May 22, 2009
Comptroller Dugan’s Statement on the FDIC’s Special Assessment Rule
WASHINGTON — Comptroller of the Currency John C. Dugan made the following statement about a Final Rule on the Special Assessment at today's Federal Deposit Insurance Corporation meeting:
I regret that I cannot support the final rule today, for three reasons.
First and foremost, I believe the total amount of the three special assessments contemplated by the rule without further comment from the public is too high, with the significant potential for pro-cyclical consequences. The interim final rule proposed several months ago would have been a one-time 20 basis point assessment using the normal assessment base of domestic deposits. The revised special assessment in today's final rule uses an asset-based assessment base, but if translated into the normal assessment base of domestic deposits, it results in the following totals: 7 1/3 basis points for the second quarter, and up to an additional 7 1/3 basis points each for the end of the third quarter and the end of the fourth quarter. Thus, instead of voting on a one-time special assessment today of 20 basis points, we're voting on the ability to impose three special assessments before the end of the year totaling 22 basis points. While the second two assessments would require separate Board votes, they would not require additional public comment, and I don't think that's appropriate.
As I said when we adopted the interim final rule, I was very concerned about the pro-cyclicality effect of imposing a 20 basis point assessment on the industry in the middle of this recession, when so many banks are struggling with steep credit losses. The comments we received on the interim final rule reinforced that concern, for all of us. Responding to this concern, the Chairman sensibly announced that, if Congress significantly increased the amount of the FDIC's borrowing authority to handle unexpected losses, the amount of the special assessment could be reduced substantially, and perhaps cut in half. Congress has now taken that action, and I thought that would have resulted in a 10 basis point assessment, which is what I would support – 5 basis points now, and the possibility of 5 basis points later in the year – an amount, by the way, that would leave the fund in positive territory based on current projections. Instead, as mentioned, the current final rule would result in a maximum of 22 basis points – 7 and 1/3 now, with the possibility of 14 2/3 additional basis points later in the year.
Now, it's true that the new assessment base would cause the special assessment to be distributed differently. But if the maximum amount were assessed before the end of the year, the least that institutions would pay would be 15 basis points, and the most that would be paid would be 30 basis points. I think that's too much to impose without getting more input from the public about potentially adverse and counterproductive public consequences. We of course will have the ability to vote on the additional two assessments, but the rule today locks into a standard that creates a kind of presumption that we should take that action whenever the fund is projected to decline below zero.
And that leads to my second objection to the final rule. In light of the Congressional action to expand the FDIC's line of credit, I don't think we should create a presumption of special assessments whenever the fund is projected to fall below zero. One of the real benefits of having a line of credit is that it allows us to reduce the upfront cost of assessments by spreading them out over time, thereby mitigating the pro-cyclical effect. Indeed, spreading costs is one main purpose of a line of credit, and it's a purpose cited both by members of Congress in passing the legislation and commenters on the interim final rule. While concerns have been expressed about allowing the fund to decline below zero in terms of the potential effect on public confidence, that result is not at all clear, especially since the fund has dropped below zero at other times without having that effect. In any event, as I've previously mentioned, there are also concerns about front-loading assessments in a pro-cyclical manner at the height of a recession. I for one would like to see a much more significant balancing of these concerns in any future decision to impose a special assessment – so long as the industry would be in a position to credibly rebuild the fund over time. The standard in the final rule ought not to tip the balance in one direction, as it does now.
Finally, I cannot support the final rule's very significant change to the assessment base, both in terms of process and substance. In terms of process, I don't think the public has received adequate notice of the precise change the Board had in mind, which was not formally announced until this morning. While the proposal may technically satisfy notice requirements of the Administrative Procedures Act, I just don't think it's enough to ask a short question in a proposed rule, especially when the final version adopted is different from the standard proposed in the question. I am therefore sympathetic to the requests made this week to extend comment on this particular aspect of the proposal for a limited additional period.
In terms of substance, the proposed change bears no relation to the increased losses to the deposit insurance fund – both incurred and projected – that are the very reason for the special assessment. In essence, the purpose and main effect of the proposed change is to shift more of the cost of the assessment from smaller banks to larger banks. As previously discussed, the final asset-based assessment imposed at the end of June would raise the equivalent of an assessment of 7.3 basis points using the normal assessment base of domestic deposits. That is, instead of being a 7.3 basis point assessment on the domestic deposits of all banks, the asset-based approach results in most larger banks (banks with more than $10 billion in assets) paying more than 7.3 basis points, and most smaller banks paying less. That result is perverse, because the overwhelming share of increased actual and projected costs to the deposit insurance fund have been caused by actual and projected failures of smaller banks, not larger ones.
The fact is, the average asset size of failed banks that have caused losses to the fund in the last several years is $2.4 billion, and the largest institution to fail, IndyMac, had $30 billion in assets. According to FDIC staff, the banks projected to fail for purposes of this cost estimate have assets consistent with this range. Nevertheless, despite these facts, larger banks have contributed nearly 70 percent of the regular quarterly deposit insurance premiums. With the final rule, the Board would shift even more of the funding costs for failures to large banks by requiring them to pay for 76 percent of this special assessment – and presumably a similar share of all future special assessments.
The Board case for making this change is exceptionally thin. It refers to the many commenters that supported such a change – but they were nearly all smaller banks that would reap the most benefit, and that benefit by itself cannot be an adequate basis to support the change. Some commenters suggested that, somehow, larger banks caused the failures of the smaller banks that have caused losses to the fund. This premise is faulty, and it is not relied on in the Board case. Large banks have certainly had their own problems, but they did not force smaller banks to load up with commercial real estate funded by brokered deposits, which is the combination that has been at the heart of so many community bank failures. Instead, the only basis suggested in the Board case for the significant change in approach is the bare conclusion that it "better balances the burden of the special assessment." This unsupported assertion is not an appropriate or adequate basis for the Board's proposed action.
Now, this is not to say that the "too-big-to-fail" differential between larger banks and smaller banks is fair, because it's not. But that unfairness is not what caused losses to the deposit insurance fund that have to be addressed by the special assessment.
In sum, I agree with my colleagues on the Board that we need to take steps now to ensure that the fund has the resources it needs to deal with future bank failures. However, for the reasons I've given, I cannot support the final rule in its current form.