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FDIC cuts special assessment to five basis points!

Today the FDIC Board adopted a final rule on the special assessment that has been hanging over the collective heads of traditional bankers since February.  The good news is that the special assessment was reduced from 20 basis points to five.  The bad news may be that more is certain to be levied in the 4th Quarter and it has some of us scratching our heads. 

The final rule establishes a special assessment of five basis points on each FDIC-insured depository institution's assets, minus its Tier 1 capital, as of June 30, 2009, rather than domestic deposits. The special assessment will be collected Sept. 30, 2009.
The special assessment will be capped at 10 basis points of an institution's domestic deposits so that no institution will pay an amount higher than they would have paid under the interim rule, according to FDIC Chairman Sheila Bair.
"This is a huge win for our banks," said OBA Chairman Marty Hansen. "Following the industry's victory earlier this week in securing passage of S. 896 increasing the FDIC's borrowing authority, this decision shows what can happen when bankers work together on a common goal like this one: reducing the impact of the special assessment."  
Hansen is president and CEO of the First State Bank of Fairfax, with approximately $40 million in total assets.
The new assessment base will include Federal Home Loan Bank advances and that may be good news or bad news for community banks, depending on the extent to which they rely on such advances to fund loan demand, said OBA President and CEO Roger Beverage.
"Individual bankers will view this result from different perspectives, depending on the extent to which they use (FHLB advances) as a major funding source," he said. "My guess is there will be some bankers who will not be happy about this change, but I have no way of knowing how many or otherwise quantifying it right now."

You'll remember that the original proposal called for the “possibility” of an additional 10 basis point assessment this year if needed. That would have brought the total assessment to 30 basis points as originally proposed. 
On this point Chairman Bair noted that, given the inherent uncertainty in the FDIC's projections about the future of the Deposit Insurance Fund (DIF) and the importance of maintaining a positive DIF balance and reserve ratio, "it is probable that an additional special assessment will be necessary in the fourth quarter, although the amount of such a special assessment is uncertain."
As a result the Board adopted the staff recommendations and included the following authority in the Final Rule:
3. Allow the FDIC Board of Directors ... to impose additional special assessments of up to five basis points on all insured depository institutions based on each institution's assets minus Tier 1 capital for the third and fourth quarters of 2009, if the FDIC estimates that the Deposit Insurance Fund (DIF or the fund) reserve ratio will fall to a level that the Board believes would adversely affect public confidence or to a level that will be close to or below zero . . . .
The final rule can be viewed at the following link:  http://www.fdic.gov/news/board/May22no1.pdf.

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