WASHINGTON — Following the extended failure wave and deficit in federal reserves, the Federal Deposit Insurance Corp. sounded decidedly more hopeful Tuesday about its future.
With banks profiting again, and credit quality continuing to improve, the agency said failure costs over the five-year period through 2014 were expected to total $45 billion, a 13% drop from a projection for the same period the FDIC made in October. Meanwhile, costs for the 2011-to-2015 period are expected to drop sharply, totaling an estimated $21 billion.
The agency's staff provided the new forecasts to the FDIC board on the same day the agency considered further changes to large-bank assessment guidelines.
The projections, part of a Deposit Insurance Fund update, came as the FDIC — having set aside billions of dollars in cash most every recent quarter for failures — has been in the red since June 2009. The FDIC reiterated that the lower failure projections, coupled with premium income, will cause the fund balance — which was negative-$7.4 billion at yearend — to turn positive this year.
"It is certainly welcome to hear news that the tide seems to have turned," said John Walsh, the acting comptroller of the currency and an FDIC board member.
The FDIC also projected a slowdown in supervisory downgrades, which can move an institution closer to failure.
"Beyond five years, the projections assume a low level of failures and associated losses," the agency said in the DIF update.
The agency said the DIF is projected to earn $13 billion this year in assessment income, and the fund is still on track to reach a statutorily required minimum reserve level totaling 1.15% of all insured deposits by 2018.
Yet officials were also cautious about the road ahead, saying failures will remain elevated this year and next compared with historic norms — though not on the breakneck pace of last year's 157 closures — and the economy is still fragile. "It's certainly nice to be on this positive trend, though obviously there are a lot of uncertainties, a few black swans flying over our heads," said FDIC Chairman Sheila Bair.
In the update, the agency said: "Staff's projections are subject to considerable uncertainty. Bank failures could be higher than projected, and recoveries from assets of banks already closed could be lower than projected, if, for example, the economic recovery stalls as a result of prolonged sharp increases in oil and other commodity prices."
Meanwhile, the FDIC proposed further tweaks to how it prices deposit insurance for banks with more than $10 billion of assets.
In February, the agency overhauled the risk-based pricing formula for large banks, creating a new scorecard method and adding factors meant to capture an institution's risk more accurately in its premium.
But the FDIC has also had the discretion, after it calculates a large bank's risk-based premium, to consider unique factors about the institution not captured in that calculation to then adjust the bank's price up or down. On Tuesday, it proposed revised guidelines on how it makes such adjustments, to stay consistent with the February overhaul.
For example, since the reforms in February expanded the risk factors used to determine a bank's initial price, the agency said it would use fewer discretionary factors in the adjustment phase. (The proposal has a comment period of 45 days.)
The FDIC said it would consider adjustments in cases where certain risk factors during the initial price calculation for an institution are outliers compared with the rest of the industry. To make an adjustment, the agency could use discretionary factors such as a bank's underwriting practices for concentrations, risk management practices and how it has utilized government support programs.
"It's important that this discretionary process be as transparent as possible to the institutions subject to it," Walsh said.
The FDIC would provide institutions with advance notice if their prices are adjusted higher. Institutions could request in writing a downward adjustment as well as attempt to appeal upward adjustments. "Frequently, they go down," Bair said of price adjustments.
"It's not always a one-way street here."
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