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Puerto Rico Public Sector Entities: A Key Factor in Special Assessment Calculations

Washington D.C. - The Office of the Commissioner for Financial Institutions (OCFI) recently submitted a recommendation to the Federal Deposit Insurance Corporation (FDIC) regarding the calculation of special assessments.

Significant Presence of Preferred Deposits

The OCFI highlighted the significant presence of preferred deposits held by Puerto Rico public sector entities at insured depository institutions (IDIs). These deposits are collateralized by short-term securities or irrevocable letters of credit, representing a substantially lower risk to the FDIC and the Deposit Insurance Fund (DIF).

Reduced Uninsured Deposit Base

According to OCFI, the large amounts of preferred deposits held by Puerto Rico public sector entities at IDIs have led to a significant reduction in the overall uninsured deposit base. As a result, OCFI respectfully recommends that the FDIC exclude preferred deposits from the special assessment base.

Preferred Deposits: An Overview

• Preferred deposits are uninsured deposits secured or collateralized as required under State law.
• In Puerto Rico, government entities are required to deposit their funds in financial institutions that can provide sufficient collateral, consisting of previously-selected securities or instruments, including irrevocable letters of credit.
• This ensures that the pledged collateral is not only safer but also has a readily ascertainable market value.

Analysis and Recommendation

OCFI’s analysis suggests that IDIs holding preferred deposits did not benefit from the systemic risk determination as much as those holding regular uninsured deposits. Additionally, preferred deposits do not represent the same risk to the DIF, given that in the event of a bank failure, pledged collateral could be sold to satisfy obligations owed to preferred depositors.

Given these factors, OCFI believes that including preferred deposits in the calculation of the special assessment base would be inconsistent with the stated rationale of allocating the burden of the special assessment to institutions that benefited most from the assistance provided under the systemic risk determination. Therefore, OCFI submits that the proposed special assessment methodology should be modified to disregard preferred deposits when determining an IDI’s special assessment base.

Implications and Next Steps

The FDIC has yet to respond to OCFI’s submission, but experts believe that this recommendation could have significant implications for Puerto Rico public sector entities and the overall stability of the financial system.