Federal Deposit
Insurance Corporation

From: Henry, Jackie [mailto:Jackie_Henry@centralbank.net] On Behalf Of Littlefield, Ken
Sent: Monday, October 20, 2008 4:10 PM
To: Comments
Subject: Assessments RIN3064-AD35

COMMENTS TO THE FDIC REGARDING SECURED LIABILITIES

Central Bank respectfully requests the FDIC to consider a modification of the Secured Liability section of the deposit insurance assessment proposal. We recommend that the definition of secured liabilities exclude any securities sold under agreement to repurchase (REPO’s) with state and local governments where the securities sold are federal government or agencies. In the alternative, we recommend that any FDIC assessment for secured liabilities be calculated using the risk factor method for category one institutions similar to the treatment of brokered deposits. Following are our justifications for this change.

The FDIC proposes to assess a deposit insurance premium for secured liabilities above 15% of domestic deposits. The secured liabilities includes Federal Home Loan Bank advances, securities sold under repurchase agreements (REPO’s), secured federal funds and other secured borrowings. The proposal provides a formula to increase the deposit insurance premium by multiplying the base assessment rate by one plus the ratio of the bank’s secured liabilities to domestic deposits minus 0.15. This factor could increase the assessment of Category I banks above the ceiling rate of 14 bps but no more than 50 percent of the initial assessment rate.

Further, the FDIC gives three theories for why secured deposits should be included. I do not believe the three theories justify an increase in assessment for some of the types of transactions conducted by Central Bank as well as many other community banks around the nation. Let me explain the transactions and the reasons they should not be included in the FDIC assessments.

Central Bank makes competitive bids for State and local deposits and/or REPO transactions under the provisions of state law. State law requires deposits to be secured by eligible collateral which is generally United States Government securities or securities of the various federal government agencies. In the alternative, banks frequently sell the state or public entity securities overnight with the agreement to repurchase them the next day. These transactions require the same high quality government securities as we use to secure their deposits as discussed above.

While REPO transactions are on balance sheet, we would not have the securities on our books except for the liability. Put another way, the banks receive the funds during business hours and covers the liability by purchasing securities and then selling them the same day. These securities require zero capital using the risk based capital standards of bank regulatory agencies.

As you can see, these transactions do not pose a risk to the FDIC and are vastly different from the theories put forth to support the higher assessment. These REPO’s are controlled by state law which requires high quality liquid securities. In the case of a bank failure, the FDIC would have to repurchase the securities from the public entity but would have the government securities as an asset and very little, if any loss exposure.

In the case of borrowing from the Federal Home Loan Bank, a bank would typically make real estate loans and fund them with borrowings for liquidity and/or interest rate risk management. I understand the FDIC’s concerns about a bank leveraging its capital and growing its loan portfolio with the use of borrowed funds. In the case of a bank failure, the FDIC would be left with the debt to the FHLB secured by real estate loans which may or may not be worth the amount of debt owed.

One theory used by the FDIC to justify the secured liability assessment is that banks can grow by making loans without paying any FDIC insurance on the funding of loans. This theory does not apply the example discussed above. A bank would have to buy government securities with the public funds since it needs them to sell each night to the public entity.

The result of the proposed assessment rules will cause banks to pass the FDIC assessment on the state or local entity. Passing on the assessment cost will lower the revenue to state and local governments and effectively shift part of the cost of bank failures to them. I do not believe this is the result the FDIC desires, nor is it a fair result. After all, the State and local governments merely want to invest their funds over night with either a secured deposit or a REPO. Either way, these liabilities pose little risk to the FDIC since they are offset by government securities.

Finally, one unintended result will be that commercial banks will not be as competitive when bidding for public funds compared to non depository financial institutions such as brokerage firms and investment banks. Non bank entities will not have to pay the FDIC assessment for REPO transactions and bank earnings will be damaged by that result.

Thanks in advance for your consideration.

Kenneth W. Littlefield
Jefferson City, MO