FDIC Insurance Changes Impact Large and Small Banks

In accordance with provisions under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Federal Deposit Insurance Corporation (FDIC) set a goal in 2016 to have the minimum reserve ratio for the Deposit Insurance Fund (DIF) at 1.35 percent by Sept. 30, 2020.

To accomplish this goal, the FDIC required an insurance surcharge on banks with assets greater than $10 billion (large banks). The FDIC also added a mechanism for a shortfall assessment to be determined as of March 31, 2019, if the DIF does not reach 1.35 percent by this date. Furthermore, the FDIC added a provision applicable to banks with assets less than $10 billion (small banks) that created assessment credits to be applied to deposit insurance assessments when the DIF reaches 1.38 percent.

The DIF exceeded the 1.35 percent minimum reserve level as of Sept. 30, 2018, which triggered two events. First, the surcharge effective for large banks ended with the third quarter 2018 deposit insurance assessment.

Second, the measurement date for the total and individual bank assessment credits for small banks was established. The estimated amount of total credits available are in excess of $764 million, per the FDIC.

For each small bank, the FDIC sent notices to outline the total estimated assessment credits and a brief outline on how the individual bank credits would be calculated. However, these credits will not be available until the minimum reserve ratio is at least 1.38 percent. Functionally, the FDIC will apply the credits against the bank’s insurance assessment each assessment period the DIF is at least 1.38 percent until each individual bank’s credit is exhausted.

How should banks account for these credits? Per FDIC regulations, the credits are not available until the reserve ratio is a minimum of 1.38 percent. In 2006, the FDIC issued credits against insurance assessments and provided instructions in its December 2006 supplemental call report instructions, stating the following:

For call report purposes, an eligible institution should not recognize an asset (or a corresponding credit to income) in 2006 for the amount of the one-time assessment credit that the FDIC has allocated to it. An eligible institution should recognize its assessment credit, to the extent it remains available and is allowed to be used, as a reduction in the insurance assessment expense the institution would otherwise be required to accrue each quarter beginning in 2007.

As many will remember, this allowed (in many cases) the recognition of an asset for the full amount of credits allocated to the institution in 2007. However, this situation is different since the use of the credits is based upon the DIF reaching at least 1.38 percent each measurement period. This creates a potential contingency each assessment period, since the DIF could go below 1.38 percent, and the FDIC would then withhold use of the credits. This contingency may impact the timing of when, and the amount of, the credit to recognize. Affected banks should consider the contingent nature of the availability of the credits and previous guidance issued by the FDIC in determining the measurement and timing of recognition. Be alert to any future guidance issued by the FDIC with respect to the credits.

DHG Contact

David Wiggins, CPA
Partner, DHG Financial Services

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