Posted by WARREN MOSLER on October 20th, 2010
The FDIC taxing banks to cover losses hasn’t been well thought out.
A universal bank tax is functionally equivalent to an interest rate hike for borrowers that doesn’t get passed through to savers.
FDIC Proposes Long-Term DIF-Management Plan
The FDIC board of directors proposed a long-range Deposit Insurance Fund management approach that includes a plan to restore the DIF. The board adopted a notice of proposed rulemaking on its long-term management plan that calls for a lower assessment rate to take effect when the reserve ratio equals 1.15 percent. Progressively lower assessment rate schedules would take effect in lieu of dividends when the reserve ratio reaches 2 percent and 2.5 percent. The DIF reserve ratio also must be at least 2 percent before a period of large fund losses, and average assessment rates over time must be approximately 8.5 basis points. The board said the goal is maintaining a positive fund balance even during periods of large fund losses and steady, predictable assessment rates throughout economic and credit cycles.
The board also adopted a DIF restoration plan to ensure that the fund reserve ratio reaches 1.35 percent by Sept. 30, 2020, as required by the Wall Street Reform Act. The DIF restoration plan would forgo the 3-basis-point increase in assessment rates scheduled for Jan. 1, 2011, and maintain the current rate schedule largely because projected DIF losses for 2010-2014 have dropped from $60 billion to $52 billion. The plan also calls for a new rulemaking next year on how to offset the effect of the Wall Street Reform Act requirement on community banks with less than $10 billion in assets.
Next month, the FDIC is expected to issue proposed regulations implementing the assessment-base change mandated by the Wall Street Reform Act. These new regulations will include proposed changes to the assessment rates necessitated by the change in the assessment base and, according to the FDIC, will ensure that the revenue collected under the new assessment system will approximately equal that under the existing system. Read more.