debt obligations should receive a zero percent risk weight consistent 

with the risk weight proposed for prepaid assessments. When the FDIC determined that a 

depository institution could apply a 20 percent risk weight to debt covered by the TLGP, 

the determination referenced the 20 percent risk weight that has traditionally been applied 

to assets covered by the FDIC’s deposit insurance. Because insured deposits are fully 

backed by the full faith and credit of the United States government and no insured 

depositor has ever or will ever take a loss, staff will review reducing the risk weight on 

insured deposits to zero percent consistent with the treatment of other governmentbacked obligations. 

Restrictions on Use of Prepaid Assessments

Under the final rule, prepaid assessments would only be used to offset regular 

quarterly risk-based deposit insurance assessments. Prepaid assessments would not be 

used, for example, for the following: 

• To offset FICO assessments (which are governed by section 21(f) of the 

Federal Home Loan Bank Act, 12 U.S.C. 1441(f)); 

• To offset any future special assessments under FDI Act section 7(b)(5); 

• To offset any future systemic risk assessments under FDI Act section 

13(c)(4)(G)(ii); 

• To offset Temporary Liquidity Guarantee Program assessments under 12 

C.F.R. 370; 

• To pay assessments for quarters prior to the fourth quarter of 2009; 

 remaining amount of its prepaid assessments (i.e., the entire amount of the prepaid assessments less then 

accrued expense payable for the first two months of the fourth quarter 2009 assessment) as a prepaid 

expense (asset). As of December 31, 2009, this institution should record (1) an expense (a charge to 

earnings) for the third month of its estimated fourth quarter 2009 assessment and (2) an offsetting credit to 

the prepaid assessment asset. 

10 12 CFR Part 3, Appendix A (OCC); 12 CFR Parts 208 and 225, Appendix A (Federal Reserve Board); 12 

CFR Part 325, Appendix A (FDIC); and 12 CFR Part 567, Appendix C (OTS). 
7

• To pay civil money penalties; or 

• To offset interest owed to the FDIC for underpayment of assessments for 

assessment periods prior to the fourth quarter of 2009. 

Staff would apply an institution’s remaining one-time assessment credits under 

Part 327 subpart B before applying its prepaid assessment to its regular quarterly riskbased deposit insurance assessments.11

Exemptions for Certain Insured Depository Institutions

The final rule would make a few modifications to the exemption process proposed 

in the NPR. These modifications are intended to benefit institutions. They would impose 

stricter deadlines on FDIC staff (in order to provide institutions with earlier notice and 

greater opportunity to plan), would allow staff to postpone determination of exemption 

applications if necessary (on condition of postponing the due date for the prepaid 

assessment), and would give exempted institutions an opportunity to file an application 

requesting that the FDIC withdraw their exemption. 

Because of the tight time frame that would be necessary under the final rule, staff 

recommends that the Board delegate decisions necessary to the exemption process to the 

Director, Division of Supervision and Consumer Protection, with the concurrence of the 

Director, Division of Insurance and Research. Staff would provide the Board with a 

report of exemptions that staff grants on its own initiative, exemption applications 

received, and their disposition by January 30, 2010. 

Under the final rule, the FDIC would exercise its discretion as supervisor and 

insurer to exempt an institution from the prepayment requirement if the FDIC determines 

that the prepayment would adversely affect the safety and soundness of the institution. 

FDIC staff would consult with the institution’s primary federal regulator in making this 

determination, but the FDIC would retain the ultimate authority to exercise such 

discretion. FDIC staff would notify any institution determined to be exempt from the 

prepaid assessment as soon as possible, but in no event later than November 23, 2009. A 

separate set of deadlines applies to institutions that file applications for exemption and is 

described in the following paragraphs. Staff does not believe that the exemptions that 

would be granted under the final rule would prevent the FDIC from meeting its current 

liquidity needs. 

In addition, an insured depository institution could apply to the FDIC for an 

exemption from the prepayment requirement if the prepayment would significantly 

impair the institution’s liquidity, or would otherwise create extraordinary hardship.12 The 

 

11 One-time assessment credits would not reduce an institution’s prepaid assessment. 

12 The NPR stated that “an insured depository institution could apply to the FDIC for an exemption from all 

or part of the prepayment requirement if the prepayment would significantly impair the institution’s 

liquidity, or would otherwise create significant hardship. The FDIC would consider exemption requests on 

a case-by-case basis and expects that only a few would be necessary.” 74 FR 51,063, 51,065 (Oct. 2, 

2009). The final rule uses the phrase “extraordinary hardship” rather than “significant hardship” to clarify 
8

FDIC would consider exemption requests on a case-by-case basis and staff expects that 

only a few institutions would find an exemption necessary. 

Written applications for exemption from the prepayment obligation should be 

submitted to the Director of the Division of Supervision and Consumer Protection on or 

before December 1, 2009, by electronic mail or fax.13 In order for an application to be 

accepted and considered by staff, the application would have to contain a full explanation 

of the need for the exemption with supporting documentation, to include current financial 

statements, cash flow projections, and any other relevant information that the FDIC 

deems appropriate. 

Any application for exemption would be deemed to be denied unless staff notifies 

the applying institution by December 15, 2009, that either: (1) the institution is exempt 

from the prepaid assessment or (2) the FDIC has postponed determination of whether the 

institution is exempt until no later than January 14, 2010. Staff expects that it would 

postpone few, if any, determinations. However, if the FDIC does postpone a 

determination, the institution would not have to pay its prepaid assessment on December 

30, 2009. If the FDIC ultimately denied the institution’s request for an exemption, staff 

would notify the institution of the denial and of the date by which the institution would 

have to pay the prepaid assessment. That date would be no less than 15 days after the 

date of the notice of denial. 

Under the final rule, an institution that the FDIC has exempted from prepayment 

on the grounds that prepayment would adversely affect the safety and soundness of the 

institution could request that the FDIC allow the institution to nevertheless pay the 

prepaid amount. If the FDIC, after consulting with the institution’s primary federal 

regulator, determines that exemption is not necessary, it would notify the institution that 

the exemption has been withdrawn. Again, the FDIC would retain the ultimate authority 

to make this determination. 

Written applications requesting that the FDIC withdraw an exemption should be 

submitted to the Director of the Division of Supervision and Consumer Protection on or 

before December 1, 2009, by electronic mail or fax.14 In order for an application 

requesting that the FDIC withdraw an exemption be accepted and considered by the 

FDIC, the application would have to contain a full explanation of the reasons the 

exemption is not needed with supporting documentation, to include current financial 

 that the FDIC expects that few exemptions will be necessary other than for those institutions exempted 

through the FDIC’s own initiative. 

The final rule also eliminates the option of a partial prepayment exemption since staff determined that it 

would be infeasible to determine partial prepayments. 

13 Applications for exemption should be submitted by either electronic mail (prepaidassessment@fdic.gov) 

or fax (202-898-6676). 

14 Applications requesting that the FDIC withdraw an exemption should be submitted by either electronic 

mail (prepaidassessment@fdic.gov) or fax (202-898-6676). 
9

statements, cash flow projections, and other relevant information that the FDIC deems 

appropriate. Any application requesting that the FDIC withdraw an exemption would be 

deemed denied unless the FDIC notifies the applying institution by December 15, 2009 

that the exemption has been withdrawn. 

Other than through an application requesting that the FDIC withdraw an 

exemption, determinations of eligibility for exemption made by the FDIC would be final 

and would not be subject to further agency review. Determinations by the FDIC on 

applications requesting that an exemption be withdrawn would also be final and would 

not be subject to further agency review. 

Any exempted institution and any institution where the FDIC has postponed 

determination of the request for exemption would still pay its third quarter 2009 riskbased assessment on December 30, 2009. 

Transfer of Prepaid Assessments

An insured depository institution would be permitted to transfer any portion of its 

prepaid assessment to another insured depository institution, provided that the institutions 

meet certain requirements as set forth in the final rule. This aspect of the draft final rule 

is similar to the procedural requirements associated with the transfer of the one-time 

assessment credit provided by the Federal Deposit Insurance Reform Act of 2005, Pub. L. 

No. 109-171, 120 Stat. 9, and implemented by regulation. See 12 CFR 327.34(c). 

Prepaid assessments would not be transferred to any entity that is not an insured 

depository institution. Prepayment assessment would not be pledged to either an insured 

depository institution or an entity that is not an insured depository institution. 

In the event that an insured depository institution merges with, or is consolidated 

into, another insured depository institution, the surviving or resulting institution would be 

entitled to any unused portion of the disappearing institution’s prepaid assessment not 

otherwise transferred.15 

 

15 As noted above, the parties to a transfer agreement would have to provide notice to the FDIC. 
10

Disposition in the Event of Failure or Termination of Insured Status

In the event that an insured depository institution’s insured status is terminated, 

any amount of the prepaid assessment remaining (other than any amounts needed to 

satisfy its assessment obligations not yet offset against the prepaid amount) would be 

refunded to the institution.16 In the event of failure of an insured depository institution, 

any amount of the prepaid assessment remaining (other than any amounts needed to 

satisfy its assessment obligations not yet offset against the prepaid amount) would be 

refunded to the institution’s receiver. 

Staff contacts: 

 

Christine Bradley, DIR, Senior Policy Analyst, (202) 898-8951 

Scott Patterson, DSC, Senior Review Examiner, (202) 898-6953 

Christopher Bellotto, Legal, Counsel, (202) 898-3801 

 

16 See 12 CFR 327.6 (2009).