This Month's Headache: New FDIC Proposal
How will your bank pay for the proposed FDIC prepayment, if it is approved?
This Month's Remedies: Prescribed by Jamie Sumner and Kyle Kuster
Bank failures continue to mount, and the Deposit Insurance Fund (DIF) continues to be drained. While some banks are identifying means to meet its nonperforming assets, the FDIC, too, is reflecting on its means to meet their guarantees on deposits.
According to the FDIC, the special assessments will not be issued, leaving just two other sufficient methods: borrowing and raising funds. This, of course, is referring to the option of the FDIC to borrow from its line of credit with the Department of the Treasury and its request for prepayment of assessments three years forward.
So, how will your bank pay for the prepayment?
It May Be Time to Tap Into Those Cash Reserves
With respect to the ability to pay the prepayment, the FDIC has stated that "as of June 30, FDIC-insured institutions held more than $1.3 trillion in cash equivalents, or 22% more than they did a year ago. This total includes at least $388 billion in balances held at the Federal Reserve Banks, of which an estimated 85 percent represents excess reserves above required levels."
Able to Prepay with Cash Supply?
Keeping this in mind, we ran our community bank peer group through the FDIC assessment rate calculator with second quarter numbers and estimated CAMELS ratings. We did this in order to get a better grasp of the community banking industry's ability to fulfill a prepayment obligation with their cash supply.
We were surprised to find that nearly 75% of the banks analyzed will only see a 20% hit to their total cash and balances due from depository institutions if the prepayment was introduced. However, about 6.3% of community banks will see a reduction of 50% or more in their cash, while less than 1% of that group will be unable to meet the prepayment.
Continue Conducting Due Diligence
The prepayment is hopefully the fix that the DIF needs to brave the continued failures. Community banks must continue to conduct due diligence and prepare their banks for a hit to available cash.