Federal Deposit Insurance Corporation 

801 17th Street NW, Washington, DC 20429-9990 Division of Insurance and Research 

February 26, 2009 

MEMORANDUM TO: The Board of Directors 

FROM: Arthur J. Murton 

 Director 

Division of Insurance and Research 

SUBJECT: Final Rule on Risk-Based Assessments; 

Amended Restoration Plan; and 

Interim Rule on Emergency Special Assessment 

SUMMARY OF RECOMMENDATIONS

1. Staff recommends that the FDIC authorize publication of the attached Final Rule (“Final 

Rule”) that would make changes to the risk-based assessment system and set assessment 

rates as of April 1, 2009. 

2. Staff recommends that the FDIC establish and implement the attached Amended Restoration 

Plan (“Amended Restoration Plan”) to extend the restoration period from five years to seven 

years due to extraordinary circumstances. 

3. Staff recommends that the FDIC authorize publication of the attached Emergency Special 

Assessment Interim Rule and Request for Comment (“Interim Rule”) that would a) impose 

an emergency special assessment of 20 basis points on all insured depository institutions on 

June 30, 2009 and, b) after June 30, 2009, permit the FDIC Board of Directors (“Board”) to 

impose an emergency special assessment of up to 10 basis points at the end of any calendar 

quarter whenever the FDIC estimates that the Deposit Insurance Fund (DIF or the fund) 

reserve ratio will fall to a level that that the Board believes would adversely affect public 

confidence or to a level close to zero or negative. 

 

BACKGROUND

Recent and anticipated failures have significantly increased losses to the DIF, resulting in 

a decline in the reserve ratio. The reserve ratio has declined from 1.19 percent as of March 31, 

2008, to 1.01 percent as of June 30, 0.76 percent as of September 30, and 0.40 percent 

(preliminary) as of December 31. This is the lowest reserve ratio for a combined bank and thrift 

insurance fund since 1993. Staff expects a higher rate of insured institution failures in the next 

Concur: ___________________ 

 Roberta K. McInerney 

 Acting General Counsel 
few years compared to recent years and a further decline in the reserve ratio before it begins to 

rise. 

Because the fund reserve ratio fell below 1.15 percent as of June 30, 2008, and was 

expected to remain below 1.15 percent, the Federal Deposit Insurance Reform Act of 2005 

required the FDIC to establish and implement a Restoration Plan to restore the reserve ratio to no 

less than 1.15 percent within five years, absent extraordinary circumstances. 

On October 7, 2008, the FDIC established a Restoration Plan for the DIF.1

 The 

Restoration Plan called for the FDIC to set assessment rates such that the reserve ratio would 

return to 1.15 percent within five years. In the FDIC’s view, this required an increase in 

assessment rates. Since rates were already three basis points above the base rate schedule, a new 

rulemaking was required. Consequently, on October 7, 2008, the Board adopted a notice of 

proposed rulemaking (NPR) with request for comments on revisions to the assessment 

regulations. The NPR proposed that, effective January 1, 2009, assessment rates would increase 

uniformly by seven basis points for the first quarter 2009 assessment period. Effective April 1, 

2009, the NPR proposed to alter the way in which the FDIC’s risk-based assessment system 

differentiates for risk and set new deposit insurance assessment rates. Also effective on April 1, 

2009, the NPR proposed to make technical and other changes to the rules governing the riskbased assessment system. The proposed rule was published concurrently with the Restoration 

Plan on October 16, 2008, with a comment period scheduled to end on November 17, 2008. 

On November 7, 2008, the FDIC Board approved an extension of the comment period 

until December 17, 2008, on the parts of the proposed rulemaking that would become effective 

on April 1, 2009. The comment period for the proposed seven basis point rate increase for the 

first quarter of 2009, with its separate proposed effective date of January 1, 2009, was not 

extended and expired on November 17, 2008. The final rule on the rate increase for the first 

quarter of 2009 was approved as proposed by the FDIC Board on December 16, 2008. 

THE FINAL RULE

The FDIC received almost 5,000 comments on the parts of the NPR that would become 

effective on April 1, 2009. FDIC staff has reviewed and considered these comments. Staff’s 

recommended Final Rule on risk-based assessments is attached. The recommended approach 

would make the same basic changes to the assessment system described in the NPR. These 

changes include: 

1) expanding the range between minimum and maximum initial assessment rates for 

institutions in Risk Category I; 

2) adding a new financial ratio – the adjusted brokered deposit ratio – to the financial 

ratio method for institutions in Risk Category I; 

 

1

 73 FR 61598. 

2
3) adding the financial ratios method assessment rate to the assessment rate formula for 

large institutions with a long-term debt issuer rating (the large bank method); 

4) increasing the maximum possible Risk Category I large bank adjustment; 

5) providing for an unsecured debt adjustment for institutions in all risk categories; 

6) providing for a secured liability adjustment for institutions in all risk categories; 

7) providing for a brokered deposit adjustment for institutions in Risk Category II, III, 

and IV; and, 

8) establishing new assessment rates for each risk category. 

The Final Rule also reflects a number of changes from the NPR that were made in response to 

comments by the public. 

Assessment Rate Schedule 

Assessment Rates Beginning April 1, 2009

1. Assessment Rate Schedule, Ability to Adjust Rates, and Effective Date

To implement the changes to risk-based assessments described below and to increase 

revenue while the Restoration Plan is in effect, the Final Rule would establish new initial base 

assessment rates for each risk category as of April 1, 2009. Estimated losses from projected 

institution failures have risen considerably since the NPR was published last fall. Furthermore, 

certain changes from the NPR made in response to public comments would have the effect of 

reducing total assessment revenue generated under the proposed rates. Consequently, initial base 

assessment rates as of April 1, 2009, which are set forth in Table 1 below, are slightly higher 

than proposed in the NPR.2 

As under the NPR, the rates reflect a proposed increase in the spread between minimum 

and maximum initial base assessment rates in Risk Category I from two basis points to an initial 

range of four basis points. 

 

2

 In the NPR, the FDIC noted that: 

[A]t the time of the issuance of the final rule, the FDIC may need to set a higher base rate schedule based 

on information available at that time, including any intervening institution failures and updated failure and 

loss projections. A higher base rate schedule may also be necessary because of changes to the proposal in 

the final rule, if these changes have the overall effect of changing revenue for a given rate schedule. In 

order to fulfill the statutory requirement to return the fund reserve ratio to 1.15 percent, the base rate 

schedule in the final rule could be substantially higher than the proposed base assessment rate schedule (for 

example, if projected or actual losses at the time of the final rule greatly exceed the FDIC’s current 

estimates). 

73 Fed. Reg. 61,560, 61,572-61,573 (Oct. 16, 2008). 

3
Table 1 

Initial Base Assessment Rates 

Risk Category 

I 

Minimum Maximum II III IV 

Annual Rates (in basis points) 12 16 22 32 45 

As discussed in greater detail below, under the Final Rule, several adjustments could be 

made to an institution’s base assessment rate in descending order, as presented in the following 

table. After applying all possible adjustments, minimum and maximum total base assessment 

rates for each risk category are as set forth below. 

Table 2 

Total Base Assessment Rates 

Risk 

Category I 

Risk 

Category 

II 

Risk 

Category III 

Risk 

Category 

IV 

Initial base assessment rate 12 – 16 22 32 45 

Unsecured debt adjustment -5 – 0 -5 – 0 -5 – 0 -5 – 0 

Secured liability adjustment 0 – 8 0 – 11 0 – 16 0 – 22.5 

Brokered deposit adjustment 0 – 10 0 – 10 0 – 10 

Total base assessment rate 7 – 24.0 17 – 43.0 27 – 58.0 40 – 77.5 

Based on the information currently available, staff proposes adoption of a Final Rule that 

would set actual rates at the proposed total base assessment rate schedule above. These proposed 

rates and other revisions to the assessment rules would take effect for the quarter beginning April 

1, 2009, and would be reflected in the fund balance as of June 30, 2009 and in the invoices for 

the assessment due September 30, 2009. 

Staff believes that the assessment rate schedule set forth in this recommended Final Rule, 

combined with other actions being taken as explained below, should provide sufficient revenue 

to cover losses rising from a large volume of institution failures and raise the insurance fund’s 

reserve ratio over time. Under the rates shown in table 1, the year-end 2013 reserve ratio is 

projected to be 0.58 percent. (In contrast, staff projects that the minimum initial assessment rate 

would have to be 20 basis points beginning in the second quarter of 2009 in order to increase the 

reserve ratio to 1.15 percent by the end of 2013.) The Final Rule would continue to allow the 

FDIC Board to adopt actual rates that are higher or lower than total base assessment rates 

without the necessity of further notice and comment rulemaking, provided that: (1) the Board 

cannot increase or decrease total rates from one quarter to the next by more than three basis 

points without further notice-and-comment rulemaking; and (2) cumulative increases and 

decreases cannot be more than three basis points higher or lower than the total base rates without 

further notice-and-comment rulemaking. 

The FDIC received comments from several industry trade groups and many banks 

regarding the proposed increases in assessment rates. Many of the letters were critical of the 

4
proposed assessment rate increases. Commenters argued that lower rates would be more 

appropriate given the current economic conditions. Further, many commenters urged the FDIC 

to take advantage of the flexibility that Congress provided to extend the restoration period 

beyond five years under “extraordinary circumstances.” Several commenters also urged the 

FDIC to withdraw the proposed rule and delay increasing assessment rates and overhauling the 

assessment system until the end of 2009. 

Staff agrees that significant increases in deposit insurance premium rates in times of 

economic and financial stress are not desirable. However, staff believes that it is important that 

the fund not decline to a level that could undermine public confidence in federal deposit 

insurance. In staff’s view, the rates that it recommends for the Final Rule, combined with the 20 

basis point special assessment that staff recommends imposing on June 30, 2009 (and possible 

additional special assessments of up to 10 basis points thereafter), pursuant to the recommended 

Interim Rule discussed below, balance these goals. 

2. Assessment Revenue Needs under the Restoration Plan

The FDIC projected last fall that adoption of a rate schedule with a minimum initial rate 

of ten basis points would increase the reserve ratio to above 1.25 percent by the end of 2013. 

However, a deepening recession and continued severe problems in the housing and construction 

sectors, financial markets and commercial real estate, contribute to staff’s expectation of 

significantly higher losses for the insurance fund compared to the projections of last October 

included in the proposed rule. The insurance fund balance and reserve ratio are likely to decline 

further in 2009 before beginning a gradual recovery in subsequent years from the effects of new 

revenue and a declining rate of bank failures. Even under the rates recommended in the Final 

Rule, staff projects that the reserve ratio may decline to close to zero – or may turn negative – by 

or before the end of 2009. Accordingly, as discussed below, staff recommends adoption of an 

Interim Rule that would impose a 20 basis point special assessment on June 30, 2009 (and 

possible additional special assessments of up to 10 basis points thereafter) to ensure that the fund 

reserve ratio does not decline to a level that could undermine public confidence in federal deposit 

insurance. 

Staff’s best estimate is that institution failures could cost the insurance fund 

approximately $65 billion from 2009 to 2013, after incurring approximately $18 billion in 

estimated costs for failures in 2008. Staff bases its loss projections on: analysis of specific 

troubled institutions and risk factors that may adversely affect other institutions; analysis of 

recent and expected loss rates given failure; analyses of the effects of further housing price 

declines and a significant economic downturn in specific geographic areas on loan losses and 

bank capital; and recent and historic supervisory rating downgrade and failure rates. Staff also 

assumes that insured deposits would increase by seven percent in 2009 and by five percent 

thereafter. The annual average growth rate in insured deposits was 6.7 percent over the past five 

years and 5.3 percent over the past ten years. 

 Staff recognizes that there is considerable uncertainty about its projections for losses and 

insured deposit growth, and that changes in assumptions about these and other factors could lead 

5
to different assessment revenue needs and rates. Under the terms of the Restoration Plan (and 

the amended Restoration Plan that staff is recommending (discussed below)), the FDIC must 

update its projections for the insurance fund balance and reserve ratio at least semiannually while 

the Restoration Plan is in effect and adjust rates as necessary. In the event that losses exceed or 

fall below the FDIC’s best estimate or insured deposit growth is more or less rapid than 

expected, the Board will be able to adjust assessment rates. 

The Supplementary Information Section of the attached recommended Final Rule 

contains an analysis of the statutory factors that the Board must consider when setting 

assessments. In sum, staff is of the opinion that its recommendation is consistent with these 

factors. 

Appendix 2 to the Final Rule contains an analysis of the effect of the risk-based 

assessment rates adopted in the rule on the capital and earnings of insured institutions based on a 

range of projected industry earnings. Given the assumptions in the analysis, for the industry as a 

whole, projected total assessments in 2009 would result in capital that would be 0.4 to 0.5 

percent lower than if the FDIC did not charge assessments. Based on the range of projected 

industry earnings, the proposed assessments would cause 8 to 12 institutions whose equity-toassets ratio would have exceeded four percent in the absence of assessments to fall below that 

percentage and 6 to 9 institutions to fall below two percent. 

For profitable institutions, assessments in 2009 would result in pre-tax income that would 

be between six and eight percent lower than if the FDIC did not charge assessments. For 

unprofitable institutions, pre-tax losses would increase by an average of three to five percent. 

Appendix 2 also provides an analysis of the range of effects on capital and earnings for these 

groups of institutions. 

Assessment System Changes 

Risk Category I: Financial Ratios Method

As under the NPR, the Final Rule would add a new financial ratio, the adjusted brokered 

deposit ratio, into the financial ratio method for institutions in Risk Category I. The adjusted 

brokered deposit ratio would measure the extent to which brokered deposits (in excess of 10 

percent of domestic deposits) are funding rapid asset growth. Generally speaking, the greater an 

institution’s asset growth and the greater its percentage of brokered deposits, the greater will be 

the increase in its initial base assessment rate. The Final Rule would also increase the spread 

between minimum and maximum rates in Risk Category I from two basis points to an initial 

range of four basis points, and update the uniform amount and the pricing multipliers for the 

weighted average CAMELS component ratings and financial ratios. 

The FDIC received numerous comments regarding the adjusted brokered deposit ratio 

proposed in the NPR. Generally, commenters recommended: 1) increasing the asset growth 

threshold that would trigger the adjustment; 2) excluding from the ratio brokered deposits that an 

6
insured depository institution receives through a deposit placement network on a reciprocal basis 

(“reciprocal deposits”); and 3) excluding from the ratio brokered deposits that are swept into an 

insured institution by a non-depository institution. After considering these comments, staff 

recommends that the Final Rule adopt the ratio as proposed in the NPR with two notable 

changes. First, the Final Rule would raise the asset growth threshold from that proposed in the 

NPR. Second, the ratio would exclude certain reciprocal deposits. 

1. Asset Growth Threshold

The NPR specified that the adjusted brokered deposit ratio would affect only those 

established Risk Category I institutions whose total gross assets are more than 20 percent greater 

than they were four years previously, after adjusting for mergers and acquisitions. The FDIC 

received several comments arguing that the minimum asset growth rate required to trigger the 

ratio should be greater than 20 percent. The comments disputed the characterization of 20 

percent cumulative asset growth over four years as “rapid.” FDIC staff recommends adoption of 

a Final Rule that would 1) raise the minimum 4-year asset growth threshold from 20 percent to 

40 percent, and 2) increase from 40 percent to 70 percent the asset growth rate required to make 

an institution’s adjusted brokered deposit ratio equal to its ratio of brokered deposits to domestic 

deposits less the 10 percent threshold. 

2. Reciprocal Deposits

The NPR provided that reciprocal deposits would be included in the adjusted brokered 

deposit ratio. The FDIC received over 3,300 comment letters, including many form letters, 

arguing that certain reciprocal deposits should not be included in the adjusted brokered deposit 

ratio. To support this position, commenters argued that such deposits are a stable source of 

funding. According to the comments, these deposits are local deposits and not out-of-market 

funds. Further, according to the comments, the interest rate on these deposits reflects that of 

local markets since the insured institution that originates the deposit sets the interest rate, rather 

than a third-party broker. FDIC staff recommends adoption of a Final Rule that would exclude 

certain reciprocal deposits from the adjusted brokered deposit ratio. Reciprocal deposits would 

be defined as deposits that an insured depository institution receives through a deposit placement 

network on a reciprocal basis, such that: (a) for any deposit received, the institution (as agent for 

depositors) places the same amount with other insured depository institutions through the 

network; and (b) each member of the network sets the interest rate to be paid on the entire 

amount of funds it places with other network members. FDIC staff feels that this change would 

recognize that reciprocal deposits as defined may be a more stable source of funding for healthy 

banks than other types of brokered deposits and that they may not be as readily used to fund 

rapid asset growth. As discussed below, staff recommends that reciprocal deposits not be 

excluded from the brokered deposit adjustment for institutions in Risk Categories II, III, and IV.3

 

3

 Many of these comment letters also argued that these reciprocal deposits should not be included in the brokered 

deposit adjustment applicable to institutions in Risk Categories II, III and IV. The brokered deposit adjustment for 

these risk categories is discussed below. 

7
3. Brokered Deposits in Sweep Accounts 

The FDIC also received several comments arguing that brokered deposits that consist of 

balances swept into an insured institution by a nondepository institution, such as balances swept 

into an insured institution from a brokerage account at a broker-dealer, should be excluded from 

the adjusted brokered deposit ratio.4 Commenters argued that these sweep accounts are stable, 

relationship-based accounts. Commenters also stated that the aggregate flows in and out of the 

sweep accounts tend to offset one another and are thus predictable. Staff is not persuaded by 

these arguments. It is staff’s view that deposits swept from broker-dealers can and have 

contributed to high rates of insured depository institution asset growth and, thus, fall squarely 

within the type of brokered deposits that the adjusted brokered deposit ratio was meant to 

capture. Staff recommends adoption of a Final Rule that would continue to include such deposits 

in the adjusted brokered deposit ratio. 

Risk Category I: Large Bank Method

The recommended Final Rule would adopt the NPR’s methodology for establishing 

assessment rates for large institutions that are currently subject to the supervisory and debt 

ratings method. In particular, the assessment rate for a large institution with a long term debt 

issuer rating would be determined using a combination of the institution’s weighted average 

CAMELS component ratings, its long term debt issuer ratings (converted to numbers and 

averaged) and the financial ratios method assessment rate, each equally weighted. The new 

method would be known as the large bank method. 

Staff’s proposed methodology is such that, using June 30, 2008 data, the percentages of 

large institutions in Risk Category I (other than new institutions less than five years old) that 

would have been charged the minimum and maximum initial base assessment rates would be the 

same as the percentages of small institutions that would have been charged these rates (25 

percent at the minimum rate and 15 percent at the maximum rate).5 This methodology would be 

used in future periods, but could lead to different percentages of institutions being charged the 

minimum and maximum rates. 

A commenting bank argued that: 

Structuring the rules with a goal to maintain parity between large and small banks 

would be in violation of [12 U.S.C. § 1817(b)(2)(D)]. Arbitrarily establishing 

 

4

 Many of these comment letters also argued that these swept deposits should not be included in the brokered deposit 

adjustment applicable to institutions in Risk Categories II, III and IV. The brokered deposit adjustment for these 

risk categories is discussed below. 

5

 A “new” institution, as defined in 12 CFR 327.8(l), is generally one that is less than 5 years old, but there are 

several exceptions, including, for example, an exception for certain otherwise new institutions in certain holding 

company structures. 12 CFR 327.9(d)(7). The calculation of percentages of small institutions, however, was 

determined strictly by excluding institutions less than 5 years old, rather than by using the definition of a “new” 

institution and its regulatory exceptions, since determination of whether an institution meets an exception to the 

definition of “new” requires a case-by-case investigation. 

8
targets for percentages of institutions that fall into a given assessment rate is 

inconsistent with not only the governing statute but the whole concept of riskbased pricing.... The fact that, under objective criteria, large banks may have a 

greater percentage of institutions that qualify for the lowest rate is not an 

indication that the rule is flawed and needs to change, but may just be a factual 

representation of the strength of large banks.6

FDIC staff disagrees with the commenter. Under the debt ratings method, the percentage 

of large Risk Category I institutions that were charged the minimum assessment rate changed 

little over time despite significant deterioration in the financial condition of these institutions. 

The recalibration of the percentages of large institutions that would have been charged the 

minimum and maximum rates applicable to Risk Category is intended to better reflect the actual 

risk posed by large institutions. 

 

Adjustments for Large Institutions and Insured Branches of Foreign Banks in Risk Category I

The Final Rule would adopt the NPR’s proposal to increase the maximum possible large 

bank adjustment from 0.5 basis points to one basis point. Like the NPR, the Final Rule provides 

that the adjustment would be made to an institution’s initial base assessment rate before any 

other adjustments were made. The adjustment could not: (1) decrease any rate so that the 

resulting rate would be less than the minimum initial base assessment rate; or (2) increase any 

rate above the maximum initial base assessment rate. 

 

Staff recommends amending the maximum size of the adjustment for two primary 

reasons. First, while the current one-half basis point is generally sufficient to preserve 

consistency in the orderings of risk indicated by assessment rates and to ensure fairness, there 

have been circumstances where more than a half a basis point adjustment would have been 

warranted. Second, it is staff’s view that an increase in the maximum size of the adjustment is 

warranted in order to maintain the proportion between the maximum adjustment and the 

difference between the minimum and maximum rates. Under the Final Rule, the spread between 

the minimum and maximum initial base assessment rates would increase from two basis points to 

four basis points. As a result of this increase, a half basis point large bank adjustment would 

represent 12.5 percent of the difference between the minimum and maximum rates, instead of 25 

percent as under the current system. Increasing the maximum adjustment to one basis point 

would maintain the 25 percent ratio and would also minimize the potential number of instances 

where the large bank adjustment is insufficient to fully and accurately reflect the risk that an 

institution poses. 

A few commenters objected to the increase in the large bank adjustment, arguing that the 

adjustment is arbitrary and subjective. FDIC staff disagrees and recommends that the Final Rule 

adopt the provision as proposed in the NPR. The large bank adjustment recognizes the need for 

subjective, expert judgment-based risk assessments for large banks. Because large institutions 

 

6

 12 U.S.C. § 1817(b)(2)(D) provides that, “No insured depository institution shall be barred from the lowest-risk 

category solely because of size.” 

9
are usually complex and often have unique operations, an entirely formulaic approach, while 

objective, has yielded a distribution of assessment rates that is not sufficiently reflective of the 

risk. While the decision to apply an adjustment cannot be reduced to a formula, the set of data 

that the FDIC reviews is consistent from one institution to the next and the FDIC strives to make 

its decisions based on the data as consistent as possible—and the reasons for the decisions as 

clear as possible—for the institutions affected. 

Adjustments for Unsecured Debt for all Risk Categories

The recommended Final Rule, like the NPR, would lower an institution’s base 

assessment rate (after making any large bank adjustment) below its initial base rate based upon 

its ratio of long-term unsecured debt (and, for small institutions, certain amounts of Tier 1 

capital) to domestic deposits (the unsecured debt adjustment). The Final Rule clarifies that 

unsecured debt would not include any senior unsecured debt that the FDIC has guaranteed under 

the Temporary Liquidity Guarantee Program. The FDIC received several comments on the 

proposed unsecured debt adjustment. In response to these comments, FDIC staff recommends 

changes, as described below, to the unsecured debt adjustment provisions of the NPR. 

1. Maximum Unsecured Debt Adjustment

Under the NPR, the maximum decrease in an institution’s base assessment rate due to the 

unsecured debt adjustment was limited to two basis points. Several commenters argued that the 

proposed maximum two basis point reduction in base assessment rates was arbitrary and too low. 

Some commenters also noted that the maximum proposed unsecured debt adjustment was much 

smaller than the maximum proposed secured liability adjustment. After considering these 

comments, FDIC staff agrees that a maximum two basis point reduction is too small. 

Accordingly, the Final Rule would more than double the maximum possible unsecured debt 

adjustment to five basis points to ensure that institutions retain an incentive to issue unsecured 

debt. 

2. Unsecured Debt Adjustment for Large Institutions

The NPR proposed to calculate a large institution’s unsecured debt adjustment by 

multiplying the institution’s long-term unsecured debt as a percentage of domestic deposits by 20 

basis points. Some commenters argued that the proposed 20 basis point multiplier should be 

increased. FDIC staff agrees. Spreads on depository institution unsecured debt have, on 

average, approximately doubled since the NPR was published. The recommended Final Rule 

would, therefore, double the size of the multiplier to 40 basis points, partly to reflect the recent 

increase in debt spreads and partly to create a sufficient incentive to issue unsecured debt. 

3. Unsecured Debt Adjustment for Small Institutions

The Final Rule would allow small institutions to factor a certain amount of Tier I capital 

(qualified Tier 1 capital) into the unsecured debt adjustment. Under the NPR, the adjustment 

would include the sum of one-half of the amount of Tier 1 capital between 10 percent and 15 

10
percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of 

adjusted average assets. One commenter, an industry trade group, recommended that the 

unsecured debt adjustment for small institutions include larger amounts of Tier 1 capital. The 

trade group argued that small institutions should be rewarded for their additional capital and that 

the proposal did not sufficiently reward them. FDIC staff agrees that small institutions should 

receive more credit for Tier 1 capital and has so provided in the recommended Final Rule. 

Adjustment for Secured Liabilities for All Risk Categories

The Final Rule would raise an institution’s base assessment rate based upon its ratio of 

secured liabilities to domestic deposits (the secured liability adjustment). The secured liability 

adjustment would apply after any large bank adjustment or unsecured debt adjustment. The 

Final Rule would adopt the adjustment as proposed in the NPR, with one exception. The NPR 

specified that the adjustment would apply only if an institution’s ratio of secured liabilities to 

domestic deposits was greater than 15 percent. To ensure that the adjustment applies only to 

those institutions that rely heavily on secured funding and whose assessments do not adequately 

compensate the FDIC for its loss exposure, FDIC staff recommends adoption of a Final Rule that 

would raise the ratio of secured liabilities to domestic deposits that triggers the adjustment from 

15 percent to 25 percent. 

The vast majority of commenters on this topic opposed the secured liability adjustment. 

Many commenters argued that the true risk of a bank lies in the quality of its assets, rather than 

how the assets are funded. Over 1,100 commenters raised concerns about the effect of the 

adjustment on Federal Home Loan Bank advances. In addition, commenters also discussed the 

effect of the proposal on the use of repurchase agreements as well as the covered bond market. 

Despite these comments, staff continues to believe that the adjustment is warranted. The purpose 

of the secured liability adjustment is to remedy an inequity. Under the final rule adopted in 

2006, an institution with secured liabilities in place of deposits pays a smaller deposit insurance 

assessment than an institution without secured liabilities, even if both pose the same risk of 

failure and would cause the same losses to the FDIC in the event of failure. Substituting secured 

liabilities for deposits can also lower an institution’s franchise value in the event of failure, 

which increases the FDIC’s losses, all else equal.7

 A risk-based system should take this 

likelihood into account. These arguments apply equally whether an institution’s secured 

liabilities consist of FHLB advances, repurchase agreements, or other forms of secured 

borrowing. 

 

Adjustment for Brokered Deposits for Risk Categories II, III, and IV

The Final Rule provides that an institution in Risk Category II, III, or IV would be 

subject to an assessment rate adjustment for brokered deposits (the brokered deposit adjustment). 

This adjustment would be limited to those institutions whose ratio of brokered deposits to 

 

7

 Overall, whether substituting secured liabilities for deposits increases, decreases, or leaves unchanged the FDIC’s 

loss given failure also depends on how the substitution affects the proportion of insured and uninsured deposits, but 

FDIC’s assessment revenue will always decline with a substitution. 

11
domestic deposits is greater than 10 percent; asset growth rates would not affect the adjustment. 

FDIC staff recommends adoption of a Final Rule that would adopt the brokered deposits 

adjustment provisions as proposed in the NPR. 

Most of the comments relating to the adjusted brokered deposit ratio (for institutions in 

Risk Category I) are also applicable here. As discussed above, FDIC staff found comments 

recommending the exclusion of certain reciprocal deposits from the adjusted brokered deposit 

ratio to be persuasive. For the brokered deposit adjustment, however, FDIC staff holds a 

different view. When an institution’s condition declines and it falls out of Risk Category I, the 

statutory and market restrictions on brokered deposits become much more relevant. These 

restrictions can cause severe liquidity problems for institutions that rely heavily on brokered 

deposits. For this reason, FDIC staff continues to recommend, consistent with the NPR, that the 

brokered deposit adjustment include all reciprocal deposits in determining the amount of 

brokered deposits above 10 percent of an institution’s domestic deposits. 

Insured Branches of Foreign Banks 

The Final Rule would make conforming changes, identical to those proposed in the NPR, 

to the pricing multipliers and uniform amount for insured branches of foreign banks in Risk 

Category I. In addition, the Final Rule would discuss the application of the new adjustments to 

insured branches of foreign banks. 

New Institutions

As proposed in the NPR, the Final Rule would make conforming changes to the treatment 

of new insured depository institutions. For assessment periods beginning on or after January 1, 

2010, new institutions in Risk Category I would be assessed at the maximum initial base 

assessment rate applicable to Risk Category I institutions, as under the final rule adopted in 

2006. Effective for assessment periods beginning before January 1, 2010, until a Risk Category I 

new institution received CAMELS component ratings, it would have an initial base assessment 

rate that is two basis points above the minimum initial base assessment rate applicable to Risk 

Category I institutions, rather than one basis point above the minimum rate, as under the final 

rule adopted in 2006. The recommended Final Rule would also discuss the application of the 

new adjustments to new institutions. 

Technical and other changes

The Final Rule would, consistent with the NPR, make technical changes and one minor 

non-technical change to assessment rules. 

AMENDED RESTORATION PLAN

In the NPR, the FDIC recommended increasing assessment rates to a level that was 

projected to restore the reserve ratio to the minimum threshold of 1.15 percent within five years 

of the implementation of the Restoration Plan. 

12
The FDIC received many comments regarding the proposed increases in assessment 

rates. Many of the commenters were critical, and several urged the FDIC to take advantage of 

FDI Act provisions that allow the FDIC to take longer than five years to restore the reserve ratio 

to 1.15 percent in “extraordinary circumstances.” In recognition of the current severe strains on 

banks and the financial system, staff has concluded that the problems facing the financial 

services sector and the economy at large constitute such extraordinary circumstances. Since the 

NPR was published, earnings and capital levels of insured institutions have continued to decline 

and the credit markets remain under significant stress. Industry losses in fourth quarter of 2008 

were the largest in the 25 years that insured institutions have reported quarterly earnings. 

Given the enormous stresses on financial institutions and the likelihood of a prolonged 

and severe economic recession, staff recommends amending the Restoration Plan to provide as 

follows: 

1. The Restoration Plan is extended to seven years; 

2. The Final Rule will be published in the Federal Register; 

3. The FDIC will adopt an Interim Rule a) imposing a 20 basis point emergency special 

assessment on June 30, 2009, and b) after June 30, 2009, permitting the Board to impose 

an emergency special assessment of up to 10 basis points at the end of any calendar 

quarter if the reserve ratio of the DIF is estimated to fall to a level that that the Board 

believes would adversely affect public confidence or to a level which shall be close to 

zero or negative; 

4. The FDIC projects that the rates adopted in the Final Rule combined with the emergency 

special assessment should return the fund reserve ratio to 1.15 percent within seven years; 

5. At least semiannually hereafter, the FDIC will update its loss and income projections for 

the fund and adjust rates as needed; 

6. Institutions may continue to use assessment credits (for regular quarterly assessments and 

for special assessments) without additional restriction (other than those imposed by law); 

and 

7. The amended Restoration Plan shall be implemented immediately. 

EMERGENCY SPECIAL ASSESSMENTS INTERIM RULE

Emergency Special Assessment

Staff projects that the reserve ratio will fall to close to zero or become negative in 2009 

unless the FDIC receives more revenue than regular quarterly assessments will produce, given 

the rates adopted in the Final Rule. Staff believes that it is important that the fund not decline to 

a level that could undermine public confidence in federal deposit insurance. Even though the 

13
FDIC has significant authority to borrow from the Treasury to cover losses, staff is concerned 

that a fund balance and reserve ratio that are near zero or negative could create public confusion 

about the FDIC’s ability to move quickly to resolve problem institutions and protect insured 

depositors. Staff views the Treasury line of credit as available to cover unforeseen losses, not as 

a source of financing projected losses. 

Under the Interim Rule, staff proposes that on June 30, 2009, the FDIC impose an 

emergency special assessment equal to 20 basis points of an institution’s assessment base on all 

insured depository institutions.8 The special assessment would be collected September 30, 2009, 

at the same time that the risk-based assessments for the second quarter of 2009 are collected. 

The assessment base for the special assessment would be the same as the assessment base for the 

second quarter risk-based assessment. 

Staff projects that a 20 basis point special assessment would increase the reserve ratio by 

approximately 32 basis points. The staff’s current projections indicate that assessments based on 

the rates adopted in the Final Rule should begin gradually raising the reserve ratio in 2010. 

Staff has analyzed the effect of a 20 basis point special assessment on the capital and 

earnings of insured institutions. Given the assumptions in the analysis, for the industry as a 

whole, the special assessment in 2009 would result in year-end 2009 capital that would be 

approximately 0.7 percent lower than in the absence of a special assessment. Based on the range 

of projected industry earnings, a 20 basis point special assessment would cause 9 to 13 

institutions (with $3 billion to $5 billion in aggregate assets) whose equity-to-assets ratio would 

have exceeded 4 percent in the absence of such an assessment to fall below that percentage and 3 

to 4 institutions (with about $1 billion in aggregate assets) to fall below 2 percent. 

For profitable institutions, the special assessment in 2009 would result in pre-tax income 

that would be between 10 percent and 13 percent lower than if the FDIC did not charge such the 

special assessment. For unprofitable institutions, pre-tax losses would increase by an average of 

between 3 percent and 6 percent. 

 

8

 12 U.S.C. 1817(b)(5) provides: 

Emergency special assessments.--In addition to the other assessments imposed on insured 

depository institutions under this subsection, the Corporation may impose 1 or more special 

assessments on insured depository institutions in an amount determined by the Corporation if the 

amount of any such assessment is necessary— 

(A) to provide sufficient assessment income to repay amounts borrowed from the Secretary of 

the Treasury under [12 U.S.C. 1824(a)] in accordance with the repayment schedule in 

effect under section [12 U.S.C. 1824(c)] during the period with respect to which such 

assessment is imposed; 

(B) to provide sufficient assessment income to repay obligations issued to and other amounts 

borrowed from insured depository institutions under section [12 U.S.C. 1824(d)]; or 

(C) for any other purpose that the Corporation may deem necessary. 

14
Further Special Assessments

Staff recognizes that there is considerable uncertainty about its projections for losses and 

insured deposit growth, and, therefore, of future fund reserve ratios. To further ensure that the 

fund reserve ratio does not decline to a level that could undermine public confidence in federal 

deposit insurance, the Interim Rule would also permit the Board to impose an emergency special 

assessment of up to 10 basis points on all insured depository institutions if, after June 30, 2009, 

the reserve ratio of the DIF is estimated to fall to a level that that the Board believes would 

adversely affect public confidence or to a level which shall be close to zero or negative. 

Near the end of each quarter, staff would project the reserve ratio for that quarter from 

available data on, or estimates of, insurance fund assessment income, investment income, 

operating expenses, other revenue and expenses, and loss provisions (including provisions for 

anticipated failures). To estimate insured deposits, staff would rely on the average quarterly rate 

that insured deposits grew over the previous four quarters. If the Board believes that the 

estimated reserve ratio will fall to a level that would adversely affect public confidence or to a 

level close to zero or negative at the end of a calendar quarter, the Board may, by vote, impose 

an emergency special assessment of up to 10 basis points on all insured depository institutions. 

The FDIC would announce the imposition and rate of any such special assessment no later than 

the last day of the quarter. The FDIC would collect the special assessment approximately three 

months later, at the same time that risk-based assessments are collected. 

The assessment base for any such special assessment would be the base for the risk-based 

assessment for the quarter ending on the date the special assessment is imposed. Staff suggests 

that September 30, 2009, be the earliest possible date for such a special assessment. Staff also 

recommends that the FDIC be required to publish notice in the Federal Register after 

announcement of the imposition of any special assessment. 

Staff projects that the combination of regular quarterly assessments and the 20 basis point 

special assessment will prevent the fund reserve ratio from falling to a level that would adversely 

affect public confidence or to a level close to zero or negative. However, in order to take 

advantage of the most current data, staff will not make its estimates of quarter-end reserve ratios 

for purposes of such a special assessment, nor would the Board determine whether to impose 

such a special assessment, until shortly before the end of each quarter. 

15