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FDIC Insurance Premiums and Basel III

The Federal Deposit Insurance Corp introduced a series of proposals this week aiming to align new Basel capital standards for banks and FDIC insurance assessments.

The proposals would revise the way the FDIC calculates payments required for the agency fund designed to protect depositors against bank failures.

The FDIC takes into account institutions’ capital levels when determining insurance premiums. Under the new proposals all banks would be required to take a standardized approach when measuring capital and calculating counterparty risk. This type of risk in particular, is factored into the FDIC’s rate assessment for nine highly complex banks. Under Basel III capital rules, these complex banks are granted some greater flexibility in assessing counterparty exposure, which often result in lower premiums. The new proposal requiring a standardized approach could result in higher premiums for these institutions. Other smaller banks would not see any changes in premiums from the proposed changes.

FDIC chief Martin Gruenberg was quoted in a meeting of the FDIC board this week saying,

“It’s important that the capital categories that we use for deposit insurance assessments appropriately reflect the changes in the capital rules to maintain consistency in risk measurement and not increase reporting burden for smaller banks.”

This change is necessary, according to the FDIC, in order to avoid two sets of capital ratios from being reported. The proposals will remain open for 60 days of public comment. If approved, all changes would go into effect in the first quarter of 2015.

This aspect of the proposals is part of overall efforts by the FDIC to align general risk categories used to price assessments with changes outlined in Basel III final rules. Under these categories, “well-capitalized” banks are charged more favorable rates. A new leverage ratio approved by the FDIC earlier this year will go into effect Jan. 2018 requiring a minimum 6% leverage ratio in order to be well capitalized and a 3% leverage ratio to be considered adequately capitalized.

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