Federal Deposit Insurance Corporation

55017th Street NW, Washington, D,C. 20429-9990 Division of Insurance and Research

August 7, 2019

MEMORANDUM TO: The Board of Directors

FROM: Diane Ellis

Director, Division of Insurance and Research

SUBJECT: Notice of Proposed Rulemaking Re: the Use and Remittance of

Certain Assessment Credits

RECOMMENDATION

Staff recommends that the FDIC Board of Directors (the Board) adopt and authorize

publication of the attached notice of proposed rulemaking (NPR or proposal) with a 30-day

comment period. The NPR would amend the deposit insurance assessment regulations that

govern the use of small bank credits and one-time assessment credits (OTACs) awarded to

insured depository institutions (IDIs). Together, the credits total to approximately $765 million.

Most of the credits are small bank credits, which represent $764.4 million of the total. OTACs

account for approximately $300,000.

In March 2016, the FDIC Board of Directors approved a final ruler that, among other

things, implemented the Dodd-Frank Wall Street Reform and Consumer Protection Act (DoddFrank Act) requirement that the FDIC offset the effect of increasing the minimum reserve ratio

of the. Deposit Insurance Fund (DIF) from 1.15 percent to 1.35 percent on IDIs with less than

$10 billion in assets (small IDIs).Z Pursuant to the rule, upon reaching the statutory minimum

reserve ratio of 1.35 percent, small IDIs will be awarded small bank credits for the portion of

their assessments that contributed to the growth in the reserve ratio from 1.15 percent to 1.35

percent.3 The FDIC's regulations provide that these small bank credits will be applied to

quarterly deposit insurance assessments only when the reserve ratio is at least 1.38 percent.4

~ 81 FR 16059 (Mar. 25, 2016).

2 Pub. L. No. 111-203, 334(e), 124 Stat. 1376, 1539 (12 U.S.C. 1817 (note)).

3 See 81 FR at 16066.
Through this NPR, the FDIC would propose that, once the DIF reserve ratio reaches 1.38

percent, and the FDIC begins to apply small bank credits to quarterly assessment invoices, such

credits would continue to be applied as long as the DIF reserve ratio is at least 1.35 percent

(instead of 1.38 percent, as currently provided). In addition, after small bank credits have been

applied for eight quarterly assessment periods, the FDIC would remit the full amount of any

remaining small bank credits in lump-sum payments to each IDI holding such credits in the next

quarterly assessment period in which the reserve ratio reaches or exceeds 1.35 percent. Finally,

at the same time that any remaining small bank credits are remitted, the FDIC also would remit

the nominal value of any remaining OTACs in lump-sum payments to each IDI holding such

credits.

The primary objective of this proposal is to make the application of small bank credits to

quarterly assessments more predictable for IDIs with these credits, and to simplify the FDIC's

administration of these credits, without materially impairing the ability of the FDIC to maintain

the required minimum reserve ratio of 1.35 percent. Staff recommends proposing an effective

date of July 1, 2019.

BACKGROUND

Small Bank Assessment Credits

To offset the effect of increasing the minimum reserve ratio on small IDIs, on March 25,

2016, the FDIC published a final rule (the 2016 final rule) that, among other things, provided

assessment credits for the portion of regular assessments paid by small IDIs that contributed to

the growth in the reserve ratio between 1.15 percent and 1.35 percent (small bank credits).s, 6

Under the current assessment regulations, upon reaching the statutory minimum reserve ratio of

1.35 percent, the FDIC awarded small bank credits to eligible IDIs, and the FDIC will apply the

credits to quarterly deposit insurance assessments when the reserve ratio is at or above 1.38

percent. ~

As of September 30, 2018, the DIF reserve ratio reached 1.36 percent, exceeding the

statutorily required minimum reserve ratio of 1.35 percent. All small IDIs, including small IDI

affiliates of large IDIs, at any time during the "credit calculation period"g were awarded a share

5 Pub. L. No. 111-203, 334(e), 124 Stat. 1376, 1539 (12 U.S.C. 1817 (note)).

6 See 83 FR 14565 (April 5, 2018) (making technical amendments to FDIC's assessment regulations, including an

amendment clarifying that small bank credits will be applied in assessment periods in which the reserve ratio is at

least 1.38 percent).

~ 12 CFR 327.11(c)(11); see also 83 FR 14565 (April 5, 2018) (making technical amendments to FDIC's assessment

.regulations, including amendment clarifying that small bank credits will be applied in assessment periods in which

the reserve ratio is at least 1.38 percent).

8 The "credit calculation period" covers the period beginning July 1, 2016 (the quarter after the reserve ratio first

reached or exceeded 1.15 percent) through September 30, 2018 (the quarter in which the reserve ratio first reached

or exceeded 135 percent). See 12 CFR 327.11(c)(2).

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of credits.9 The aggregate amount of small bank credits awarded is $764.4 million.10 As of

March 31, 2019, the reserve ratio had not reached or exceeded 1.38 percent, so small bank

credits have not yet been applied to IDIs' quarterly deposit insurance assessments.

One-Time Assessment Credits

The Federal Deposit Insurance Reform Act of 2005 (FDI Reform Act) required the FDIC

to provide one-time assessment credits (OTACs) to IDIs that existed on December 31, 1996, and

paid a deposit insurance assessment prior to that date, or that were successors to such an

institution.11, 12 In October 2006, the FDIC adopted a final rule implementing the OTAC

requirement.13 The FDIC began to apply OTACs to offset the collection of deposit insurance

assessments beginning with the first assessment period of 2007. As of March 31, 2019, only two

IDIs have outstanding OTACs totaling approximately $300,000. The FDIC estimates that

OTACs will continue to be applied for more than 13 years.

DISCUSSION OF THE PROPOSAL

Application of Small Bank Credits as Long as Reserve Ratio is at or above 1.35

Percent

FDIC staff recommends that the Board adopt and authorize publication of the attached

proposal to amend the deposit insurance assessment regulations so that small bank credits would

continue to be applied if the reserve ratio falls below 1.38 percent, as long as it does not fall

below the statutory minimum reserve ratio of 1.35 percent. Staff believes that the proposed

changes would reduce the likelihood that the application of small bank credits would be

suspended due to small variations in the reserve ratio. In particular, the proposed changes would

reduce the likelihood that small bank credits would be applied in the quarter when the reserve

ratio first reaches 1.38 percent and then immediately suspended in the next quarter if the reserve

ratio falls below 1.38 percent. The proposal is expected to result in more stable and predictable

application of small bank credits to quarterly assessments, permitting IDIs to better budget for

9If a small IDI acquired another small IDI through merger or consolidation during the credit calculation period, the

acquiring small IDI's regular assessment bases for purposes of determining its credit base included the acquired

IDI's regular assessment bases for those quarters during the credit calculation period that were before the merger or

consolidation.

to In January 2019, aggregate small bank credits of $764.7 million were awarded to 5,381 institutions. Since then,

due to mergers, IDI failures, and voluntary liquidations, 5,212 remaining institutions have small bank credits and the

aggregate amount of outstanding small bank credits is $764.4 million.

11 The FDI Reform Act was included as Title II, Subtitle B, of the Deficit Reduction Act of 2005, Pub. L. No. 109-

171, 2107(a), 120 Stat. 18, 1539 (12 U.S.C. 1817(e)(3)).

12 By statute, the aggregate amount of credits equaled the amount that would have been collected if the FDIC had

imposed a 10.5 basis point assessment on the combined assessment base of the Bank Insurance Fund and the

Savings Association Insurance Fund as of December 31, 2001. Individual shares were required to be based on the

ratio of the institution's assessment base on December 31, 1996, to the aggregate assessment base of all eligible IDIs

on that date.

13 12 CFR 327 Subpart B (32730 et seq.).
their assessment cash flow, and could benefit certain IDIs that, under the proposal, might realize

the full value of their credits at an earlier date.

The FDIC is also proposing a related change to the assessment regulations to allow for

the recalculation of small bank credits applied each quarter as a result of subsequent amendments

to quarterly regulatory reports.la

Remitting Small Bank Credits and One-Time Assessment Credits after Eight

Quarterly Assessment Periods

The FDIC also proposes to remit the remaining balance of any small bank credits in

lump-sum payments to each IDI holding credits after such credits have been applied for eight

quarterly assessment periods. At the same time that any remaining small bank credits are

remitted, the FDIC proposes to also remit any remaining OTACs to IDIs holding such credits.

Staff believes that adopting a maximum duration for the use of small bank credits and

OTACs would accelerate the time at which IDIs would receive the benefit of such credits, and

would permit more efficient administration of the DIF on agoing-forward basis. These benefits

would not have an impact on the long-term adequacy of the DIF because the total amount of

credits awarded would not change.

Proposed Effective Date and Application Date

Under the Administrative Procedure Act, "[t]he required publication or service of a

substantive rule shall be made not less than 30 days before its effective date, except as otherwise

provided by the agency for good cause found and published with the rule."15 Under the proposal,

the amendments to the FDIC's deposit insurance assessment regulations would be effective

immediately upon publication in the Federal Register. The FDIC finds good cause that the

publication of a final rule implementing this proposal can be less than 30 days before its effective

date because IDIs would benefit from more stable and predictable application of small bank

credits before the final rule would otherwise become effective.

Because the FDIC invoices for quarterly deposit insurance assessments in arrears,

invoices for the third assessment period of 2019 would be made available to IDIs in December

2019, with a payment date of December 30, 2019. To address any possibility that the reserve

ratio may reach or exceed 1.38 percent as of June 30, 2019 (the end of the second quarterly

assessment period), then decrease below 1.38 percent as of September 30, 2019 (the end of the

third quarterly assessment period), the FDIC is proposing to apply the rule beginning with the

third quarterly assessment period of 2019. This application date would provide certainty to IDIs

with small bank credits that the proposed rule would apply to the third assessment period of

2019, and that the FDIC could apply small bank credits even if the DIF reserve ratio is less than

1.38 percent (but at least 1.35 percent) for that assessment period.

~'~ Quarterly regulatory reports include the Consolidated Reports of Condition and Income and the quarterly Reports

of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks.

is 5 U.S.C. 553(d).

~!
Expected Effects

The proposal would not change the total amount of credits awarded, but it could affect

when the FDIC would apply credits. Based on quarterly regulatory reports data as of March 31,

2019, the aggregate amount of outstanding small bank credits, $764.4 million, represented less

than one basis point of the reserve ratio. Based on the same data as of March 31, 2019, staff

estimates that approximately 41 percent of the aggregate amount of small bank credits will be

used in the first quarter that credits are applied and would not be affected by the proposal.

Application of small bank credits in future quarters would represent a substantially smaller

portion of the reserve ratio. The largest quarterly effect subsequent to the first application of

credits would be approximately equal to one-third of a basis point of the reserve ratio.

Therefore, the application of small bank credits in any one quarter would not be sufficient on its

own to cause the reserve ratio to fall below 1.35 percent.

Using the same data, staff estimates that 5,025 IDIs (or 96.4 percent) will exhaust their

individual shares of small bank credits within four assessment periods of use, and another 178

IDIs (or 99.8 percent) will exhaust their individual shares within eight assessment periods of use.

After applying small bank credits for eight assessment periods, the FDIC estimates that nine IDIs

would hold $1.75 million in credits. Under the proposal, the FDIC would remit any remaining

individual small bank credit balances in a lump-sum payment.

Similarly, the proposal also would require the FDIC to remit the outstanding balances of

OTACs. As of March 3.1, 2019, two IDIs held OTACs totaling approximately $300,000, and

staff estimates that approximately $248,000 in OTACs will remain after eight more quarters of

use. Under the proposal, at the same time that the FDIC remits the remaining balances of small

bank credits (after eight quarters of use), the FDIC also would remit the remaining individual

OTAC balances to each of these two IDIs in a lump-sum payment.

Conclusion

FDIC staff recommends that the Board approve the attached notice of proposed

rulemaking for publication in the Federal Register with a 30-day comment period. The proposal

seeks comment on all aspects of the proposed rulemaking.

Staff contacts:

DIR

Ashley Mihalik, Chief, Banking and Regulatory Policy Section, (202) 898-3793

LaVaughn Henry, Policy Analyst, Banking and Regulatory Policy Section, (202) 898-6798

DOF

Jithendar Kamuni, Manager, Assessment Operations Section, (703) 562-2568

LEGAL

Samuel B. Lutz, Counsel, (202) 898-7337

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