As Failures Wane, FDIC Trims Budget

By Joe Adler and Donna Borak


The slowdown in failures has led the Federal Deposit Insurance Corp. to pull back on its budgeting. On the same day it proposed new capital requirements for all institutions, the FDIC’s board of directors approved a 2011 agency budget of $3.96 billion, a 0.7% drop from the previous year. Though that is only a slight decline, agency officials described the move as an important step. It represents a “transition point for the agency,” said FDIC Vice Chairman Martin Gruenberg. The spending proposal came as the board took steps to implement the “Collins Amendment,” a Dodd-Frank Act provision crafted by Sen. Susan Collins, R-Maine, that establishes an industrywide capital floor as well as new market risk capital standards unveiled last year by the international Basel Committee on Banking Supervision. The board also finalized a new target ratio of agency reserves to insured deposits — known as the designated reserve ratio — of 2%. The new ratio is well above the previous DRR of 1.25%, but will only serve as a long-term goal that would not be reached before 2027. But the biggest surprise perhaps from the meeting was the proposed decrease — however small — in the budget. The FDIC had not seen any decline in expenditures since 2006, while spending has expanded tremendously over the past few years to handle the wave of failures. Observers said the proposal’s impact could be large. “Although blindingly technical, the U.S. proposal to rewrite the market risk rules will define U.S. financial markets,” Karen Shaw Petrou, the managing partner at Federal Financial Analytics Inc. “Now that the biggest trading institutions are subject to bank capital requirements, a lot more equity will need to back whatever trading the ‘Volcker Rule’ still lets them do.”