Problem 2: Two Depository Institutions Have Composite CAMELS
Problem 2 Two Depository Institutions Have Composite Camels Ratings Of
Problem 2 Two depository institutions have composite CAMELS ratings of 1 or 2 and are “well capitalized.” Thus, each institution falls into the FDIC Risk Category I deposit insurance assessment scheme. Institution A has average total assets of $750 million and average Tier I equity of $75 million. Institution B has average total assets of $1 billion and average Tier I equity of $110 million. Institution A has no unsecured debt or brokered deposits. Institution B has no unsecured debt and an asset growth rate over the last four years of 8 percent.
Further, the institutions have the following financial ratios and CAMELS ratings:
Institution A:
- Tier I leverage ratio (%): 9.45
- Net income before taxes/risk-weighted assets (%): 2.65
- Nonperforming loans and leases/gross assets (%): 0.90
- Other real estate–owned/gross assets (%): 0.90
- Brokered deposits/total assets (%): 2.75
- One year asset growth (%): 4.80
- Loan composition:
- Construction and Development: 0.00
- Commercial and Industrial: 10.68
- Leases: 0.15
- Other Consumer: 17.95
- Loans to Foreign Government: 0.60
- Real Estate Loans Residual: 0.00
- Multifamily Residential: 0.10
- Nonfarm Nonresidential: -4.00
- Family Residential: 41.54
- Loans to Depository Banks: 0.50
- Agricultural Real Estate: 1.35
- Agricultural: 0.40
Institution B:
- Same ratios and composition, adjusted accordingly.
The CAMELS components ratings are also provided, and the DIF reserve ratio is 1.30 percent.
Calculate the deposit insurance assessment and the dollar value of the deposit insurance premium for each institution.
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Paper For Above instruction
The calculation of deposit insurance assessments for depository institutions involves careful consideration of each bank's risk profile, financial health, and other qualitative and quantitative factors. Under the Financial Institutions Data Collection and Analysis (FIDCA) framework, the Federal Deposit Insurance Corporation (FDIC) assigns risk categories and sets assessment rates accordingly. This paper focuses on computing the deposit insurance premiums for two well-capitalized banks, designated as Institution A and Institution B, based on their financial ratios, CAMELS ratings, asset compositions, and growth rates.
Overview of FDIC Insurance Assessment Scheme
The FDIC's risk-based deposit insurance assessment model categorizes banks into different risk classifications—primarily Category I (well capitalized) and Category II (adequately capitalized)—with corresponding assessment rates. Institution A and Institution B, both with composite CAMELS ratings of 1 or 2, are categorized under Risk Category I, which entails the lowest assessment rates. The assessment rate is primarily influenced by factors such as capital adequacy (Tier I leverage ratio), asset quality (nonperforming assets), earnings performance, and deposit composition.
Financial Ratios and Risk Factors
Institution A's key ratios include a Tier I leverage ratio of 9.45%, a net income before taxes at 2.65% of risk-weighted assets, and relatively low levels of nonperforming assets (0.90%). Since well-capitalized banks generally exhibit high Tier I ratios (above 6%) and positive earnings, Institution A's risk profile is low. Its asset growth rate of 4.80% is moderate, indicating steady but not excessive growth.
Institution B exhibits similar risk indicators, with no unsecured debt or brokered deposits—factors that typically reduce assessment scores—coupled with an asset growth rate of 8%, indicating a slightly higher growth-related risk.
Calculation of Deposit Insurance Assessment
The assessment rate for Risk Category I banks like these is typically determined based on their specific risk scores, but for simplicity, the FDIC assigns a base rate (e.g., 0.05%) with upward adjustments based on risk factors. Given both institutions' strong ratios and risk profiles, their assessment rates can be approximated at the baseline rate of around 0.05%. However, considerations such as brokered deposits, asset growth, and loan composition influence potential premiums.
- Institution A:
- Total assets: $750 million
- Assessment rate: 0.05%
- Premium = $750 million × 0.0005 = $375,000
- Institution B:
- Total assets: $1 billion
- Assessment rate: 0.05%
- Premium = $1 billion × 0.0005 = $500,000
These premiums are further adjusted based on deposit insurance assessment formulas that incorporate additional risk factors such as brokered deposits and growth rates. Given Institution B’s asset growth of 8%, an upward adjustment of assessment rate may be warranted, possibly adding 0.01%, raising its rate to 0.06%. This yields a revised premium:
- Institution B: $1 billion × 0.0006 = $600,000
Similarly, Institution A's assessment remains at 0.05% due to lower growth and risk factors.
Dollar Value of the Deposit Insurance Premiums
The calculated premiums reflect the expected contributions for a given assessment period based on current risk assessment models. For Institution A, with total assets of $750 million, the premium of approximately $375,000 is payable periodically, supporting the federal deposit insurance system.
Additional Considerations
Other factors influencing the premiums include the institutions' risk-related qualitative ratings from the CAMELS components, the geographic distribution of assets and liabilities, and the current deposit insurance reserve ratio of 1.30%. Typically, a lower reserve ratio might trigger marginal increases in assessment rates overall, but since these institutions are well-capitalized, their assessments remain relatively low.
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References
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