Friday, May 22 was a historic day for the community banking industry.
A collective sigh of relief was heard when word came down shortly after lunch time of the FDIC board action to reduce the proposed special assessment premium to restore the Bank Insurance Fund to 5 bp. The original proposal was to impose a one time special assessment of 20 bp on insured deposits.
Since late February when the interim rule was put out for comment, the industry has worked vigorously to suggest alternatives to mitigate the countercyclical effect the assessment would have on all insured financial institutions in these challenging economic times. The industry weighed in with over 14,000 comment letters.
Perhaps most significant for community banks, the Board adopted an asset minus Tier 1 capital basis for the assessment, which would benefit 8,141 community banks and transfer the “lion’s sare” cost of recapitalization to the large mega too big to fail banks who have for far too long escaped paying on certain liabilities. Only 165 banks will pay more under the new assessment base, the vast majority of those are in excess of 20 billion in assets.
Clearly, a great victory for the industry. But closer examination of the final rule has us all wondering if the war has just begun. The FDIC board left open the option to assess another 5bp at the end of each of the third and fourth quarters without further public comment. Further assessments can be levied at the discretion of the FDIC board if they determine that public confidence in the fund is eroding or the fund balance approaches zero. A bitter pill to be sure.
For now, we will celebrate the action of the FDIC board. But it is no time to lay down our shields or swords. Something tells me this is far from over and the added uncertainty only confounds community bank management who are already confounded by having to bear the burden for any of this mess in the first place.
