Publications & Resources

September/October 2010
Deposits & Liquidity

 

FDIC Pre-paid Assessments – How a Bank Can Buy or Sell Depending on Need

By H.D. Barkett

Last year, the Federal Deposit Insurance Corporation (FDIC) required insured depository institutions to prepay on December 30, 2009, their quarterly assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012.

While necessary to help meet the cost of bank failures and rebuild the Deposit Insurance Fund (DIF), the FDIC’s policy did impose on insured depository institutions an opportunity cost of holding a non-interest-bearing asset in the form of prepaid assessments (credits) – and paying for the credits with funds that could have been used for profit-generating activities, like lending in the local community.

Fortunately, the FDIC did provide banks with an ability to lessen the impact of the prepayment requirement. How? By allowing banks (with FDIC approval) to buy and sell the credits to each other. 

For banks looking to improve their liquidity position, selling their credits can provide an easy source of cash. Further, since the credits do not provide a return, an institution can sell credits to free up its funds for potentially higher-yielding activities, consequently increasing its return on assets.

While some banks may want to sell credits, other institutions may be looking for opportunities to purchase. For example, buying credits may appeal to banks that estimate they are likely to run out of their existing credits faster than originally expected.  The FDIC charges assessments based on a formula related to a bank’s risk. Banks whose conditions deteriorate or whose balance sheets change, could face higher premium charges that exhaust their credits faster than expected. Rather than paying 100 percent of the amount due to the FDIC, a bank may be able to buy credits at a discount from another bank.

Furthermore, prepaid assessments are zero-risk-weighted assets that may offer a higher yield than other similarly weighted assets. How can the yield be higher? Because each bank can decide the price at which it is interested in buying.  For example, a bank with investments in Treasuries can bid for credits (which are in effect backed by the full faith and credit of the federal government) accordingly, attempting to earn a higher return.

Banks interested in viewing the market for prepaid assessments can do so at www.prepaidassessment.com. 

Promontory Interfinancial Network, LLC developed Prepaid Assessment Marketplace, which is a free service to the banking industry. All development and operating costs are borne by Promontory and Promontory does not charge institutions any fees to use the service. It was conceived to help interested parties identify each other so that they can take advantage of the opportunity to transfer prepaid assessments.

Promontory’s role is limited to operating the marketplace, and Promontory does not act as a broker or “clear” these transactions – indeed, transfers can only be made through the FDIC (via its electronic system FDICconnect) and after notice to the FDIC, which retains the right to reject any transfer on supervisory or other grounds.

Banks looking for more information can visit www.prepaidassessment.com or contact Promontory’s Treasury Desk at 866-776-6426 (option 2).

H.D. Barkett is managing director of Promontory Interfinancial Network. He can be reached at 866-776-6426 ext. 3447 or hbarkett@promnetwork.com.

Unauthorized reproduction of all or part of this material without the express written consent of the author is strictly prohibited. All rights reserved.