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FDIC Extends Transaction Account Guarantee Program

Federal Deposit Insurance Corporation (FDIC) has extended the Transaction Account Guarantee (TAG) program to December 31, 2010 and also approved Notice of Proposed Rulemaking (NPR) to revise the deposit insurance assessment system.

Under the TAG program, customers of participating insured depository institutions are provided full coverage on transaction accounts. However, the interim rule gives the board discretion to extend the program to the end of 2011, without additional rulemaking, if it determines that economic conditions warrant such an extension.

Sheila Bair, chairman of FDIC, said: “It’s necessary to extend the TAG program because the lingering effects of the financial crisis that emerged in 2008 in large systemically important banks have now spread to institutions of all sizes, particularly in regions suffering from ongoing economic weakness.

“Allowing the TAG program to expire in this environment could cause a number of community banks-already under stress-to experience deposit withdrawals from their large transaction accounts and would risk needless liquidity failures. This reflects the continuing legacy of too big to fail and the different liquidity pressures our community banks experience as a result.

“I believe it’s a wise decision to keep the rates for the TAG program at current levels so as to enable most participating institutions to remain in the program and retain liquidity to support lending needed for our nation’s economic recovery. Ultimately, it should be up to Congress to determine our insurance limits, and I hope this will receive prompt attention.”

The Notice of Proposed Rulemaking (NPR) is to revise the deposit insurance assessment system for large institutions, which pose unique and concentrated risks to the deposit insurance fund.

Under the proposal, risk categories and long-term debt ratings would no longer be used. The FDIC would continue to use the supervisory ratings as a factor in measuring risk. The FDIC would replace the financial ratios currently used with a scorecard consisting of well-defined financial measures that are more forward looking and better suited for large institutions. The proposal also includes questions about how to incorporate other risk measures, like the quality of underwriting or risk management practices, in the future.

The proposal would create two scorecards: one for large institutions and the other for highly complex institutions.

A highly complex institution would be defined as an insured depository institution with greater than $50bn in total assets that is fully owned by a parent company with more than $500bn in total assets. The designation also would apply to a processing bank and trust company with greater than $10bn in total assets.

Each scorecard would have two components-a performance score and loss severity score-that are of particular interest to the FDIC as an insurer. Two scores would be combined to produce a total score, which would be translated into an initial assessment rate. Similar to the current system, the FDIC would retain an ability to make limited discretionary adjustments.

The proposal also would alter the assessment rates applicable to all insured depository institutions to ensure that the revenue collected under the proposed assessment system would approximately equal that under the existing assessment system

Ms Bair added: “Events during the past two years have made clear the need for improvement in how well and how quickly we recognize and charge for risk. This proposal is a significant improvement to how we do that. By better differentiating risk among large institutions, the proposal would reduce insurance assessments paid by lower-risk institutions, both large and small.”