The FDIC is modifying the measurement tools it uses to assess the risks that large banks pose. The FDIC currently places each bank in one of four categories of riskiness. This assignment is based on supervisory ratings and capital levels, and is used directly to price deposit insurance but more generally to regulate and evaluate banks’ solvency/riskiness/capital adequacy. Moving forward, the FDIC plans to
draw finer distinctions among large institutions based on the risk that they post.
But more importantly, it changes some of the inputs for the assessment so as
. . . to better capture risk at the time an institution assumes the risk, to better differentiate institutions during periods of good economic and banking conditions based on how they would fare during periods of stress or economic downturns, and to better take into account the losses that the FDIC may incur if an institution fails.
That is, the assessment will be more forward-looking and reign in risk taking more in booms than in recessions. And, if the FDIC cares not only about how much money its insurance fund might lose but what the state of the world is when this happens — meaning are lots of other banks failing at the same time – then this approach will also pay more attention to systemic risk than individual risk. Finally, the FDIC approach will differ for institutions that are simply very large and those that are “structurally and operationally complex or that pose unique challenges and risks in case or failure.” All very good steps forward. The full details are here.