Deposit Insurance Fund: FDIC Proposes Rule to Implement the Dodd-Frank Act Requirement to Increase the Reserve Ratio from 1.15 Percent to 1.35 Percent by Imposing a Surcharge on Large Banks

Sullivan & Cromwell LLP - October 28, 2015

On October 22, 2015, the Federal Deposit Insurance Corporation (the “FDIC”) published for comment a proposed rule (the “Proposed Rule”), which would implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) that require the FDIC to raise the minimum reserve ratio for its Deposit Insurance Fund (“DIF”) to 1.35% from the former minimum of 1.15% by September 30, 2020.  The Proposed Rule would:

  • impose a surcharge on the quarterly assessments of insured depository institutions (“IDIs”) with total consolidated assets of $10 billion or more (“Large Banks”), beginning the quarter after the reserve ratio of the DIF first reaches or exceeds 1.15% (it was at 1.06% as of June 30, 2015) and continuing through the earlier of (i) the quarter that the reserve ratio first reaches or exceeds 1.35%, and (ii) December 31, 2018;
  • if the reserve ratio does not reach 1.35% by December 31, 2018 (provided it is at least 1.15%), impose a shortfall assessment on Large Banks on March 31, 2019 (payable in full on June 30, 2019); and
  • provide assessment credits to IDIs with total consolidated assets of less than $10 billion (“Small Banks”) for the portion of their regular assessments that contributed to the growth in the reserve ratio between 1.15% and 1.35%, with such credits being applied at a rate of 2 basis points annually (but not to reduce assessments below zero) in each quarter that the reserve ratio is at least 1.40%.
Importantly, the Proposed Rule notes that once the DIF reserve ratio reaches 1.35%, the September 30, 2020 Dodd-Frank Act deadline will have been met and will no longer apply.  If the reserve ratio later falls below 1.35%, even if that happens before September 30, 2020, the FDIC would have a minimum of eight years to return the reserve ratio to 1.35%, which may reduce the likelihood of a large increase in assessment rates.

The FDIC projects that the net effect of lower assessment rates that go into effect when the reserve ratio reaches 1.15% and the imposition of the surcharge would result in 34 of the 108 Large Banks paying lower assessments in the future than they are currently paying, while the remaining Large Banks would see some increase.  The FDIC estimates that it would collect approximately $10 billion in surcharges from Large Banks and award approximately $900 million in credits to Small Banks.