The government’s promise that insured deposits will be protected from loss in the event of a bank failure has been the backbone of banking system stability for 90 years. The Federal Deposit Insurance Corporation’s stewardship of the Deposit Insurance Fund is vital to keeping that promise and maintaining the public’s confidence.
The banking system’s influx of insured deposits associated with pandemic-related fiscal and monetary support triggered a decline in the Deposit Insurance Fund’s reserve ratio – the Fund’s balance divided by total insured deposits – below the legal minimum in 2020. The law requires the FDIC to establish a restoration plan to bring the reserve ratio back to the minimum level within eight years, in this case by September 30, 2028.1
Careful Board Oversight
As the Board reviewed the Restoration Plan in 2022, it was clear that we were at serious risk of missing the law’s deadline. As any responsible Board should do, we evaluated various projections and determined action was necessary. We proposed and then finalized a 0.02% increase in assessment rates to put the Deposit Insurance Fund on more stable footing.
There was significant opposition to this decision. I get it – banks don’t like paying more for deposit insurance.
In 2022, a number of lobbying organizations made a series of claims to convince the FDIC not to raise assessment rates.2 They claimed that insured deposits would decline, improving the reserve ratio.3 Since then, insured deposits continued to grow and have increased by 4.7% year-over-year, which is a bit higher than the 20-year historical average. They claimed that there was “little to no chance” that bank failures would cause material losses on the Deposit Insurance Fund given the banking industry’s health.4 Just a few months later, three very large banks failed and cost the Deposit Insurance Fund $18 billion in insured losses.
Based on these and other factors, the banks projected that the reserve ratio would be back in compliance with the legal minimum by 2023 without an assessment rate increase.5 At the end of 2022, the reserve ratio was 1.25%. It has since dropped to 1.10% as of June 2023.
The assessment rate increase took effect at the start of this year. Despite the March turmoil, we are projected to come back into compliance with the legal minimum reserve ratio by 2026. That still leaves us with a two-year cushion. If we hadn’t proactively raised rates, we’d currently be on track to miss the statutory deadline.
It’s critical that we continue to closely monitor these projections and act again, if necessary.
Designated Reserve Ratio
We’ve spent a lot of time over the past two years reviewing the Deposit Insurance Fund Restoration Plan to return the reserve ratio to 1.35%. It’s important to remember that the 1.35% target is the bare minimum level established by law.
Beyond this legal minimum, Congress charged the FDIC with setting a long-term target reserve ratio in line with a set of statutory factors related to prudent Deposit Insurance Fund management.6 The agency has set the target at 2% every year since 2010. That is the level that would have been necessary to prevent the Deposit Insurance Fund from entering the red in the last two major banking crises.
I support maintaining this long-term target, but I think in the coming year we need to take steps to ensure this isn’t a make-believe number. We are currently on track to hit that level in 2034.
The closest we came to reaching it previously was in 2019 when the reserve ratio maxed out at 1.41%. It had inched up to that point over the previous few years and then leveled off despite the industry’s record profits. That makes no sense. If our deposit insurance assessment formula was more countercyclical, the Deposit Insurance Fund could be fully replenished in positive times.
I also continue to worry that large banks are not paying their fair share of assessment premiums. The failure of a large bank doesn’t only impact the Deposit Insurance Fund directly. As we saw with Silicon Valley Bank, large bank failures can create contagion and stress at other banks that then lead to additional Deposit Insurance Fund losses.
I want to thank staff in the Division of Research and Insurance for working with me to explore policy options that could address these issues. This is an area where we should make meaningful progress in 2024.
- 12 U.S.C. § 1817(b)(3)(B) and (E)
- See for example, .
- Id. (“The FDIC’s assumption that deposits will continue to grow is not supported by current data.”; “In the proposal, the FDIC recognizes that deposit levels remain elevated but fails to acknowledge that they have begun and are likely to continue to decline.”)
- Id. (“…there is little to no chance that [DIF losses due to bank failures] would be significant considering the current health of the banking industry and the fact that the number of banks on the FDIC’s Problem Bank List is at an historic low.”)
- Id. (“…the best estimate is that the ratio will surpass the statutory minimum sometime in 2023, even absent any assessment rate increase.”; “However, to the extent the factors that would affect the path DIF reserve ratio are uncertain, such uncertainty is generally to the upside.”)
- 12 U.S.C. § 1817(b)(3)(A).