1. Why is it preferable to prepay assessments rather than borrow from the Treasury?

Prepayment of assessments ensures that the deposit insurance system remains directly industry-funded and it preserves Treasury borrowing for emergency situations.

2. Isn’t this a short term solution predicated on a swift banking recovery?

No. While industry earnings are weak, banks overall have the liquid assets necessary to make the proposed prepayment.

3. Will smaller banks be affected disproportionately by this action?

No. The FDIC believes that most of the prepaid assessment will be drawn from available cash and excess reserves. Furthermore, the FDIC will exercise discretion as supervisor and insurer to exempt an institution from the prepayment requirement if the FDIC, in consultation with the institution's primary federal regulator, determines that prepayment would adversely affect the safety and soundness of the institution. The FDIC will notify institutions so exempted by November 23, 2009. In addition, an institution may apply to the FDIC for an exemption if the prepayment would significantly impair the institution's liquidity, or otherwise create extraordinary hardship. An application for exemption must be submitted by December 1, 2009.

Finally, prepaying assessments will have the same proportional effect on insured institutions as the regular risk-based deposit insurance assessments. These payments will be determined by an institution’s risk and amount of assessable deposits.

4. Didn’t Congress raise the FDIC’s borrowing limit for just this scenario?

The Helping Families Save Their Home Act, enacted on May 20, 2009, permanently increased the Deposit Insurance Fund’s statutory line of credit with the U.S. Treasury from $30 billion to $100 billion, and increased it to $500 billion through the end of 2010 if certain conditions are met.

It has not been the FDIC’s intent to use this line of credit as the first source of funding in the event we needed additional liquidity to resolve failed banks. The line of credit is available in the event of an emergency or other unforeseen event that requires an unexpected large cash outflow.

The FDIC’s current liquidity needs do not represent an emergency and can be planned for and met by industry resources.

5. Doesn't this take much needed capital out of the system and constrict lending?

No. It doesn't take capital out as would a special assessment. Instead, it draws on the ample liquidity of the banking industry.

As of June 30, FDIC-insured institutions held more than $1.3 trillion in cash equivalents, or 22 percent 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.

6. How should banks account for the prepayment?

Under GAAP accounting rules, prepaid assessments, unlike special assessments, will not immediately affect bank earnings. Each institution should record the entire amount of its prepaid assessment as a prepaid expense (an asset) as of December 30, 2009, the date the payment will be made.

As of December 31, 2009, and each quarter thereafter, each institution should record an expense (charge to earnings) for its regular quarterly assessment and an offsetting credit to the prepaid assessment until the asset is exhausted.

Once the asset is exhausted, the institution will resume paying and accounting for quarterly deposit insurance assessments as they currently do. They should record an accrued expense payable each quarter for the assessment payment, which will be made to the FDIC at the end of the following quarter.

7. How will the FDIC account for the prepayment?

Although the FDIC's immediate liquidity needs will be resolved by the inflow of approximately $45 billion in cash from prepaid assessments, prepaid assessments, unlike a special assessment, will not immediately benefit the DIF revenue or the DIF balance.

The DIF will initially account for the amount collected as both an asset (cash) and an offsetting liability (deferred revenue). Revenue is not recognized immediately because the DIF does not earn the right to the assessment premium funds until the end of the quarter in which the premium is due.

At the end of each quarter, when the FDIC estimates the amount that each institution will be assessed for deposit insurance for that quarter, the DIF will recognize revenue and simultaneously reduce the deferred revenue liability, thereby gradually reducing the liability until each institution's premium prepayment is exhausted or the amount remaining after collection of the amount due on June 30, 2013, is returned to the institution.

8. Isn’t this the same as borrowing from the industry without charging interest?

Some may view borrowings and prepayment of assessments as conceptually similar, but there are some important differences. A borrowing would be voluntary and require the DIF to pay interest. Prepaid assessments are mandatory and there will be no interest component.

9. How many banks will be exempt from paying the assessment up front?

The FDIC will exercise its discretion as supervisor and insurer to exempt an institution from the prepayment requirement if the FDIC, in consultation with the primary federal regulator, determines that the prepayment would adversely affect the safety and soundness of an institution. Actual numbers or names of institutions to be exempted from the prepaid assessment requirement will not be made publicly available.

Based upon currently available data, staff does not expect the number of exemptions to significantly affect the amount of prepaid assessments that the FDIC will collect.

10. If a bank’s total deposits or actual assessment rate decreases during the next three years, will the FDIC refund a portion of their prepaid assessment?

No. The FDIC will not refund any portion of a prepaid assessment based upon changes in an institution's actual assessment rate or a decrease in or growth of deposits during the next three years. However, any prepaid assessment that is not exhausted after payment of the amount due on June 30, 2013, will be returned to the institution.

11. When is the DIF expected to go negative?

FDIC estimates that the DIF balance as of September 30, 2009 will be negative.

12. Will I be able to offset all of the assessment premiums (including FDIC deposit insurance, FICO, and TAGP assessments) with the prepaid assessment amount?

No, the prepaid assessments can only be used to offset regular quarterly risk-based deposit insurance assessments. They cannot be used to offset FICO or TAGP assessments

13. What happens if my actual growth or actual risk category rating differs from the amounts used to determine the prepaid amount? Will the FDIC continue to calculate and invoice my institution during the prepayment period?

The prepaid amount will be based on an estimate of an institution’s assessments for the fourth quarter of 2009 and for all of 2010 through 2012. This estimate depends on an institution’s total base assessment rate in effect on September 30, 2009, its third quarter 2009 assessment base, and an estimated rate of growth in that assessment base. The assessment rate used to calculate the prepaid assessment will be increased by 3 basis points for 2011 and 2012.

The estimate of an institution’s assessments over this period and the prepaid amount will not affect an institution’s actual assessments over this period. Actual assessments over this period, even if they differ from the original estimate, will not result in a revision of the prepaid amount. Instead, actual assessments, beginning with the assessment due on March 30, 2010 (representing payment of the regular quarterly risk-based deposit insurance assessment for the fourth quarter of 2009) will be deducted from the prepaid amount until the prepaid amount is exhausted. If the prepaid assessment is not exhausted after payment of the amount due on June 30, 2013, any remaining amount will be returned to the institution

14. When was the last time the insurance fund had a negative balance, and why?

The only previous time the FDIC reported a negative fund balance was during the last banking crisis in the late 1980s and early 1990s. The FDIC reported a negative fund balance as of December 31, 1991 of approximately -$7.0 billion due to setting aside a large ($16.3 billion) reserve for future failures. The fund remained negative for five quarters, until March 31, 1993, when the fund balance was approximately $1.2 billion.

15. If the DIF goes negative, does this mean that the FDIC will no longer be able to protect insured depositors?

No. Deposit insurance coverage is unaffected by the DIF balance.

When a bank fails, the FDIC protects depositors using its cash resources. The FDIC has taken steps to bolster its industry-funded cash resources, in part by requiring prepaid assessments. The FDIC also has other cash resources available, including up to a $500 billion borrowing line with the U.S. Treasury.

FDIC’s deposit insurance guarantee is backed by the full faith and credit of the United States government, and no depositor ever has or ever will lose a penny of insured deposits.

16. Has the FDIC ever required prepaid assessments or borrowed from the Treasury before?

The FDIC has never required banks to prepay assessments for more than one semiannual period. To meet its liquidity needs, the FDIC borrowed from the Federal Financing Bank (FFB) during the second quarter of 1991. Borrowings from the FFB peaked at $15.2 billion as of June 1992. The Fund began to repay the FFB during the third quarter of 1992 and borrowings were fully repaid (along with $802.4 million in interest) by September 1993.

17. How much does the FDIC expect to spend on bank failures and how much money will the proposed prepaid assessment raise?

The FDIC is projecting that the DIF will incur approximately $100 billion in failure costs over the period 2009 through 2013. Some of this amount has already been realized, and most of these losses are expected to occur before year-end 2010. In fact, between actual failures that have already occurred and expenses for failures expected over the next year that have been set aside in the DIF’s Contingent Loss Reserve (CLR), well over half of this amount is already reflected in the September 2009 Fund balance.

The proposed prepaid assessment is expected to raise approximately $45 billion.