In recent news, Davis Polk & Wardwell LLP has analyzed the special FDIC assessment aimed at recovering losses from Silicon Valley Bank (SVB) and Signature Bank failures. The FDIC’s final rule on the assessment is largely unchanged from the proposed rule, with a few clarifications and modifications.
The special assessment base will be equal to the amount of uninsured deposits reported by insured depository institutions (IDIs) for the quarter ended December 31, 2022, minus up to $5 billion of uninsured deposits. This assessment will be collected over eight quarterly periods starting from April 1, 2024. The first collection will be reflected on the invoice for the first quarterly assessment period of 2024, with the first payment due on June 28, 2024.
Background – FDIC’s obligation to recover DIF losses:
The FDIC is legally required to recover any losses incurred by the Deposit Insurance Fund (DIF) after the use of the systemic risk exception. This exception was invoked by the Secretary of the Treasury on March 12, 2023, to protect all uninsured depositors of SVB and Signature Bank. Additionally, the FDIC is mandated to maintain the DIF reserve ratio at a minimum of 1.35 percent and implement a plan to restore the reserve ratio if it falls below this threshold.
Due to the impact of the COVID-19 pandemic, the DIF reserve ratio fell below 1.35 percent, leading the FDIC to adopt a restoration plan in September 2020. This plan imposed higher assessment rates on IDIs. The recently finalized special assessment is in addition to the increased assessment rates already implemented under the restoration plan.
Details of the final rule:
The estimated losses to the DIF under the final rule are slightly higher than the proposal, leading to a higher assessment rate. IDIs will now be assessed 13.4 basis points annually, up from 12.5 basis points in the proposal, in order to recover an estimated loss of approximately $16.3 billion, up from the estimated $15.8 billion in the proposal. The assessment base will be the estimated uninsured deposits reported by each IDI in its December 31, 2022, call report, excluding the first $5 billion of uninsured deposits.
The special assessment will be collected quarterly for eight quarters, beginning in the first quarter of 2024. However, the FDIC retains the flexibility to extend the special assessment period or impose a one-time shortfall assessment if needed to fully recover the losses to the DIF.
Changes from the proposal:
The final rule includes a few changes from the proposal. One significant change relates to amendments to an IDI’s call report for the December 31, 2022, reporting period. In the proposal, such amendments would not have affected the special assessment rate or base. However, the final rule now allows for amendments to correct the reporting of estimated uninsured deposits through the FDIC’s Assessment Reporting Review process.
The final rule also addresses mergers, consolidations, and terminations of deposit insurance. If the special assessment period is extended or a one-time final shortfall assessment is imposed, the assessment base will not be adjusted for mergers or failures that occurred after the adoption of the final rule. Additionally, any bank that voluntarily terminates its insured status after the final rule is adopted will still be required to pay its share of the special assessment.
Similarities between the proposal and final rule:
Despite some opposing comments, the FDIC largely retained the proposed special assessment base of all uninsured deposits in the final rule. Commenters suggested excluding or adjusting certain types of deposits, but the FDIC rejected these suggestions to maintain a fair burden distribution among IDIs. The FDIC opted to use the December 31, 2022, snapshot for the special assessment base as it closely represents each institution’s vulnerability to deposit withdrawals in the absence of the systemic risk determination.
The final rule also maintains provisions for the collection and payment of the special assessment, as well as the FDIC’s discretion to extend the assessment collection period or impose a one-time final special assessment if necessary.
In conclusion, the FDIC’s special assessment to recover losses from SVB and Signature Bank failures remains largely unchanged in the final rule. IDIs will be assessed based on their uninsured deposits, with a higher assessment rate than initially proposed. The assessment will be collected over eight quarters, and the FDIC retains flexibility to adjust the assessment period or impose a shortfall assessment if needed.
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