| MEMORANDUM TO: |
Board of Directors |
| FROM: |
Arthur J. Murton, Director
Division of Insurance and Research |
| SUBJECT: |
BIF Assessment Rates for the Second Semiannual Assessment Period of 2003 |
Recommendation
The staff recommends that the Board maintain the existing Bank Insurance Fund
(BIF) assessment rate schedule of 0 to 27 basis points (bp) per year.
This rate schedule complies with the statutory requirements of the Federal
Deposit Insurance Act for the Board to establish a risk-based assessment system
and set assessments only to the extent necessary to maintain the BIF at the
Designated Reserve Ratio (DRR) of 1.25 percent.
Summary
The reserve ratio for the BIF stood at 1.27 percent as of
December 31, 2002. Although not all first quarter Call Reports have been filed
yet, the best available information indicates that the BIF reserve ratio
remained above 1.25 percent as of March 31, 2003. Staff believes there is a
reasonable probability that the reserve ratio will fall below 1.25 percent
during the upcoming semiannual assessment period if additional premium income is
not collected. However, if the ratio does fall below 1.25 percent, the Board
would have two semiannual assessment periods to bring the ratio back to the DRR.
Therefore, staff recommends maintaining the existing
projected ranges for the relevant variables at December 31,
2003, this rate schedule would result in an average annual assessment rate of
approximately 0.20 bp.
Staff has considered a range of plausible events that could
produce significant movements to the BIF reserve ratio. In this case, the staff
has taken a somewhat different approach than in prior cases submitted to the
Board; however, this new approach does not result in a different recommendation
than the prior methodology would have produced. The previous methodology
provided a range of adverse scenarios, with little upside, and no best estimate.
Our new methodology provides ranges for estimated insurance losses, primarily
based on estimated changes to the contingent loss reserve for financial
institution failures; changes in both interest income and in the market value of
available-for-sale (AFS) securities resulting from changes in interest rates;
and growth of insured deposits. The ranges resulting from the new methodology
are statistically meaningful and are narrower than ranges presented with the
prior methodology.
Analysis
I In setting assessment rates since the recapitalization of the
BIF, the Board has considered: (1) the probability and likely amount of loss to
the fund posed by individual insured institutions; (2) the statutory requirement
to maintain the fund at the DRR, currently 1.25 percent, and (3) all other
relevant statutory provisions.
Current BIF Reserve Ratio
The BIF reserve ratio was 1.27 percent as of December 31,
2002, the latest date for which complete data are available. Some data are
available that give a preliminary indication of the BIF reserve ratio as of
March 31, 2003. The fund balance, which is the numerator of the reserve ratio,
rose by $332 million to $32.382 billion (unaudited), up from $32.050 billion on
December 31, 2002. This increase was primarily supported by significant
unrealized gains on available-for-sale securities. As in prior periods, interest
income and assessment income more than covered basic operating expenses.
Final data on the level of insured deposits, the denominator
for the reserve ratio, are not available at this time because not all March 31,
2003, Call Reports have been filed.
Beginning on May 1, staff conducted a telephone survey to determine insured
deposits at 11 of the largest insured financial institutions. The survey results
combined with preliminary information from Call Reports already received
indicate that BIF-insured deposits declined by approximately 0.15 percent in the
first quarter and stood at about $2.524 trillion as of March 31, 2003. While
this information does not provide an exact amount of insured deposits, it does
provide a reasonable estimate of first quarter insured deposit growth.
The information preliminarily indicates that the BIF reserve ratio stood at
approximately 1.28 percent as of March 31, 2003. Final data will be published
later this quarter after all March 31, 2003 Call Reports are received and
edited.
Projections for the BIF Reserve Ratio Over the Next Assessment Period
Staff’s best estimate for the BIF reserve ratio as of
December 31, 2003 is 1.24 percent. The lower and upper bounds of the likely
range for the BIF reserve ratio as of December 31, 2003 are 1.15 percent to 1.30
percent, respectively. Although the lower bound of the estimated range, 1.15
percent, is well below the statutory requirement of 1.25 percent, staff believes
the ratio most likely will be closer to the best estimate of 1.24 percent. As
mentioned in the Summary, staff used a new methodology to prepare this case. The
previous methodology would have reflected a range for the reserve ratio of 1.08
percent to 1.27 percent.
The following is an analysis of the anticipated effect of
changes in the fund balance and the rate of insured deposit growth on the
reserve ratio as of December 31, 2003.
1. Fund Balance
Staff evaluates three significant inputs in estimating changes
to the fund balance. First, staff estimates the impact of insurance losses,
which are primarily losses from failed institutions. Second, staff estimates the
amount of interest income that the fund will receive during the year. Third,
staff projects the level of unrealized gains and losses on available-for-sale (AFS)
securities that will be present at the end of the period.
A. Insurance Losses.
Insurance losses primarily consist of two components: a contingent liability for
future failures and an allowance for losses on banks that have already failed.
The Financial Risk Committee (FRC) recommends the amount of the contingent
liability for failures each quarter, and this recommendation represents the FRC’s
best estimate of BIF losses from bank failures. It reflects the staff’s view
of those potential losses that are "probable and estimable," as
required by generally accepted accounting principles. Actual results could
differ from these estimates. As of December 31, 2002 the BIF loss reserve stood
at $1,008 million. The BIF loss reserve declined to $872 million as of March 31,
2003.
In prior cases submitted to the Board, a range of
possible insurance losses was estimated by using a proportion of the FRC’s
two-year projected range of failed-institution assets. Beginning with this case,
in addition to considering the FRC’s projected range of failed-institution
assets, staff is estimating a likely range of insurance losses based on
projected changes in the contingent loss reserve. Several factors drive changes
in the contingent loss reserve for the twelve months ending December 31, 2003.
These factors include: (1) the shifting of problem banks among different risk
categories within the reserve, (2) the movement of banks out of the reserve due
to improved financial conditions, mergers, or failures, and (3) the addition of
new problem bank assets to the reserve. To adequately capture the effects of
these changes, staff estimates the probabilities of banks moving within
categories, entering, or leaving the contingent loss reserve. These
probabilities are based on the recent history of changes to the reserve.
Based on
this analysis, staff estimates that the contingent loss reserve balance will
range from $785 million to $1.7 billion at year-end 2003. Table 1 shows the
range of potential loss provisions based on changes in the contingent loss
reserve, adjustments for net losses/recoveries due to the resolution of closed
banks, adjustments for litigation losses, and adjustments for other
contingencies. As a baseline scenario, staff assumes that the current balance of
the contingent loss reserve correctly provides for probable and estimable losses
from future failures, so that no additional provisions would be required for the
remainder of 2003. Therefore, in staff’s best estimate of the reserve ratio, a
zero provision is assumed.
Table 1
Potential Provisions and Adjustments for Loss Allowances
For the Year Ending December 31, 2003
|
|
High Provision |
Low Provision |
|
Provision Related to Future Failures (1) |
$1,198 million |
$79 million |
|
Adjustment for Closed Banks Net Recoveries (2) |
$25 million |
$25 million |
|
Adjustment for Litigation Losses (3) |
$14 million |
$14 million |
|
Adjustment for Other Contingencies (4) |
$19 million) |
$19 million |
|
Potential Provision for Losses |
$1,256 million |
$137 million |
Notes:
- Includes provisions required to account for the differences between the
actual balance of the contingent loss reserve on December 31, 2002 ($1,008
million) and the December 31, 2003, balance estimated by statistical analysis.
Changes in the contingent loss reserve occur from reductions in reserves after
failures, reductions in reserves from improvement in institutions’
conditions, and additions of reserves due to institutions’ deterioration.
- Assumes a range of -5% to +5% of the estimated net recovery value of bank
resolutions, $505 million as of December 31, 2002.
- Based on the standard deviation of changes in the contingent liability for
litigation losses for the period 1998 to 2002.
- Based on the standard deviation of changes in the contingent liability for
representations, warranties, asset securitization guarantees, and assistance
agreements for the period 1998 to 2002.
Staff believes that the range provided by the statistical analysis adequately
represents the most likely range of additional provisions needed to cover
insurance losses from future failures. However, the bounds of this range do not
represent "best case" and "worst case" scenarios, and larger
or smaller provisions could occur. This statistical analysis is based on our
most recent five years’ historical reserving experience. To the extent that
the industry outlook may be more favorable than during the period on which the
analysis is based, the range presented above may be somewhat pessimistic.
Conditions in the banking industry appear relatively favorable at this time, and
staff believes that current industry trends do not foreshadow widespread
deterioration in the industry.
The level of insurance losses will depend on the future condition of the economy
and its effect on the banking industry. Staff has considered various economic
scenarios and believes that a slow-growth recovery is most likely. However, the
source of this recovery may have to come from business sector spending rather
than consumer spending, a mainstay of previous economic growth. Furthermore,
uncertainties such as concerns about corporate governance, oil price volatility,
or the possibility of further terrorist attacks could adversely affect the speed
of any economic recovery.
B. Interest Income and Unrealized Gains and Losses on AFS Securities
Staff has adopted a new methodology to identify a likely range of potential
interest rate movements over the next year. In previous cases, staff modeled
parallel shifts in interest rates (in the last two cases, plus 150 bp or minus
50 bp) to represent possible changes in interest rates over the assessment
period. However, the prior methodology did not provide for the possibility of
nonparallel yield curve shifts. Also, the shift magnitudes were designed to
represent extreme changes in rates, but they were derived in a largely ad hoc
manner. Furthermore, the same rates were applied throughout the entire
assessment period, when in fact interest rates may change over time. Finally,
the prior method precluded any estimation of the expected interest income
and AFS unrealized gain/(loss) on AFS securities by providing only extreme
bounds within which interest rates may fall.
The staff attempted to overcome these
shortcomings by adopting a more analytical methodology for projecting interest
rates. In particular, the interest rate projections were derived from a
statistical model using experts’ forecasts as detailed in the Blue Chip
Financial Forecasts. Upon identifying the ten most accurate experts over the
entire 2001-2002 period, staff developed a statistical model that produced
projected interest rates for each quarter of 2003 based upon the experts’
forecasts over the same period. This methodology produced forecasted yield
curves that changed in shape over time.
Along with calculating expected yield
curves, staff also calculated bounds within which interest rates are likely to
fall using the statistical model. These bounds vary over the assessment period
and change in shape over time, as opposed to being parallel shifts in rates. The
bounds are consistent with the notion that the projections represent the most
likely scenarios and that the true rates may be above or below the projections.
In general, the projections indicate
stable or slightly rising rates for the period under consideration. The lower
bound generally reflects rates that are as much as one percentage point lower
than current rates, while the upper bound reflects rates that may be
approximately one-quarter percentage point to two percentage points higher than
current rates. Charts showing the projected rates, upper bound, lower bound, and
comparisons with the March 2003 yield curve are included as Attachment 1 to this
case. Using the projected rates, staff estimates future interest income and AFS
unrealized gains/(losses).
Table 2 projects low, best, and high estimates for interest
income and unrealized gains and losses on AFS securities
using the forecast rates and the bounds. Because of the significant
percentage of AFS securities held in the insurance fund portfolio at this time,
when interest rates change, the magnitude of the resulting change in market
value of these securities dominates the effect of changes in interest income.
Table 2
Potential Changes in Interest Income and Unrealized Gains
(Losses) on AFS Securities
December 31, 2002 to December 31, 2003 ($ in millions)
|
|
Low Estimate (1) |
Best Estimate (1) |
High Estimate (1) |
|
Interest Income |
1,480 |
1,548 |
1,546 |
|
Unrealized Gain (Loss) on AFS Securities (2) |
372 |
255 |
32 |
Notes:
- The Low Estimate is calculated using upper bound interest rates, the Best
Estimate is calculated using the projected rates, and the High Estimate is
calculated using the lower bound rates. Net estimated failure resolution
outlays equal $5.411 billion for the Low Estimate, $289.5 million in the Best
Estimate, and $6.3 million in the High Estimate. Although the level of
interest rates is assumed to be generally higher in the Low Estimate scenario
than in the other two, overall interest revenue is actually lower in the Low
Estimate due to a significantly smaller balance invested during the period.
- Includes actual unrealized gains on AFS securities for the period January 1,
2003 through February 28, 2003 and projected gains/losses through December 31,
2003.
Staff does not anticipate dramatic changes in bond market rates. The slightly
rising interest rate environment forecasted in the best estimate is consistent
with (in fact, slightly lower than) the April consensus predictions in Blue
Chip Financial Forecasts. The projected interest rates used for the best
estimate are also consistent with a slow-growth economic recovery. In recent
weeks, uncertainty about the direction of the economy has increased somewhat. If
these uncertainties continue, or if growth fails to develop, market rates could
remain steady or decline. In such a scenario, the potential negative impact to
AFS securities would not be as great as projected in the best estimate.
Nevertheless, as the remaining maturity of the AFS portfolio shortens, there is
a strong likelihood that previously identified unrealized gains will be given
back. In addition, falling interest rates would be detrimental to interest
income in the long term.
C. Projected Fund Balance.
Table 3 summarizes the effects on the fund balance of the
low, best, and high estimates assumed for insurance losses, interest income, and
unrealized gains and losses on AFS securities. The projection also assumes that
the current assessment rate schedule will remain in effect through December 31,
2003.
Table 3
Projected Fund Balance (1)
($ in millions)
| |
Low Bound |
Best Estimate |
Upper Bound |
|
Assessments (2) |
77 |
77 |
77 |
|
Interest Income (3) |
1,480 |
1,548 |
1,546 |
|
Total Revenue |
1,557 |
1,625 |
1,623 |
|
Operating Expenses (4) |
800 |
800 |
800 |
|
Provision for Losses |
1,256 |
0 |
(137) |
|
Total Expenses & Losses |
2,056 |
800 |
663 |
|
Net Income |
(499) |
825 |
960 |
|
Unrealized Gain (Loss) on AFS Securities (3) |
(372) |
255 |
32 |
|
Comprehensive Income (Loss) (5) |
(871) |
570 |
992 |
|
Fund Balance (Unaudited) – 12/31/02 |
32,050 |
32,050 |
32,050 |
|
Projected Fund Balance – 12/31/03 |
31,179 |
32,620 |
33,042 |
Notes:
- Projected income and expense figures are for the twelve months ending
December 31, 2003.
- Assumes that the current assessment rate schedule remains in effect through
December 31, 2003.
- See also Table 2 for an explanation regarding changes in interest revenue
and unrealized gain (loss) on AFS securities under these projections.
- Operating expenses for 2003 allocated to the BIF are estimated based on the
FDIC’s 2003 budget.
- Comprehensive Income is used instead of Net Income due to the magnitude of
the change in market value of AFS securities that occurs with fluctuations in
interest rates. See note (3) above.
2. Insured Deposits
Since 1989, the annual growth rate for BIF-insured deposits
has been as high as 6.9 percent and as low as negative 2.1 percent (Figure 1).
After declining from 1992 through 1994, insured deposits grew between 2.5
percent and 3.8 percent from 1995 to 1998. After minimal growth in 1999 (0.8
percent), insured deposits grew by 6.9 percent in 2000, 4.8 percent in 2001, 4.9
percent in 2002, and are projected to grow at a rate of 3.9 percent in 2003. Equity
market declines and volatility as well as a change in the way banks report
uninsured deposits have factored into the recent strong growth in insured
deposits.
Figure 1
 [D]
It takes approximately $20 billion in insured deposit growth
to create a 1 basis point decline in the BIF reserve ratio, all other things
held constant. Based upon the March 31, 2003 BIF balance, it would take about
$63.1 billion in insured deposit growth (2.5 percent) to reduce the BIF to the
DRR level, all else being equal. Our estimates indicate that deposit growth over
the next year will be greater than this figure. However, the fund balance is
also likely to grow and the ultimate level of the reserve ratio will depend on
how fast the fund grows relative to the growth of BIF-insured deposits.
Previous cases presented to the Board estimated insured deposit growth as
falling within a range of +2 percent to +6 percent. For this case, staff
developed a statistical model to project an expected rate of insured deposit
growth. The model indicates that the likely rate of insured deposit growth for
2003 is 3.9 percent. This rate of growth would bring the total of BIF-insured
deposits to $2.626 trillion. The likely range of insured deposit growth is +0.8
percent to +7.1 percent. This range represents the confidence interval in the
estimated model. Staff has backtested the model and believes that it provides a
reasonable estimation of insured deposit growth. The model estimates future
growth rates in insured deposits through historical growth rates in insured and
total deposits and, as such, does not explicitly incorporate economic shocks
into the projection. However, some events that could force insured deposits into
the high range of our forecast are a depressed stock market with high volatility
as well as monetary expansion. An upturn in the stock market could force insured
deposits into the low range of our forecast.
3. BIF Reserve Ratio
Based on the projected BIF balance and the growth of the
insured deposit base, the best estimate of the BIF reserve ratio at December 31,
2003, is 1.24 percent (Table 4). The best estimate assumes a baseline
of zero loss provisions, stable or slightly increasing interest rates, and an
insured deposit growth rate of 3.9 percent.
The staff projects the lower bound and upper bound of the
likely range to be 1.15 percent and 1.30 percent, respectively (Table 4). The lower bound, which reflects a 12 bp decrease from the December 31,
2002, ratio, assumes a strong increase in the insured deposit base (+7.1
percent) and a higher interest rate scenario, resulting in a downward adjustment
to the fund balance due to a reduction in the aggregate amount of unrealized
gains on AFS securities (Table 3). The lower bound also incorporates the high
loss estimate for insurance losses from possible near-term failures as projected
by staff. The estimate reflects the staff’s view of a reasonably possible
adverse scenario. It is not intended to represent a "worst case"
scenario.
The upper bound produces a 3 bp increase in the reserve ratio
at December 31, 2003. This estimate assumes slower growth (+0.8 percent) in the
BIF-insured deposit base, the low loss estimate for the provision for losses,
and lower interest rates, resulting in an upward adjustment to the aggregate
amount of unrealized gains on AFS securities.
Table 4
Projected BIF Reserve Ratios
($ in millions)
| |
|
December 31, 2002 |
|
|
Fund Balance |
|
$32,050 |
|
|
Estimated Insured Deposits |
|
$2,527,448 |
|
|
BIF Ratio |
|
1.27% |
|
| |
Low Bound (1)
December 31, 2002
|
BestEstimate(2)
December 31, 2002
|
High Bound (3)
December 31, 2002
|
|
Projected Fund Balance |
$31,179 |
$32,620 |
$33,042 |
|
Estimated Insured Deposits |
$2,707,000 |
$2,626,000 |
$2,548,000 |
|
Estimated BIF Ratio |
1.15% |
1.24% |
1.30% |
Notes:
- The Lower Bound refers to the scenario of higher loss provisions (see
Table 1), higher interest rates (Low Estimate in Table 2), and a higher
insured deposit growth rate (+7.1 percent).
- The Best Estimate refers to a baseline scenario of zero loss provisions,
stable or moderately rising interest rates (Best Estimate in Table 2), and
the insured deposit growth rate projected by staff (+3.9 percent).
- The Upper Bound refers to the scenario of lower loss provisions (see Table
1), stable or moderately declining interest rates (High Estimate in Table
2), and a lower insured deposit growth rate (+0.8 percent).
As mentioned in the Summary, staff used a different
methodology than that used in prior cases presented to the Board to produce the
range shown in Table 4 above. If the previous method had been used, it would
have shown a range from 1.08 percent to 1.27 percent, the same as that shown in
the November 2002 case. The previous methodology provided a low end to the
projected BIF range that incorporated what the FRC considered to be reasonably
possible losses rather than likely insurance losses. Although the low end of the
previous methodology remains a possible outcome, the revised methodology refines
the estimation of losses due to failure in order to provide a more likely
scenario. Also, unlike the previous methodology, the revised methodology
considers the possibility that reserves for losses could be reduced due to
improvements in the conditions of financial institutions. In addition, the
revised methodology refines the estimation of the impact that changes in
interest rates have on comprehensive income and provides greater analysis of
potential insured deposit growth. Staff believes that the methodology presented
in this case provides a more likely range for the BIF reserve ratio.
Staff also calculated a number of alternate scenarios to the
ones presented in Table 4. In one of the scenarios, staff assumed zero provision
for losses, no change in interest rates, zero required cash flow for failed bank
resolutions, and insured deposit growth of 4.2 percent, which is the five year
average insured deposit growth rate. This scenario results in a reserve ratio of
1.248 percent at December 31, 2003. In this somewhat optimistic scenario,
projected BIF growth is outstripped by moderate growth in insured deposits. This
scenario illustrates that the BIF reserve ratio is currently at risk of falling
below the DRR even in an environment where the condition of the banking industry
is relatively favorable. This is being driven by projections of declining
interest income and reduced unrealized gains on AFS securities.
If either the best estimate or lower bound indicated in Table
4 were to be realized, the current rate schedule would not be sufficient to
maintain the reserve ratio above the DRR through December 31, 2003. However,
there is considerable uncertainty about the state of the economy and which
direction interest rates might move. In the short-term, adverse economic
developments might lead to declining interest rates, which would likely add
value to the BIF’s AFS securities. Such a scenario would boost the fund
balance and would be more likely to maintain the fund above the DRR. However,
the long-term impact of such a scenario could be reduced interest income for the
fund and an adverse effect on the condition of the banking industry.
Given that the BIF reserve ratio is currently greater than
1.25 percent and that there is much uncertainty about the direction of interest
rates, staff believes that it is reasonable to maintain the existing BIF rate
schedule. Although a moderate decline in the BIF reserve ratio will push it
below the statutory DRR of 1.25 percent, the Board would have two semiannual
assessment periods to bring the ratio back to the target.
If the Board desires greater protection against the chance
that the reserve ratio may fall below the DRR, an alternative approach would be
to increase the effective rate schedule uniformly by a small amount. If
additional assessments are collected and prove to be in excess of an amount
necessary to maintain the reserve ratio above the DRR, the FDIC would be
required to refund any excess amounts to those institutions classified as
"1A" for purposes of the FDIC’s risk-related premium system.
Statutory Requirements Regarding the Assessment Rate Schedule
The Federal Deposit Insurance Act requires that the Board set
semiannual assessment rates:
[W]hen necessary, and only to the extent necessary (I) to
maintain the reserve ratio of each deposit insurance fund at the designated
reserve ratio; or (II) if the reserve ratio is less than the designated
reserve ratio, to increase the reserve ratio to the designated reserve ratio
....
Because the BIF reserve ratio is above 1.25 percent as of
December 31, 2002, the Board can raise semiannual assessment rates for the
second half of 2003 only pursuant to clause (I), to maintain the BIF at 1.25
percent. The statutory provisions that require the FDIC to return the ratio to
1.25 percent when the ratio falls below that target have not been activated.
If the reserve ratio falls below 1.25 percent, Section 7 of
the FDI Act requires that the FDIC restore it to the designated reserve ratio
within one year "after such rates are set". The statute does not
define when "rates are set" and legislative history provides no
guidance on this issue. Based on a plain reading of the statute, it seems
reasonable to use the date on which the Board acts to establish rates for the
upcoming semiannual period. This would comport with the intent of this provision of Section 7 that the FDIC be given
one year (i.e., two semiannual periods) to increase the reserve ratio to the
designated reserve ratio without being required to impose the minimum assessment
of 23 basis points.
Thus, for example, if final Call Report data show that the
BIF reserve ratio fell below 1.25 percent as of March 31, 2003 (and remained
below 1.25 percent as of June 30, 2003), the one-year period to re-establish the
reserve ratio to 1.25 percent would begin in November 2003, when the Board sets
the rates that become effective on January 1, 2004. The FDIC must do one of two
things if the BIF reserve ratio used to set the January 1, 2004, rates is
below 1.25 percent. The FDIC must either: (1) set assessment rates to achieve
the 1.25 percent by November 2004, which would allow two semiannual periods to re-establish the
1.25 percent—the periods beginning January 1, 2004 and July 1, 2004 (in
addition to any amounts collected during the second half of 2003), or (2) the
FDIC must establish a recapitalization schedule of 15 years or less and charge
23 basis point minimum average assessments.
Statutory Requirements Regarding Refunds
The Federal Deposit Insurance Act, as amended by the Deposit
Insurance Funds Act of 1996 (Funds Act), provides that if the reserve ratio at
the end of an assessment period exceeds the DRR, the Board is required to refund
the excess amount to certain insured depository institutions. However, refunds
to depository institutions may not exceed the assessments they paid in that
assessment period, and refunds may not be made to institutions that exhibit
certain weaknesses (financial, operational, or compliance) or are not
well-capitalized. The FDIC interprets the Funds Act as requiring refunds only to
those institutions classified as "1A" for purposes of the FDIC’s
risk-related premium system.
Risk-Based Assessment System
Staff recommends retaining the current spread of 27 bp between the assessments
paid by the best- and worst-rated institutions as well as the rate spreads
between adjacent cells in the assessment rate matrix. The proposed assessment
rate schedule appears in Table 5. The Board previously determined that the
current rate spreads provide appropriate incentives for weaker
institutions to improve their condition and for all institutions to avoid
excessive risk-taking, consistent with the goals of risk-based assessments and
existing statutory provisions. The current rate spreads also generally are
consistent with the historical variation in bank failure rates across cells of
the assessment rate matrix.
Table 5
Proposed Assessment Rate Schedule
Second Semiannual Assessment Period of 2003
BIF-Insured Institutions
|
Capital Group |
A |
B |
C |
|
1. Well |
0 bp |
3 bp |
17 bp |
|
2. Adequate |
3 bp |
10 bp |
24 bp |
|
3. Under |
10 bp |
24 bp |
27 bp |
In setting assessment rates to achieve and maintain the reserve ratio at the
DRR, the Board is required to consider the effects of assessments on members’
earnings and capital. The estimated annual revenue from the existing rate
schedule is $77 million, which is $12 million less than the annual amount that
was projected six months ago. In recommending that the Board maintain this
schedule, the staff has considered the impact on bank earnings and capital and
found no unwarranted adverse effects.
The Assessment Base Distribution and Matrix Migration
Table 6 summarizes the current distribution of institutions across the assessment matrix.
Table 6
BIF Assessment Base Distribution (1)
Assessable Deposits as of December 31, 2002
Supervisory Subgroup and Capital Groups in Effect January 1, 2003
|
Capital Group |
|
A |
B |
C |
|
1. Well |
Number |
7,470 |
91.7% |
441 |
5.4% |
97 |
1.2% |
|
1. Well
|
Base ($billion) |
3,738 |
96.7% |
87 |
2.3% |
23 |
0.6% |
|
2. Adequate |
Number |
106 |
1.3% |
13 |
0.2% |
10 |
0.1% |
|
2. Adequate
|
Base ($billion) |
15 |
0.4% |
2 |
0.0% |
2 |
0.1% |
|
3. Under |
Number |
1 |
0.0% |
0 |
0.0% |
5 |
0.1% |
|
3. Under
|
Base ($billion) |
0 |
0.0% |
0 |
0.0% |
1 |
0.0% |
Estimated annual assessment revenue $77 million
Assessment Base $3,867.1 billion
Average annual assessment rate (bp) 0.20 basis points
Notes:
- "Number" reflects the number of BIF
members, including BIF-Oakar institutions; "Base" reflects all BIF-assessable
deposits.
With 98.4 percent of the number of institutions and 99.3
percent of the assessment base in the three lowest assessment risk
classifications of "1A," "1B," and "2A," as of
January 1, 2003, the current distribution in the rate matrix reflects little
fundamental difference from the previous semiannual assessment period. The
current distribution reflects some shrinkage in the best-rated premium category.
Since the previous assessment period, 167 institutions migrated into the
"1A" risk classification (Table 7), and 185 institutions migrated out
of the "1A" risk classification. Only 673 institutions are classified
outside of the best risk classification.
Overall, for all BIF-insured institutions, the supervisory
subgroup component of the risk classification was upgraded since the previous
period for 110 institutions with an assessment base of $59.8 billion and was
downgraded for 145 institutions with an assessment base of $32.0 billion.
Table 7
BIF Migration To and From Assessment Risk Classification "1A"
|
Institutions entering "1A"
|
Number
|
Base ($billion)
|
Due to capital group reclassification only
|
77
|
20.0
|
Due to supervisory subgroup reclassification only
|
88
|
58.1
|
Due to both
|
2
|
0.3
|
Total
|
167
|
78.4
|
|
Institutions leaving "1A"
|
Number
|
Base ($billion)
|
|
Due to capital group reclassification only
|
77
|
10.0
|
|
Due to supervisory subgroup reclassification only
|
102
|
27.7
|
|
Due to both
|
6
|
0.9
|
|
Total
|
185 |
38.6 |
Notes:
Reflects BIF-insured institutions
that moved in and out of assessment risk classification "1A" from the
second semiannual assessment period of 2002 to the first semiannual assessment
period of 2003. The numbers only include institutions that were rated in both
periods.
Other Issues
Refunds for first semiannual period of 2003. Since BIF-insured
institutions classified as "1A" currently pay no assessments to the
BIF under the proposed rate schedule they are ineligible to receive any refund
for the first semiannual period of 2003.
FICO Assessment.
TThe Funds Act separates the Financing Corporation (FICO) assessment from
the FDIC assessment, so that the amount assessed on individual institutions by
the FICO is in addition to the amount paid according to the BIF rate schedule.
All institutions are assessed the same rate by FICO, as provided for in the
Funds Act, and the FICO rate is updated quarterly. The FICO rate for the first
quarterly payment in second semiannual assessment period of 2003 will be
determined using March 31, 2003 Call Report and Thrift Financial Report data.
Staff Contacts
Chris Newbury, Chief, Fund Analysis Section,
Division of Insurance and Research, at (202) 898-3504, or Joe DiNuzzo, Counsel,
Legal Division (202) 898-7349. For FICO assessment information, please contact
Richard Jones, Chief, Deposit Insurance Pricing Section, Division of Insurance
and Research, at (202) 898-6592.
Attachment 1 – Interest Rate Scenarios
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 [D]
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