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Week Ending May 6, 2005
HR 1185 to reform the Federal deposit insurance system and for other purposes.
BRIEF
The Federal Deposit Insurance Corporation (FDIC) since its creation in 1934 has been assuring depositors that their deposits are insured-to a point-should the bank or savings and loan holding their money fail. The National Credit Union Share Insurance Fund (NCUSIF) has been doing the same since 1970.
The bill would make some changes to the deposit insurance organizations as a result of an FDIC study done in 2001. The historic coverage to $100,000 would be increased to $130,000 and further to $150,000 in 2013 with adjustments for inflation every five years. Retirement accounts and municipal accounts would benefit from double coverage. Some retirement accounts would be covered to $260,000 and in-State municipal accounts “to $2 million or the sum of the new standard coverage amount plus 80 percent of the amount of deposits in excess of the new standard, whichever is lower.”
The FDIC itself would be combining the program for banks and the one for savings and loans into one fund thereby providing for more equal premiums to either institution type. The FDIC would also be freed from the requirement to maintain a ratio of reserves to deposits insured at 1.25 percent. The organization would, under the bill, be allowed to maintain a ratio between 1.15 percent and 1.4 percent. In addition the FDIC is also free to set premiums amounts more on the basis of risk and to provide minimum premiums to institutions with a good track record and other evidence that they are minimum risks. The committee report accompanying the bill noted that “Currently over 90 percent of the industry does not pay for deposit insurance, and more than 1,100 institutions that were chartered within the last 8 years have never paid any premiums. Current law also limits the FDIC's ability to charge riskier institutions, new entrants, and institutions growing at excessive rates appropriate premiums based on the risks they present to the fund. The current premium restrictions require safer institutions to subsidize riskier institutions unnecessarily, and new entrants and institutions that undergo significant growth are allowed to avoid paying premiums.”
The FDIC would offer credits and dividends on premiums paid by the institutions when the reserve fund exceeds 1.35 percent and greater. The bill requires that a plan be created to address refurbishing the FDIC funds within ten years should the ratio fall below 1.15 percent.
The bill would require reports to Congress within one year. One would take a look at the FDIC organization and determine if it is appropriate. Another would look towards voluntary insurance for depositors with account in excess of the FDIC insured limits and one other report would look at the “feasibility of privatizing all deposit insurance at insured depository institutions and insured credit unions.”
Sponsor: Representative Spencer Bachus (R-AL-6th)
Vote: Passed House 413 to 10 (May 4, 2005) (RC 157)
Cost to the taxpayers: Although increasing the amount insured could lead to greater exposure for the FDIC should there be failures the freedom to assess collection more appropriately in relation to risk would increase net assessments collected.
The CBO concluded “CBO estimates that provisions in H.R. 1185 increasing insurance coverage would increase the net cost of resolving failed financial institutions by about $1.4 billion over the next 10 years. The bill also would expand the FDIC's discretion to determine the timing and amounts of insurance premiums that financial institutions would be required to pay. CBO expects that the FDIC would use this new authority to collect net assessments about $3.8 billion higher than CBO estimates would be collected under current law. Over the same period, we estimate NCUA would increase its net assessments by $0.1 billion under the bill. As a result, CBO estimates that H.R. 1185 would reduce net direct spending of the FDIC and NCUA by $2.5 billion over the 2006-2015 period.”
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MORE INFORMATION
CONGRESSIONAL BUDGET OFFICE NOTES
Section 1. Short title; table of contents
This section establishes the short title of the bill, the `Federal Deposit Insurance Reform Act of 2005,' and provides a table of contents.
Section 2. Merging the BlF and SAIF
This section amends provisions of the Federal Deposit Insurance Act to merge the Bank Insurance Fund and the Savings Association Insurance Fund. The section transfers each fund's respective assets and liabilities into a newly created Deposit Insurance Fund (DIF).
The section gives the FDIC at least 90 days after the bill is enacted to complete the merger of the BIF and SAIF. The effective date of the merger would be the first day of the next calendar quarter after the grace period elapses. For example, assuming the bill is enacted on March 10 the FDIC would have until June 8 to complete the merger, and all transactions would become operationally effective as of July 1.
Section 3. Increase in deposit insurance coverage
This section provides for a higher level of deposit insurance coverage and an inflation index for general depositors, individual retirement accounts, and municipalities. Further, it expands coverage to employee benefit plans. Credit unions are provided with complete parity in coverage with other insured depository institutions.
The section also eliminates the $100,000 deposit insurance limit on accounts at insured depository institutions and replaces it with a new standard maximum deposit insurance limit of $130,000.
The section further provides that, beginning April 1, 2007, the new standard maximum deposit insurance limit would be subject to a 5 year cost of living adjustment, calculated according to the Personal Consumption Expenditures Chain-Type Index (PCE) published by the Department of Commerce and rounded to the nearest $10,000. The FDIC and National Credit Union Administration (NCUA) Boards of Directors are required to publish the new standard maximum deposit insurance amount in the Federal Register and provide a corresponding report to Congress within 6 months of the new calculation. Also, the 5-year inflation-adjusted standard maximum amount would automatically increase unless a Congressional act provides otherwise. The new standard amount would take effect on January 1 of the year immediately succeeding the calendar year in which the new amount is calculated.
The section also requires institutions to provide pass through coverage for employee benefit plans. However, institutions that are not well-capitalized or adequately-capitalized may not accept employee benefit plan deposits.
The section also doubles the new standard maximum deposit insurance limit for certain retirement accounts to $260,000.
Finally, this section increases coverage for in-State municipal deposits to $2 million or the sum of the new standard coverage amount plus 80 percent of the amount of deposits in excess of the new standard, whichever is lower, and provides that no State may deny to insured depository institutions within its jurisdiction the authority to accept insured in-State municipal deposits, or prohibit the making of such deposits in such institutions by any in-State municipal depositor.
Section 4. Setting assessments and repeal of special rules relating to minimum assessments and free deposit insurance
This section allows the FDIC Board to set assessments in such amounts as it may determine to be necessary or appropriate in order to maintain the reserve ratio at the designated reserve ratio. This provision also eliminates the existing restrictions on the FDIC's authority to levy assessments on any institution above amounts needed to achieve and maintain the existing DRR of 1.25 percent. In effect, the minimum statutory rate (23 basis point cliff rate) is eliminated.
This section establishes a rate of not more than 1 basis point (exclusive of any credit or dividend) for those insured depository institutions in the lowest-risk category under the FDIC's risk-based assessment system. This section also provides that no depository institution will be barred from the lowest-risk category solely because of size. The one basis point rate does not apply during any period in which the DIF's reserve ratio is less than 1.15 percent of aggregate insured deposits.
In testimony before the Subcommittee on Financial Institutions and Consumer Credit, FDIC Chairman Donald Powell stated that:
Using the current system as a starting point, I believe that the FDIC should consider additional objective financial indicators, based upon the kinds of information that banks and thrifts already report, to distinguish and price for risk more accurately within the existing least-risk (1A) category. The sample `scorecard' included in the FDIC's April 2001 report represents the right kind of approach.
(Hearing before the Subcommittee on Financial Institutions and Consumer Credit, Viewpoints of the FDIC and Select Industry Experts on Deposit Insurance Reform, Oct. 17, 2001, Serial no. 107-47, p. 5.)
This scorecard example showed the lowest-risk category, 1A+, contained approximately 42 percent of all banks. The Committee looked to these examples, and the distribution of banks (including size, charter, and governance) within each of the 1A subcategories, as a basis for this provision. This section provides a necessary balance between the expanded authority and discretion of the FDIC to charge all institutions premiums and assuring that top-rated institutions are not excessively charged.
The Committee envisions that this rate will be the starting point or base premium for the risk-based assessment schedule to be developed by the FDIC (with higher premiums associated with higher risk categories being set relative to this base rate). Nothing in this provision precludes the FDIC from providing credits or dividends should the fund be at sufficient levels to warrant such an action.
The Committee is concerned that the FDIC's development and implementation of a new risk-based assessment system not negatively impact the cost of homeownership or community credit by charging higher premiums to prudently-managed and sufficiently-capitalized institutions simply because they fund mortgages and other types of lending through advances from Federal Home Loan Banks. The Gramm-Leach-Bliley Act took great care in trying to provide adequate funding resources for community financial institutions and insured housing lenders through expanding community institutions' access to Federal Home Loan Bank advances. The Committee expects the FDIC to take into consideration the goals of the Gramm-Leach-Bliley Act with respect to Federal Home Loan Bank advances and the objectives of this Act when developing a risk-based premium system.
The section also requires insured depository institutions to maintain all records that the FDIC may require for verifying the accuracy of any assessment for 3 years or, in the case of disputed assessments, until the dispute has been resolved, and increases the fees that the FDIC can impose for late payments of premium assessments from $100 to 1 percent of assessments per day, for institutions with assessments greater than $10,000. Institutions with assessments lower than $10,000 would face a maximum penalty of $100 for each day they were delinquent in paying their premium assessments.
This section also provides for a 50 percent discount in the assessment rate for deposits attributable to `lifeline' deposit accounts and repeals section 232 of the Federal Deposit Insurance Corporation Improvement Act of 1991 that required that credits for such accounts be funded from congressional appropriations.
The bill repeals a number of provisions requiring the FDIC to set premiums on a semiannual basis, replacing them with a provision granting the FDIC greater flexibility in the timing of those evaluations, so long as they are done at least once in a l2-month period. In granting this flexibility, the Committee intends that the FDIC should make these changes, absent extraordinary circumstances, in a manner that provides insured depository institutions with sufficient lead time to make reasonable budget preparations.
Section 5. Replacement of fixed designated reserve ratio with reserve range
This section eliminates the current 1.25 percent `hard target' DRR and provides the FDIC Board with the discretion to set the DRR within a range of 1.15 to 1.40 percent for any given year, using the following criteria as a basis for making these determinations:
(1) present and future risk of losses to the deposit insurance fund;
(2) economic conditions; and
(3) any other factors the Board may determine to be appropriate.
The more flexible range for setting the DRR is designed to prevent sharp swings in the assessment rates for insured depository institutions. In designating the reserve ratio, the FDIC must follow notice-and-comment rulemaking procedures, and is required to publish a thorough analysis of the data and projections on which the proposed DRR is based.
Section 6. Requirements applicable to the risk-based assessment system
This section directs the FDIC to collect information from all appropriate sources in determining risk of losses to the DIF. This provision does not authorize the FDIC to impose additional recordkeeping requirements on insured depository institutions.
The FDIC is required to consult with the appropriate Federal banking agency in assessing the risk of loss to the DIF with respect to any insured depository institution. This risk of loss evaluation may be done on an aggregate basis for institutions that are determined to be well-capitalized and well-managed.
The FDIC is also required to provide notice and opportunity for comment prior to revising or modifying the risk-based assessment system.
Section 7. Refunds, dividends, and credits from Deposit Insurance Fund
This section provides for refunds or credits of any assessment payment that was made by an insured depository institution in excess of the amount due the FDIC.
The section specifies two circumstances under which the FDIC is required to pay dividends to insured depository institutions: (1) whenever the reserve ratio of the DIF equals or exceeds 1.35 percent of estimated insured deposits and is less than or equal to 1.4 percent of such deposits, the FDIC is required to pay dividends equal to 50 percent of the amount in excess of what is required to maintain the reserve ratio at 1.35 percent; and (2) whenever the reserve ratio of the DIF exceeds 1.4 percent of estimated insured deposits, the FDIC is required to pay dividends in the amount of the excess of what is necessary to maintain the ratio at 1.4 percent.
The requirement that when the DIF exceeds 1.35 percent and is less than or equal to 1.4 percent, the FDIC must provide a cash dividend equal to one-half the difference between the actual fund balance and the fund balance required to maintain a reserve ratio of 1.35 percent is intended to slow the fund's growth automatically as it approaches its upper limit and return dividends to institutions that could be used for lending and to provide other financial services in their communities.
The section also provides for a transitional credit of 12 basis points of the total assessment base as of December 31, 2001 (or about $5.4 billion) to eligible insured depository institutions based on their respective share or percentage of total industry insured deposits held as of December 31, 1996. Eligible insured depository institutions had to be in existence at December 31, 1996, or be a successor to such an institution, and paid a deposit insurance assessment prior to that date.
In addition to the transitional credit, this section directs the FDIC to promulgate regulations establishing an ongoing system of credits to be applied against future premium assessments. Such credits will not be awarded, however, during any period in which (1) the reserve ratio of the DIF is less than the DRR; or (2) the reserve ratio is less than 1.25 percent of estimated insured deposits. In determining the amount of any ongoing assessment credits, the FDIC is required to consider the factors for designating the reserve ratio and setting assessments outlined elsewhere in the statute.
For purposes of allocating dividends and credits, the FDIC is required to determine each insured depository institution's relative contribution to the DIF (or any predecessor deposit insurance fund), taking into account the institution's share of the assessment base as of December 31, 1996; the total amount of deposit insurance assessments paid by the institution after December 31, 1996; that portion of assessments paid by an institution that reflects higher levels of risk assumed by the institution; and such other factors as the FDIC deems appropriate. The FDIC's calculation, declaration and payment of dividends are made subject to notice-and-comment rulemaking.
For any insured depository institution that exhibits financial, operational or compliance weaknesses ranging from moderately severe to unsatisfactory at the beginning of the assessment period, credits may not exceed the amount equal to the average assessment on all insured depository institutions.
In promulgating regulations establishing a system for dividends and credits, the FDIC is required to include provisions allowing insured depository institutions a reasonable opportunity to challenge administratively the amount of their dividends or credits.
Nothing in this section precludes the FDIC from providing credits, over and above the mandated dividend requirement, should it so choose.
The Committee intends that the FDIC, in determining the appropriate distribution of dividends or ongoing credits, weigh a number of factors in its rulemaking process. The calculation should recognize past contributions to the deposit insurance funds by incorporating the ratio determined for an institution in the calculation of the institution's one-time credit based on total assessment base at year-end 1996, as well as the actual assessments paid since that time. In establishing the dividend and credit systems, the FDIC should also take into account and make adjustments that reflect the higher risk profiles of some institutions so that they are not rewarded for riskier behavior. The FDIC is given the discretion to incorporate additional factors, through the rulemaking process, as it deems appropriate.
Initially, the Committee anticipates that the FDIC will establish a dividend account or similar mechanism for each insured depository institution. It is contemplated that when a dividend is declared, each institution would receive the same proportion of the total dividend declared as its dividend account bears to the sum of all institutions' dividend accounts for that declaration. As an example of how this might work under such a scenario, the calculation of an institution's dividend account could be based on the balance in the fund multiplied by the institution's 1996 assessment base ratio (described above). In addition, after reducing the amount of assessments paid to account for an institution's higher risk profile, and after considering other factors, the Corporation would incorporate the remainder in the calculation of the dividend account. In sum, it is the Committee's intent that the FDIC create and implement a robust system of dividends and ongoing credits based upon the various factors set forth in the bill.
Section 8. Deposit Insurance Fund restoration plans
Whenever the reserve ratio falls or is projected to fall below the low end of the range within which the FDIC is authorized to set the DRR, the FDIC is required, within 90 days, to establish and implement a plan for restoring the DIF to that level within ten years. While such a restoration plan is in effect, the FDIC has the authority to restrict the use of assessment credits by insured depository institutions, but is required to apply to an institution's assessment an amount that is the lesser of the institution's assessment or 3 basis points of an institution's assessment base. The FDIC must publish the details of its restoration plan in the Federal Register within 30 days of its implementation.
Section 9. Regulations required
This section provides that the FDIC has 270 days after the date of enactment to prescribe final regulations, after notice and opportunity for public comment, establishing the DRR, implementing increases in deposit insurance coverage, implementing the dividend requirement and the one-time assessment credit, and providing for premium assessments under the amended Act.
Section 10. Studies of FDIC structure and expenses and certain activities and further possible changes to deposit insurance system
This section provides that within one year of enactment, reports must be submitted to Congress on the following issues:
(1) The efficiency and effectiveness of the administration of the prompt corrective action (PCA) program, including the degree of effectiveness of the Federal banking agencies in identifying troubled depository institutions and the degree of accuracy of the risk assessments made by the FDIC;
(2) The appropriateness of the FDIC's organizational structure for the mission of the FDIC, to take into account the current size and complexity of the business of insured depository institutions; the extent to which the organizational structure contributes to or reduces operational inefficiencies that increase operational costs; and the effectiveness of internal controls;
(3) The feasibility of establishing a voluntary deposit insurance system for deposits in excess of the maximum amount of deposit insurance for any depositor;
(4) The feasibility of privatizing all deposit insurance at insured depository institutions and insured credit unions; and,
(5) The feasibility of using actual domestic deposits rather than estimated insured deposits in calculating the DIP's reserve ratio and the DRR.
Finally, the section directs the FDIC to conduct a study of the reserve methodology and loss accounting for insured depository institutions in a troubled condition over the period January 1, 1992 through December 31, 2004, and report its findings and conclusions to Congress within 6 months of the date of enactment. The FDIC is required to obtain comments on the design of this study from the Government Accountability Office (GAO), and to provide a draft of the final report to GAO prior to its submission to Congress.
Section 11. Bi-annual FDIC survey and report on increasing the deposit base by encouraging use of depository institutions by the unbanked
This section requires the FDIC to conduct a bi-annual survey on efforts by insured depository institutions to bring the `unbanked' into the conventional finance system, and report its findings and conclusions to the House Committee on Financial Services and the Senate Committee on Banking, Housing and Urban Affairs, together with any recommendations for legislative or administrative action.
Section 12. Technical and Conforming Amendments to the Federal Deposit Insurance Act relating to the merger of the BIF and SAIF
This section makes numerous amendments to ensure the technical conformity of the Federal Deposit Insurance Reform Act to various provisions in the Federal Deposit Insurance Act and other banking laws, to include the authority of the DIF to borrow from insured depository institutions and the Federal Home Loan Banks.
In particular, this section repeals section 5(d)(2) of the Federal Deposit Insurance Act, dealing with exit fees collected from institutions leaving the Savings Association Insurance Fund (SAIF). The Committee intends that those funds be returned to the DIF upon the repeal of this provision.
Section 13. Other Technical and Conforming Amendments relating to the merger of the BIF and SAIF
This section ensures the technical conformity of the Federal Deposit Insurance Reform Act to various provisions in the Federal Deposit Insurance Act and other banking laws. Most notably, amendments conform the Federal Deposit Insurance Reform Act to the Balanced Budget and Emergency Control Act of 1985.
AMENDMENTS
Dana Rohrabacher (R-CA-46th)
An amendment to strike section 3 of the bill (and redesignate the subsequent sections and any cross reference to any such section and conform the table of contents accordingly). (Editor’s Note: Section three refers to increasing the amount of money insured)
On agreeing to the Rohrabacher amendment Failed by voice vote.
Carolyn B Maloney (D-NY-14th)
An amendment to strike "For purposes" on page 4, line 8, and insert "except as provided in subparagraph (G), for purposes"; to insert "with respect to any qualified insured depository institution" on page 4, line 15, before the comma at the end; to strike the closing quotation marks and the second period on page 7, line 2 and to insert a new subsection on page 7, line 2 entitled CONDITIONS FOR INCREASED DEPOSIT INSURANCE COVERAGE
By unanimous consent, the Maloney amendment was withdrawn.
CBO NOTES
Basis of estimate: Two federal agencies are primarily responsible for the deposit insurance system. The FDIC insures the deposits in banks (financed through the BIF) and the deposits of thrifts (financed through the SAIF). The NCUA insures the deposits in credit unions (referred to as shares) with the Share Insurance Fund. When financial institutions fail, the FDIC and NCUA use the insurance funds to reimburse the insured depositors of the failed institutions. These agencies then sell the assets of the institutions and deposit any money recovered into the insurance funds.
Because H.R. 1135 would increase the amount of federally insured deposits, CBO estimates that the bill would increase the future costs of resolving failed financial institutions. We also expect that the FDIC and NCUA would increase the amount of premiums collected from financial institutions under the bill. Over the 2006-2015 period, we estimate that the cost of resolving failed institutions would increase by $1.4 billion and that premiums paid by financial institutions would increase by $3.9 billion. Thus, we estimate that enacting H.R. 1185 would result in a net reduction in direct spending by the FDIC and NCUA of $2.5 billion over the 2006-2015 period. The major components of this estimate are explained below.
Increase in the Cost of Resolving Failed Financial Institutions
H.R. 1185 would increase deposit insurance coverage from $100,000 to $130,000 for most accounts, with higher coverage levels for employee benefit plans and in-state municipal deposits. Such increases would apply to deposits held by credit unions, banks, and thrifts. In addition, the bill would require the FDIC and NCUA to adjust deposit insurance coverage every five years beginning January 1, 2008, to account for inflation. Because H.R. 1185 would require that coverage levels be rounded to the nearest $10,000, CBO estimates that coverage would remain at $130,000 in 2008 and would increase to $150,000 in 2013.
By 2006, we expect that insured deposits will total $3.8 trillion under current law. Based on information from the FDIC and the experience from past increases in deposit insurance coverage, CBO estimates that the increased insurance coverage under H.R. 1185 would increase the deposits insured by the FDIC by about $330 billion--or around 8 percent by 2007.
By insuring current deposits that are now uninsured, the bill would increase the liability of the FDIC and NCUA when institutions fail, without significantly increasing the assets of those institutions. Under current law, we expect the FDIC's net losses on failed institutions to total about $8.4 billion over the 2006-2015 period. (We project that gross losses of $38.6 billion would be offset, in part, by recoveries of $30.2 billion from selling the assets of the failed institutions over the 10-year period.) CBO estimates that the bill would lead to an increase in losses of roughly $1.4 billion over the next 10 years. Similarly, we estimate that enacting H.R. 1185 would increase NCUA's net outlays to resolve failed credit unions by less than $10 million over the 2006-2015 period.
By increasing deposit insurance coverage, H.R. 1185 could reduce incentives of depositors to monitor the behavior of financial institutions. Over the long term, this could lead to increased risk-taking by those institutions and ultimately to higher losses. On the other hand, if the FDIC incurs larger losses to resolve failed banks and thrifts, H.R. 1185 would give the agency the flexibility to set premiums to restore the balances in the insurance fund over several years--rather than immediately--thus allowing the agency to recover from large losses without imperiling other institutions. In this way, the new authority under the bill could reduce future losses from failed institutions. CBO has no basis for estimating the magnitude of either of these effects. We expect, however, that any changes in the costs of resolving failed institutions would eventually be borne by banks and thrifts through premiums.
Effects on Premiums Paid to the FDIC by Financial Institutions
Three general provisions of H.R. 1185 would affect the total amount of premiums collected by the FDIC. The bill would provide the FDIC with increased discretion to set premiums. Financial institutions would be given credits that could be used to pay the FDIC premium assessments in lieu of cash. Finally, the bill would require the FDIC to merge the BIF and SAIF.
The amount of premiums that banks and thrifts would pay through the combined effects of the three major provisions of H.R. 1185 would depend on the DIF's balance in each year, which in turn would depend on the costs of resolving failed institutions and on the growth in insured deposits. Overall, CBO estimates that the net effect of these provisions on deposit insurance premiums would be an increase in collections of about $3.8 billion over the next 10 years, considerably more than the projected increase in the FDIC's costs to resolve failed financial institutions ($1.4 billion). The major provisions that would affect premium assessments are described below.
Increased FDIC Discretion Over Premiums. Under current law, the FDIC is required to assess premiums so as to maintain reserves equal to 1.25 percent of insured deposits in the BIF and the SAIF. H.R. 1185 would give the FDIC broad discretion to set premiums paid by insured financial institutions and would allow the reserve ratio to range from between 1.15 percent of insured deposits to 1.4 percent. As a result, the total amount collected would depend on how the FDIC chooses to exercise that discretion.
Specifically, the bill would charge the FDIC with assessing premiums based on the degree of risk for each institution. It would authorize the FDIC to assess additional premiums if it considers the DIF's reserves to be inappropriately low, and it would require the FDIC to implement a 10-year plan to restore the fund's reserve balances if the DIF reserve ratio falls below 1.15 percent. It is possible that the FDIC could use its broad discretion under H.R. 1185 differently than CBO assumes for this estimate, resulting in either smaller or greater premium collections than CBO estimates. The following sections describe how CBO expects that the FDIC would exercise its discretion under the bill.
Basic Premiums Based on the Risk of Each Institution. For this estimate, CBO assumes that when setting premiums, the FDIC would consider all of the bill's criteria. Specifically, H.R. 1185 would authorize the FDIC to charge premiums based on each institution's risk of failure. CBO expects that the FDIC would choose to charge all institutions some premiums all of the time because even the strongest institutions pose some risk. (Under current law, the vast majority of institutions do not pay any premiums if the BIF or the SAIF reserves are greater than 1.25 percent of insured deposits.) The bill, however, would limit the amount of premiums the strongest institutions could pay to 0.01 percent of their deposits.
Based on information from the FDIC, CBO expects that the existing category of least risky banks would be subdivided into three groups, and that the lowest-risk group would be assessed at a rate of 0.01 percent. Banks and savings associations in higher-risk categories would pay correspondingly higher rates, CBO estimates. CBO also expects that the risk posed by the strongest institutions would not be significantly different from that of the next strongest institutions. Therefore, we expect that the FDIC would not charge those groups substantially different premiums.
Likewise, CBO expects that the FDIC would attempt to limit volatility in premiums and avoid increases in premiums for temporary reductions in the fund. As a result, CBO assumes that the FDIC would try to set premiums at levels considered likely to achieve the desired reserve ratio over several years. By expanding insurance coverage, H.R. 1185 also would affect the FDIC's decision about the reserve target, because increasing insured deposits would reduce the DIF's reserve ratio from about 1.3 percent to less than 1.2 percent. For this estimate, CBO assumes that the FDIC would opt to rebuild the reserve gradually following enactment of the bill, resulting in a reserve ratio of close to 1.20 percent over the 10-year period. Setting a higher target would require correspondingly higher assessments and would yield higher receipts to the DIF.
Under such assumptions, CBO estimates that the FDIC's premium assessments--before the use of premium credits--would total $18.1 billion over the 2006-2015 period, compared to about $9.1 billion under current law. The amounts paid by most banks and savings associations would be reduced by the availability of one-time premium credits authorized by the bill (premium credits are described in the next section). Because of the time needed to implement these changes, CBO assumes the new premium levels would not take effect until fiscal year 2007.
Other Provisions Affecting Assessments. H.R. 1185 also sets parameters for changing premiums and using credits if the DIF's reserves fall below or above the 1.15 percent to 1.4 percent range. While those provisions would affect the amounts collected under such conditions, they would not have a significant effect under CBO's current baseline assumptions.
For example, if the DIF's reserves were to fall below 1.15 percent of insured deposits, H.R. 1185 would require the FDIC to devise and implement a restoration plan to bring the reserve ratio back to 1.15 percent within 10 years. This flexibility to set restoration plans could reduce assessment income of the FDIC because it could spread the necessary premiums over 10 years. On the other hand, this provision of H.R. 1185 might provide FDIC the discretion necessary to recover from a large loss in the fund without imperiling other institutions.
H.R. 1185 also would give the FDIC broad authority to grant additional premium credits on an ongoing basis. For this estimate, CBO assumes that the FDIC would grant additional credits only when the DIF reserve ratio approaches 1.35 percent. Based on our estimates of the growth of insured deposits, increased losses, and the impact that one-time credits would have on premium income, CBO estimates that it is unlikely the fund balance would approach 1.35 percent of insured deposits over the next 10 years.
Credits for Future Premiums. H.R. 1185 would require the FDIC to provide certain banks and thrifts with one-time credits against future premiums, based on the amount of their payments to the BIF or SAIF prior to 1997. The FDIC's income from premiums would decline to the extent such credits are used. CBO estimates that financial institutions would use credits worth nearly $5.4 billion during the 2006-2015 period. Therefore, the FDIC's collections would be reduced by an equivalent amount over the next 10 years. CBO expects that most of the credits would be used over the 2006-2008 period.
The credits would equal 12 basis points (0.12 percent) of the combined assessment base of the BIF and SAIF as of December 31, 2001. They would be allocated to each institution based on its market share as of December 31, 1996. Institutions established after that date would be ineligible for these one-time credits against their future assessments.
H.R. 1185 would limit the use of credits by institutions that are not well capitalized or that exhibit financial, operational, or compliance weaknesses that range from moderately severe to unsatisfactory. Under the bill, such institutions could use credits worth no more than the average assessment on all depository institutions for that period. In addition, if the DIF's reserves were to fall below 1.15 percent of insured deposits, institutions would be prohibited from using more than three basis points worth of credits in that year.
Based on information from the FDIC, CBO expects that about $5.2 billion of the credits awarded would be used during the 2006-2015 period. After adjusting for such credits, CBO estimates that implementing this bill would increase net proceeds from premiums by a total of $3.9 billion relative to CBO's baseline over the next 10 years.
Merging BIF and SAIF. H.R. 1185 would require the FDIC to merge the Bank Insurance Fund and the Savings Association Insurance Fund and create a new Deposit Insurance Fund. By 2006, CBO expects the net worth of the combined fund would be about $50 billion. Together with the other reforms in the bill, CBO expects that merging the funds would have a negligible budgetary impact. Considered separately from the other reforms in the bill, merging the funds would delay the collection of premiums on institutions now insured by the BIF for a few years and would have a minor impact on net outlays from the fund over the 2006-2015 period.
Increase in Premiums Paid to NCUA by Financial Institutions
Under current law, credit unions must pay NCUA 1 percent of the net change in deposits each year. NCUA provides rebates to credit unions if the balance in the share insurance fund exceeds 1.3 percent of insured deposits. Under current law, CBO estimates that NCUA will collect net premiums of about $3.6 billion from its members over the 2006-2015 period.
Based on information on the characteristics of credit union deposits, CBO expects that H.R. 1185 would extend insurance coverage to about $8 billion in currently uninsured deposits in 2006. CBO estimates that, under the bill, the net premiums collected by NCUA would increase by $100 million over the 2006-2015 period. About $60 million of that amount would be realized in 2007. The premiums collected for the expanded insurance coverage would more than offset CBO's estimate of the additional costs to NCUA of $10 million over the next 10 years to resolve failed institutions.
Estimated Impact on state, local, and tribal governments: H.R. 1185 contains an intergovernmental mandate as defined in UMRA. A provision in section 3 would preempt New York state laws that limit savings banks and savings and loan associations from accepting municipal deposits. Complying with this mandate would impose minimal costs, if any, on the state of New York, and any such costs would not exceed the threshold established in UMRA ($61 million in 2005 adjusted annually for inflation). Enacting the bill could benefit municipalities in New York to the extent that more depository institutions could compete for their deposits and offer more favorable terms as part of that competition.
Estimated impact on the private sector: H.R. 1185 contains private-sector mandates as defined in UMRA, primarily because it would require certain depository institutions to pay higher premiums for federal deposit insurance. CBO estimates that the direct cost of those mandates would likely exceed the annual threshold in UMRA ($123 million in 2005, adjusted annually for inflation) in most of the first five years the mandates would be in effect. We do not have sufficient information to provide an estimate of the aggregate cost of all the mandates in the bill.
Banks and Savings Associations
Commercial banks and savings associations must have federal deposit insurance. CBO, therefore, considers changes in the federal deposit insurance system that increase requirements on those institutions to be private-sector mandates under UMRA. Specifically, the bill would increase federal insurance coverage for insured depository accounts. Because premiums are based in part on the amount of insured deposits, an increase in coverage would require banks and savings associations to pay more in deposit insurance premiums.
Three additional provisions of H.R. 1185 would affect the total amount of premiums collected by the FDIC. First, the bill would require the FDIC to merge the BIF and the SAIF insurance funds. Second, the bill would provide the FDIC with greater discretion to set premiums by allowing the agency to collect premiums from all banks and savings institutions regardless of their risk category. Under current law, banks and savings associations in the lowest risk category do not have to pay any deposit insurance premiums when their deposit insurance fund (BIF or SAIF) is above the designated reserve ratio of 1.25 percent of insured deposits. Third, the bill would direct the FDIC to grant credits to some financial institutions that could be used to pay deposit insurance premiums in lieu of cash.
CBO estimates that banks and savings associations would pay (net of credits) about $1.1 billion more in premiums in fiscal years 2007 through 2011 relative to current law. The incremental cost to the industry would depend, in part, on how the FDIC uses its new discretion under the bill to set premium rates. CBO expects that the FDIC would begin to collect premiums from banks and savings associations that are not required to pay premiums under current law.
Credit Unions
Because the bill also would increase the coverage of insured accounts for federally insured credit unions, those credit unions would have to contribute more to the National Credit Union Insurance Fund. CBO estimates that those additional contributions would total about $100 million over the 2006-2010 period. All federally chartered and most state-chartered credit unions are required to have federal deposit insurance. According to the National Association of Federal Credit Unions, 17 states do not require their state-chartered credit unions to purchase federal deposit insurance. The cost of the mandate would amount to the incremental premiums paid by those institutions required to have federal insurance and thus may be less than the total additional contributions collected from all federally insured credit unions.
Employee Benefit Plan Deposits
The bill also would prohibit banks, savings associations, and credit unions that are not well capitalized or adequately capitalized from accepting deposits for employee benefit plans. CBO does not have sufficient information to assess the cost of this mandate.
Estimate prepared by: Federal Costs: Kathleen Gramp and Judith Ruud; Impact on State, Local, and Tribal Governments: Sarah Puro; Impact on the Private Sector: Judith Ruud and Craig Cammarata.
Estimate approved by: Robert A. Sunshine, Assistant Director for Budget Analysis.
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