At a time when good news is hard to come by in the financial services industry, or anywhere for that matter, the FDIC’s recently proposed Deposit Insurance Fund management plan can be met with some relief. First of all, the FDIC plan would forgo the 3-basis-point increase in assessment rates scheduled for Jan. 1, 2011, which is expected to save the industry billions of dollars. Second, the agency said it is abandoning the increase largely because it has reduced its projected losses for the DIF. So far, so good.
These provisions are part of a long-term plan that significantly restructures how the FDIC funds the DIF, and this is where things get a little more complex. The FDIC will not provide dividends to banks when the reserve ratio tops 1.5 percent, as it is authorized to do. Instead, it plans to gradually lower assessments to keep the reserve ratio well above its statutory minimum.
In other words, community banks may never again see a DIF dividend, and they certainly will not experience a decade of not paying assessments, as the industry did from 1996 to 2006. However, with a positive fund balance and predictable assessment rates, community banks are less likely to face special assessments to replenish the fund when they can least afford it.
Short-term relief from scheduled assessments and a countercyclical approach to funding the DIF that will benefit banks during economic downturns is downright good news. Further, with the FDIC expected to release its rule on ICBA-advocated changes to the assessment base next month, we even have something to look forward to.