November 28, 2023

Uninsured Deposits and the FDIC Final Rule for Special Assessments on Banks

7 min

The FDIC recently approved a final rule to impose a special assessment on banks to recover losses in connection with the decision to guarantee uninsured deposits at two failed banks in March 2023. No banking organizations with total assets under $5 billion will pay the special assessment.

The final rule becomes effective on April 1, 2024. Payment of the special assessment will begin with the first quarterly assessment period of 2024 (January 1 through March 31, 2024), with an invoice payment date of June 28, 2024.

Who must pay the special assessment?

  • The special assessment will apply to all banks uniformly—large banks, regional banks, and any other, smaller banks or banks that meet the applicable threshold (described below)
  • No banking organizations with total assets under $5 billion will pay a special assessment
  • The FDIC estimates that 114 banking organizations will be subject to the special assessment:
    • 66 banking organizations with total assets between $5 billion and $50 billion
    • 48 banking organizations with total assets over $50 billion

How much needs to be paid?

  • The FDIC estimates that approximately $16.3 billion was attributable to the protection of uninsured depositors for two banks that failed in March 2023, Silicon Valley Bank and Signature Bank. The amount is higher than the FDIC's previous estimate of 12.5 basis points (3.13 basis points quarterly).
  • The assessment base for the special assessment is a bank's estimated uninsured deposits, reported for the quarter that ended December 31, 2022, adjusted to exclude the first $5 billion in estimated uninsured deposits from the bank (or for banks that are part of a holding company with one or more subsidiary banks, at the banking organization level)
  • The special assessment will be collected at an annual rate of approximately 13.4 basis points for an anticipated total of eight quarterly assessment periods of 3.36 basis points
    • The estimated loss pursuant to the systemic risk determination will be periodically adjusted, and the FDIC can cease collection early, impose an extended special assessment collection period after the initial eight-quarter collection period to collect the difference between losses and the amounts collected, and impose a one-time final shortfall special assessment after both bank receiverships terminate
  • The FDIC is essentially using the amount of a bank's uninsured deposits as a proxy to determine the bank's riskiness

Are there any exclusions from a bank's amount of uninsured deposits?

  • The first $5 billion of uninsured deposits will be deducted, as described above
  • Specific types of deposits are not excluded. Commenters had argued that collateralized deposits, including public deposits and trust-related deposits (e.g., fiduciary funds awaiting investment or distribution) and intercompany deposits (e.g., from nonbank affiliates, including parent holding companies) should be treated differently. The final rule, however, treats all uninsured deposits uniformly

Why is the FDIC making a special assessment?

  • Under federal law, the FDIC must make a special assessment after using its systemic risk determination authority. In levying a special assessment, the FDIC does not need to follow normal deposit insurance assessment rates and may consider who benefited from the action and the effects on the banking industry.
  • The FDIC believes that large banks and regional banks, and particularly those with large amounts of uninsured deposits, were the institutions most vulnerable to uninsured deposit runs in spring 2023 and benefited the most from the stability that the systemic risk determination provided

Why was there a systemic risk determination?

  • Unlike other business entities, when a bank fails it does not enter bankruptcy to resolve creditors' claims. Instead, it is taken into FDIC receivership, an administrative process in which the FDIC takes control of and resolves the bank. The costs to the FDIC associated with the resolution are funded by drawing on the FDIC's Deposit Insurance Fund, which is funded through assessments on banks and backed by the U.S. Treasury.
  • Unless the systemic risk exception is invoked, uninsured depositors and other creditors may only be repaid in a resolution to the extent permissible under the general least-cost-resolution statutory requirement, which seeks to minimize costs to the Deposit Insurance Fund. The systemic risk exception allows the FDIC to bypass that general requirement (subject to specific safeguards).
  • The systemic risk exception reflects Congress's recognition that financial stability issues and concerns may sometimes outweigh the general policy of minimizing costs to the Deposit Insurance Fund.

How does the special assessment work in cases of mergers, acquisitions, or consolidations?

  • If a bank acquires another bank through merger, acquisition, or consolidation, the acquiring bank must pay the target bank's special assessment (if any), including any unpaid special assessment, in addition to its own special assessment, from the quarter of the transaction through the remainder of all special assessment collection periods
  • If the FDIC extends the collection period or imposes a one-time final shortfall assessment, each banking organization's assessment base will not be adjusted for mergers or failures that occurred after the adoption of this final rule or during the eight-quarter collection period.
  • The FDIC has also clarified that the special assessment base of the acquiring bank in a merger or consolidation that occurred prior to the March 2023 systemic risk determination will be adjusted to include the uninsured deposits of the acquired bank and will get the benefit of a single $5 billion deduction.

What if a bank terminates its insured status?

  • To avoid incentivizing banks to voluntarily terminate their insured status to avoid paying the special assessment, the FDIC will require any bank that voluntarily terminates its insured status after the adoption of the final rule (or during any special assessment collection period) to pay the entire remaining amount of its special assessment at the same time its obligation to pay regular deposit insurance assessments ends.

What are some key considerations for uninsured deposits generally?

  • For banks that recently recalculated their uninsured deposits. After the FDIC issued its proposed rule for the special assessment, certain banks amended their December 31, 2022 regulatory reports, leading to a reduction of more than $250 billion in reported uninsured deposits. The FDIC has announced a compliance review to ensure banks accurately report uninsured deposit levels. The FDIC has observed that some banks (incorrectly) reduced the reported amount of uninsured deposits on the basis that these deposits were, for instance, collateralized by pledged assets or intercompany deposit balances. Based on previous FDIC guidance, banks that incorrectly reported uninsured deposits should amend their Call Reports and submit the revised data file.
  • For entities looking to maximize deposit insurance, and among other options:
    • Structure institutions, account types, and ownership categories carefully. Depositors may essentially structure their deposits across various FDIC-insured banks and within each bank, among different account types and ownership categories (subject to applicable FDIC regulations). To the extent desirable, customers may also move portions of their deposits to federally insured credit unions as member shares (similar to, but legally distinct from, deposits), which are subject to a separate NCUA insurance fund.
    • Cash management accounts. Brokerages and other nonbank financial institutions may offer cash management accounts that, using a sweep feature, spread cash amounts (not securities amounts) across multiple FDIC-insured banks, up to the applicable FDIC maximum deposit insurance limit
    • Reciprocal deposit agreements. Many FDIC-insured banks participate in networks that allow a depositor's relationship bank to sweep account balances in excess of the FDIC maximum deposit insurance limit to other FDIC-insured banks within the network. These banks do so for a fee, generally in the form of a reduced interest rate that is charged to the depositor. In return for the fee, the depositor gets access to more deposit insurance with less operational and administrative burden, while maintaining liquidity.
  • For banks, their affiliates, and third-party service providers that participate in arrangements under reciprocal deposit agreements. Carefully review the FDIC regulations for the determination of deposit insurance, including on a pass-through basis, as well as the recent interagency guidance on third-party risk management and the requirements of the Bank Service Company Act—including Section 7(c)