On November 12, 2009, the FDIC adopted its final rule regarding prepaid assessments.  The final rule is largely unchanged from the FDIC’s initial proposal; the most significant change is that the FDIC will now refund any unused assessments after collection of the amount due on June 30, 2013, as opposed to December 30, 2014.

Effect

As noted by the FDIC, the prepayment of FDIC assessments primarily impacts liquidity – both of the FDIC Deposit Insurance Fund and the banks.  As the prepaid assessments merely represent the prepayment of future expense, they do not affect a Bank’s capital (the prepaid asset will have a risk-weighting of 0%) or tax obligations.

Given the higher FDIC assessments generally, and the elevated assessment rates for troubled banks, the prepayment of FDIC assessments could represent a significant cash outlay.  The FDIC’s online assessment rate calculator includes a prepayment tab to help banks estimate their payments

Exemptions

The final rule provides that the FDIC, after consultation with the institution’s primary federal regulator, may exempt any institution from the prepayment requirement if it determines, in its sole discretion, that the prepayment “would adversely affect the safety and soundness of the institution.”  The FDIC is required to provide notice to such institutions by Monday, November 23, 2009 if it has exempted the institution.  We are aware that the FDIC started mailing exemption letters on November 12th.

The FDIC has not indicated the standards it will apply for exemptions.  Based on the exemptions we’ve seen so far, it appears that all institutions subject to a formal enforcement action may be exempted.

As provided in the final rule, and explained in the FDIC letter, institutions exempted by the FDIC may apply for the FDIC to withdraw the exemption.  Any such request must be submitted in writing on or before December 1, 2009, and must “contain a full explanation of the reasons the exemption is not needed and provide supporting documentation, including current financial statements, cash flow projections, and any other relevant information, including any information the FDIC may request.”

For institutions not exempted by the FDIC on its own accord, the final rule provides that any institution may apply for an exemption if the prepayment “would significantly impair the institution’s liquidity, or would otherwise create extraordinary hardship.”  The FDIC has previously indicated that it did not anticipate granting many exemptions beyond those that it initiates on its own.

Public Notice?

It is not clear from the final rule whether the FDIC intends to publicly announce which institutions have been granted an exemption, or whether they will be obligated to release the names of such institutions pursuant to a Freedom of Information Act request.  Regardless, a dedicated analyst would likely be able to construct a list of exempted banks by carefully examining call reports for evidence of the deferred asset associated with the prepaid assessments.

Institutions that are exempted by the FDIC need to be ready to address any consumer concerns assuming that the exemption will ultimately become public knowledge.  However, given the importance of liquidity in the current banking environment, we don’t see a strong reason for any institution granted an exemption to seek a waiver of that exemption.