Risk-Based Assessment System
SAIF Assessment Rates for the Second Semiannual Assessment Period of 2004
May 5, 2004
The Board of Directors
Arthur J. Murton, Director
Division of Insurance and Research
SAIF Assessment Rates for the
Semiannual Assessment Period of 2004
Recommendation The staff recommends that the Board maintain the existing Savings
Association Insurance Fund (SAIF) assessment rate schedule of 0 to 27 basis
points (bp) 1
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 SAIF at the Designated Reserve Ratio (DRR) of 1.25 percent.
Summary Staff believes that the SAIF reserve ratio will remain above the DRR
throughout the assessment period. Therefore, staff recommends maintaining the
existing assessment rate schedule. Based on December 31, 2003, data and
projected ranges for the relevant variables at December 31, 2004, this rate
schedule would result in an average annual assessment rate of approximately
Staff has considered a range of plausible events that could produce
significant movements in the SAIF reserve ratio. We have continued to refine
the methodology introduced in the previous assessment rate case. Our
methodology provides ranges for estimated insurance losses that are primarily
based on estimated changes to the contingent liability for anticipated
failures (contingent loss reserve); 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.
Analysis In setting assessment rates since the recapitalization of the SAIF, 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
Projections for the SAIF Reserve Ratio over the Next Assessment
Period Staff's best estimate for the SAIF reserve ratio as of December 31, 2004 is
1.38 percent. The lower and upper bounds of the likely range for the SAIF
reserve ratio as of December 31, 2004 are 1.32 percent to 1.44 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, 2004.
1. Fund Balance Staff evaluates three significant inputs in estimating changes to the fund
balance. First, staff estimates the impact of probable 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 anticipated failures (contingent loss reserve) and an allowance
for losses on institutions that have already failed. The Financial Risk
Committee (FRC) recommends the amount of the contingent loss reserve each
quarter. This recommendation represents the FRC's best estimate of
"probable and estimable" SAIF losses from potential institution
failures, as required by generally accepted accounting principles. Actual
results could differ from these estimates. As of December 31, 2003 the SAIF
loss reserve stood at $3 million. The SAIF loss reserve remained virtually
unchanged at $3 million as of March 31, 2004.
Staff has estimated a likely range of insurance losses based on projected
changes in the contingent loss reserve for the period ending December 31,
2004. These projections are influenced by several factors including: (1) the
shifting of problem institutions among different risk categories within the
reserve, (2) the movement of institutions out of the reserve due to improved
financial conditions, mergers, or failures, and (3) the addition of new
problem institution assets to the reserve. To capture the effects of these
changes, staff uses a migration approach, which estimates the probabilities of
institutions entering into or leaving the contingent loss reserve as well as
the probability of institutions moving between loss reserve categories. These
probabilities are based on the recent history of changes to the reserve. Other
factors driving changes in the contingent loss reserve are changes in expected
failure rates and changes in rates of loss given failure. For purposes of this
estimation of the contingent loss reserve, staff assumes that failure and loss
rates remain constant through the period.
Based on consideration of the above factors, staff estimates that potential
loss provisions for the twelve months ending December 31, 2004 will range from
($1 million) to $129 million and the best estimate is $42 million.3
Table 1 shows the range of potential loss provisions as well as adjustments
for net losses/recoveries on resolution receivables, adjustments for
litigation losses, and adjustments for other contingencies.
Potential Provisions and Adjustments for Loss Allowances
For the Twelve Months Ending December 31, 2004
Provision Related to Future Failures (1)
Adjustment for Closed Institutions
Net Recoveries (2)
Adjustment for Litigation Losses (3)
Potential Provision for Losses
(1) Includes provisions required to bring the contingent loss reserve to
estimated December 31, 2004 levels after accounting for a) actual reserve losses
sustained in the first quarter of 2004 ($0.7 million), and b) estimated reserve
losses sustained through the remaining three quarters of 2004 ($2 million).
Changes in the contingent loss reserve occur because of reductions in reserves
due to failures, reductions in reserves due to improvement in problem
institutions' conditions, and additions to reserves due to problem institutions'
(2) Assumes a range of -5% to +5% of the estimated net recovery value of
institution resolutions receivables totaling $273 million as of December 31,
(3) Range is based on the standard deviation of changes in the contingent
liability for litigation losses for the period 1998 to 2003.
Staff believes that the range provided by the statistical migration
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.
Nevertheless, SAIF-insured institutions in general appear to be well
positioned to withstand considerable financial stress from unlikely economic
shocks. For example, staff has considered economic stress events as they
relate to specific risk concerns enumerated in industry outlook contained in
Tab 1. To determine the potential insurance fund implications of these
concerns, staff has developed several stress event simulations, each of which
demonstrate that SAIF-insured institutions are well positioned to withstand a
significant degree of financial adversity.
Subprime Lending Risk: Staff believes that subprime lending continues to be
the most likely source of near-term losses to the insurance funds. Subprime
lending has been a significant factor in 28 percent of the number of failures
and 67 percent of the assets of failed institutions since 1997. In addition,
the percentage of "problem" subprime lenders continues to be high,
making up 36 percent of the assets of institutions on the contingent loss
Using periods of historically poor performance for various categories of
consumer loans, staff subjected subprime lending institutions to a two-year
period of instantaneously higher consumer loan loss rates. For the fourth
quarter, these simulations produced SAIF-insured failed assets of only $1.4
billion (less than 1 percent of institution assets considered). Simulations
using year-end 2002 data produced similar results.
Mortgage Lending Risk: Prospects for rising interest rates may cause some
concern over the future performance of institutions engaged in mortgage
lending activities. Rising rates could place pressure on the net interest
margins of some mortgage lending institutions by raising funding costs against
fixed-rate loan portfolios and securities holdings. Higher rates could also
suppress mortgage origination volumes and the value of home prices in the face
of weaker sales activity.on these findings, combined with signs of improving
overall economic conditions, staff believes that current industry trends do
not foreshadow widespread deterioration in the bank and thrift industries.
Using periods of historically significant declines in both net interest
margins and mortgage loan performance, staff subjected institutions with
mortgage lending concentrations to a two-year period of higher loan loss rates
and declining net interest margins. For the fourth quarter 2003, these
simulations produced SAIF-insured failed assets of only $1.2 billion (0.1
percent of institution assets considered). Simulations using year-end 2002
data resulted in SAIF-insured failed assets of $5.8 billion or 0.7 percent of
institution assets. The improvement in simulation results from year-end 2002
to year-end 2003 reflects generally improved performance measures of thrifts.
Commercial Real Estate Mortgage Lending Risks: Rising interest rates could
also have an adverse impact on commercial real estate loan performance as debt
servicing burdens on variable rate loans increase. This concern is compounded
by the already weak fundamentals that exist in many metropolitan areas for
commercial property types such as offices and hotels. Institutions with heavy
commercial real estate loan concentrations are most vulnerable to any rise in
commercial real estate loan losses.
Using periods of historically significant declines in commercial real
estate values, staff subjected institutions with commercial real estate
mortgage lending concentrations to a two-year period of higher loan loss
rates. For the fourth quarter 2003, the worst case simulation, which drew
assumptions from the experience of New England institutions during the late
1980s, produced SAIF-insured failed assets of $0.4 billion. Results using
year-end 2002 data were similar. For comparative purposes, this same
simulation produced just under $8 billion in failed SAIF-insured assets using
year-end 1991 data.
Based on these findings, combined with signs of improving overall economic
conditions, staff believes that widespread deterioration in thrift industry
performance is unlikely in the next one to two years.
B. Interest Income and Unrealized Gains and Losses on AFS
Securities Staff relied upon expert forecasts as detailed in the Blue Chip Financial
Forecasts to develop interest rate projections and analyze the potential
effect of changes in interest rates on interest income and unrealized gains
and losses on AFS securities. The forecasts defined as our "best
estimate" were the consensus forecasts through the fourth quarter of 2004
as detailed in the March issue of the Blue Chip Financial Forecasts. Adopting
the experts' consensus forecasts also allows for forecasted yield curves that
change in shape over time.
Along with forecasting yield curves based upon the experts' forecasts,
staff also calculated bounds within which interest rates are likely to fall
using the historical differences between the experts' forecasts and the actual
interest rates. 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 actual rates may be above or below the projections. In
general, the projections indicate stable or slightly rising rates for the
period under consideration. The low estimate (high estimate) generally
reflects rates that are as much as 200 bp higher (30 bp lower) than current
rates, with the range increasing over time. Charts showing the projected
rates, upper bound, and lower bound are included as Appendix A to this case.
Table 2 shows projections for low, best, and high estimates for interest
income and unrealized gains and losses on AFS securities using the forecast
rates and upper and lower 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.
Potential Changes in Interest Income and
Unrealized Gains (Losses) on AFS Securities
December 31, 2003 to December 31, 2004 ($ in millions)
Low Estimate (1)
Best Estimate (1)
High Estimate (1)
Unrealized Gain (Loss) on AFS Securities (2)
Net Fund contribution from Investment Activities
(1) 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 $31 million for the Low Estimate and $10 million for both the
Best Estimate and the High Estimate.
(2) Includes actual unrealized gains on AFS securities for the period
January 1, 2004 through February 29, 2004 and projected gains/losses for the
remaining period through December 31, 2004.
Staff's best estimate reflects a modest upward trend in bond market
interest rates. Since the end of March, treasury yields have increased to
six-month highs on news of strong payroll growth, strong retail sales, and an
increase in inflation indicators. Based on the treasury yield curve as of
April 30th, this recent shift in yields generally falls in between assumptions
underlying the "best" and "low" estimates in Table 2
above. Accordingly, some depreciation in the value of AFS securities should be
expected if current interest rate trends persist. As the remaining maturity of
the existing AFS portfolio shortens, previously identified unrealized gains
will also dissipate. Over the longer term, higher yields on treasury
securities will boost overall interest earnings as securities reprice upward
and as maturing securities are reinvested at higher rates.
C. Projected Fund Balance Table 3 summarizes the effects on the fund balance of the low, best, and
high estimates assumed for insurance losses, interest income, and unrealized
gains and losses on AFS securities. The projection also assumes that the
current assessment rate schedule will remain in effect through December 31,
Projected Fund Balance (1)
($ in millions)
Interest Income (3)
Operating Expenses (4)
Provision for Losses
Total Expenses & Losses
Unrealized Gain (Loss) on AFS
Comprehensive Income (Loss) (5)
Projected Fund Balance
(1) Projected income and expense figures are for the twelve months ending
December 31, 2004.
(2) Assumes that the current assessment rate schedule remains in effect
through December 31, 2004.
(3) See also Table 2 for an explanation regarding changes in interest
revenue and unrealized gain (loss) on AFS securities under these
(4) Operating expenses for 2004 allocated to the SAIF are estimated based
on budgeted 2004 operating expenses inclusive of amounts budgeted for
(5) 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, annual growth rate for SAIF-insured deposits has been as high
as 7.2 percent and as low as an annual shrinkage of 7.1 percent (Figure 1).
After declining during the period from 1989 through 1993, insured deposits
grew 2.2 percent and 2.7 percent in 1994 and 1995, respectively. After
contracting 3.9 percent in 1996, and minimal growth between 1997 and 1999 (1.0
percent, 3.8 percent, and 0.2 percent respectively), insured deposits grew by
5.2 percent in 2000, 6.1 percent in 2001, and 7.2 percent in 2002. Growth
slowed down slightly in 2003 to 4.6 percent, and is projected to grow at a
rate of 1.1 percent in 2004. An upturn in equity markets have factored into
the recent slow growth in insured deposits.
It takes approximately $6.6 billion in insured deposit growth to create a 1
basis point decline in the SAIF reserve ratio, all other things held constant.
Based upon the December 31, 2003 fund balance, it would take about $82.7
billion in insured deposit growth (9.2 percent) to reduce the fund to the DRR
level, all else being equal. Staff's estimate indicates that deposit growth
over the next year will be far lower than this figure.
Based on projections using a statistical model, the best judgment of the
staff is that SAIF-insured deposits are likely to experience a growth rate in
the range of -2.2 percent to +4.3 percent between December 2003 and December
2004. This range represents the statistical margin of error in the estimated
Staff believes the most likely scenario is that insured deposits will grow at
the midpoint of this range (1.1 percent), which will bring the total for SAIF-insured
deposits to $906 billion. A scenario that could force insured deposits into
the high range of our forecast would include a depressed stock market with
high volatility. In contrast, an upturn in the stock market and in the U.S.
economy as a whole could force insured deposits into the low end of the
3. SAIF Reserve Ratio Based on the projected SAIF balance and the growth of the insured deposit
base, the best estimate of the SAIF reserve ratio at December 31, 2004 is 1.38
percent (Table 4, next page). The best estimate assumes a baseline of a small
increase in contingent loss provisions, a modest increase in treasury yields,
and insured deposit growth of 1.1 percent.
Staff projects the lower bound and upper bound of the likely range to be
1.32 percent and 1.44 percent, respectively (Table 4, next page). The lower
bound, which reflects a 5 bp decrease from the December 31, 2003, ratio,
assumes a strong increase in the insured deposit base (4.3 percent growth) and
a higher interest rate scenario, which results in a downward adjustment to the
fund balance due to a reduction in the aggregate amount of unrealized gains on
AFS securities (Table 3). The lower bound also incorporates the high loss
estimate for insurance losses from possible near-term failures as projected by
staff. Although the estimate reflects staff's view of a reasonably possible
adverse scenario, it is not intended to represent a "worst case"
The upper bound produces a 7 bp increase in the reserve ratio relative to
December 31, 2003 levels. This estimate assumes a contraction of 2.2 percent
in the SAIF-insured deposit base, reverse provisions for failure-related
losses, and a modest decline in interest rates, which results in a nominal
adjustment to the aggregated amount of unrealized gains on AFS securities.
Projected SAIF Reserve Ratios
($ in millions)
Estimated Insured Deposits
Lower Bound (1)
December 31, 2004
Best Estimate (2)
December 31, 2004
Upper Bound (3)
December 31, 2004
Projected Fund Balance
Estimated Insured Deposits
Estimated SAIF Ratio
(1) The Lower Bound refers to the scenario of higher loss provisions (Low
Estimate in Table 1), higher interest rates (Low Estimate in Table 2), and a
higher insured deposit growth rate (+4.3 percent).
(2) The Best Estimate refers to a baseline scenario of moderate loss
provisions (Best Estimate in Table 1), stable or moderately rising interest
rates (Best Estimate in Table 2), and the insured deposit growth 1.1 percent.
(3) The Upper Bound refers to the scenario of lower loss provisions (High
Estimate in Table 1), moderately declining interest rates (High Estimate in
Table 2), and a lower insured deposit growth rate (-2.2 percent).
Staff's best estimate of the reserve ratio for December 31, 2004 is 13 bp
higher than the DRR and 1 bp higher than the ratio at December 31, 2003. The
most significant factor influencing this estimated increase is the projected
slowdown in insured deposit growth. This slowdown in growth outweighs other
factors that tend to place downward pressure on the ratio including the
Interest rates remain at very low levels but have recently begun to move
higher in line with improving economic conditions. Unrealized gains on AFS
securities will decline even in a stable interest rate environment because
these gains disappear as securities move closer to their maturity dates.
With rates moving higher, reductions in unrealized gains can be expected
Approximately 17 percent ($82 million) of comprehensive income in 2003
represented reversals of provisions for insurance losses due to reductions
in estimated losses on prior failures and due to reductions in the
contingent loss reserve. Although staff remains optimistic about industry
prospects, reserve levels are already at nominally low levels precluding
substantial reversals to the loss provisions going forward.
As a result of these factors, staff believes that the "best
estimate" is for a slightly higher SAIF reserve ratio. Because the entire
expected range for the SAIF reserve ratio is greater than the DRR of 1.25
percent, staff believes that it is reasonable to maintain the existing SAIF
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 institution failure rates across
cells of the assessment rate matrix.
Proposed Assessment Rate Schedule
First Semiannual Assessment Period of 2005
In setting assessment rates to achieve and maintain the reserve ratio at
the target 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 $12 million, which is $1 million less than the
annual amount that was projected six months ago. In recommending that the
Board maintain this schedule, the staff has considered the impact on thrift
earnings and capital of the current rate schedule and found no unwarranted
The Assessment Base Distribution and Matrix Migration Table 6 summarizes the current distribution of institutions across the
SAIF Assessment Base Distribution (1)
Assessable Deposits as of December 31, 2003
Supervisory Subgroup and Capital Groups in Effect January 1, 2004
Base ($ billion)
Base ($ billion)
assessment revenue $12 million
Average annual assessment rate (bp) 0.11
(1) Number reflects the number of SAIF members (excludes BIF-Oakar
institutions). Base reflects all SAIF-assessable deposits.
With 98.5 percent of the number of institutions and 99.9 percent of the
assessment base in the three lowest assessment risk classifications of 1A,
1B, and 2A, as of July 1, 2003, the current distribution in the rate
matrix reflects little fundamental difference from the previous semiannual
assessment period. The current distribution reflects a slight increase in the
percentage of institutions in the best-rated premium category. Since the
previous assessment period, 22 institutions migrated into the "1A"
risk classification (Table 7, next page), and 15 institutions migrated out of
the "1A" risk classification. Only 103 institutions are currently
classified outside of the best risk classification.
SAIF Migration To and From Assessment Risk Classification "1A"
Institutions entering "1A"
Due to capital group reclassification only
Due to supervisory subgroup reclassification only
Due to both
Institutions entering "1A"
Due to capital group reclassification only
Due to supervisory subgroup reclassification only
Due to both
The table reflects SAIF-insured institutions that moved in and out of
assessment risk classification "1A" from the second semiannual
assessment period of 2003 to the first semiannual assessment period of 2004.
The numbers only include institutions that were rated in both periods. The
table does not reflect other assessment risk classification migrations that
are not either to or from 1A.
Overall, for all SAIF-insured institutions, the supervisory subgroup
component of the risk classification was upgraded since the previous period
for 35 institutions with an assessment base of $5.3 billion and was downgraded
for 17 institutions with an assessment base of $2.6 billion.
Other Issues FICO Assessment. The Deposit Insurance Funds Act of 1996
(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 SAIF 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 2004 will be
determined using March 31, 2004 Call Report and Thrift Financial Report data.
Staff Contacts For information about deposit insurance assessments, please contact Steve
Burton, Acting Chief, Fund Analysis Section, Division of Insurance and
Research, at (202) 898-3539, 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.
Footnotes 1 Although the current effective rate schedule is 0 to 27 basis points, the base rate schedule, established in 1995, is still 4 to 31 basis points. The FDIC may alter the existing rate structure and may change the base SAIF rates by rulemaking with notice and comment. Without a notice-and-comment rulemaking, the Board has authority to increase or decrease the effective rate schedule uniformly up to a maximum of 5 basis points, as deemed necessary to maintain the target DRR.
2 The Board is reviews and weighs the following factors when establishing an assessment schedule: a) the probability and likely amount of loss to the fund posed by individual institutions; b) case resolution expenditures and income; c) expected operating expenses; d) the revenue needs of the fund; e) the effect of assessments on the earnings and capital of fund members; and f) any other factors that the Board may deem appropriate. These factors directly affect the reserve ratio prospectively and thus are considered as elements of the requirement to set rates to maintain the reserve ratio at the target DRR.
3 Staff estimates that the balance of the contingent loss reserve as of December 31, 2004 will range from $1 million to $124 million, and the best estimate is $42 million.
4 TThe model is a regression model where the current growth rate in insured deposits is estimated as a linear function of the previous growth rate in insured deposits, the current and previous growth rates of total (insured and uninsured) domestic deposits, as well as the current yields on 3 month and 10 year Treasury Bills. The range (-2.2%, +4.3%) corresponds to a 95% confidence level. In other words, if the process generating insured deposit growth in the future is the same as in the past, we can be sure with 95% confidence that the actual growth rate in insured deposits, over the year 2004, will lie within this range. The growth rate predicted by the model (thus, the most likely rate) is the midpoint of this range (1.1% annual growth).