The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Act") includes significant changes to the federal deposit insurance system, including changes to how deposit assessments are calculated, the minimum reserve ratio, procyclical assessments and coverage limits. The Act also requires a study on the use of non-core funding. While some of these changes may primarily burden large financial institutions, others may result in restrictions that could put community banks at a competitive disadvantage.
How have deposit assessments changed?
Section 331 of the Act requires the FDIC to amend its regulations to generally define the term "assessment base" for purposes of determining deposit insurance premiums as a bank's "average consolidated total assets" minus its "average tangible equity." Although the FDIC has flexibility in how it calculates the assessment base under current regulations, the FDIC has historically used a bank's deposit liabilities rather than its assets for that determination. The change is likely to result in higher premiums for larger institutions that rely more heavily on funding sources other than insured deposits. Some estimate that this change will reduce assessments for community banks by a third, saving such banks $4.5 billion over the next three years. However, the Act does not specify a deadline for the FDIC to amend the assessment base.
What do they mean by "procyclical assessments"?
Under prior law, the FDIC was required to suspend or rebate assessments when the reserve ratio exceeded 1.5% of estimated insured deposits. This provision seemed shortsighted in light of recent experience. Section 332 of the Act grants the FDIC the discretion to suspend or limit rebates to depository institutions. The Act also eliminates provisions of the Federal Deposit Insurance Act that allowed rebates when the reserve ratio was between 1.35% and 1.5% of estimated insured deposits.
How has the minimum reserve ratio changed?
Section 334 of the Act makes a conforming amendment to the definition of "minimum reserve ratio" to reflect the new asset-based assessment base. The Act increases the minimum reserve ratio that is to be established by the FDIC Board of Directors from 1.15% of estimated deposits to 1.35% or "a comparable percentage" of the asset-based assessment base described above. The FDIC must reach the greater reserve ratio for the Deposit Insurance Fund by September 20, 2020. Notably, Section 334 goes on to require the FDIC to "offset the effect" of the greater ratio on institutions with consolidated assets of less than $10 billion. Although the Act's language is not completely clear, the intent is to require larger institutions to pay the added premiums to attain the higher ratio, reducing the impact on community banks.
How did the Act change insurance coverage limits and coverage for commercial accounts?
Section 335 of the Act permanently increased the standard maximum deposit insurance limit from $100,000 to $250,000. The increase was made retroactive to cover depositors with any institution that failed on or after January 1, 2008. The Act similarly amends the Federal Credit Union Act to increase the standard maximum share insurance applicable to credit unions from $100,000 to $250,000.
Section 343 of the Act extended the full deposit insurance coverage for non-interest bearing transaction accounts previously covered under the FDIC's Transaction Account Guaranty Program. However, the coverage is no longer optional for banks. The extension provides coverage for these commercial accounts until December 31, 2012.
Also, under Section 627 of the Act, banks may now pay interest on demand accounts. As a result, banks will generally no longer need to offer NOW accounts or repurchase transactions/sweep accounts in order to provide competitive interest rates to commercial deposit customers. While larger banks may compete more aggressively for these deposits than they had under prior law, community banks will also benefit by being able to avoid complicated repurchase/sweep arrangements while still paying competitive interest rates on commercial deposits.
What changes lie ahead in the use of brokered deposits?
The Act did not immediately change any rules concerning use of brokered deposits or other sources of non-core funding. However, Section 1506 requires the FDIC to conduct a study to evaluate the definition of core deposits for purposes of calculating insurance premiums of banks. The FDIC is also required to evaluate the potential impact of revising the definitions of brokered deposits and core deposits. The study is to assess the differences between core deposits and brokered deposits, their role in the economy and banking sector, and the effect of redefining the term “core deposit,” as well as the resulting competitive impact upon large institutions and community banks. The FDIC is required to report on the results of this study within one year after enactment of the Act. The study's findings could result in greater restrictions on use of brokered deposits and non-core funding for community banks, putting such institutions at a competitive disadvantage with respect to more diverse funding sources available to large institutions.