After careful review of the data and the comments received on the proposal, I will vote in favor of finalizing an increase in deposit insurance assessment rates of two basis points.
The FDIC’s Deposit Insurance Fund has gone broke twice in the last three decades.1 Congress enacted a law that requires the FDIC to set a designated reserve ratio.2 The Board of Directors has consistently set this target year after year at 2%, which was developed using historical experience of what level would prevent the Deposit Insurance Fund from going broke again.3 Not only is the FDIC well below this 2% target, the Fund’s current balance is also in violation of the statutory floor set by Congress of 1.35%.4
Given the plausible scenarios we have before us, the modest two basis point adjustment dramatically reduces the likelihood of a much more substantial increase later in order to comply with the deadline set by existing law.5
Over the course of this rulemaking process, the FDIC received valuable input which made clear to me that there are a number of changes we need to make over the long term to deposit insurance assessment policies.
First, the FDIC must work to find additional ways for the banks posing the most risk to the Deposit Insurance Fund to pay more, relative to smaller institutions where the likelihood of large losses to the Fund are tiny.
Second, the FDIC must take steps to build a framework that ensures changes in assessment rates are countercyclical. As I noted in my June statement when voting to propose rate adjustments, we should adjust premiums upward and downward based on economic conditions, recent industry profits, and other appropriate indicators.6
Third, the FDIC should try to develop a framework that relies less on ad-hoc adjustments and more on a systematized formula based on the quantitative factors mentioned previously. Just as many laws provide for automatic adjustments based on inflation, we should try and move in this direction to improve transparency and board reliability.
Of course, none of our insured banks want to pay higher premiums. However, failing to take this step would be a gamble and risks violating the law governing the Deposit Insurance Fund. That said, I hope the Board can continue to work with our insured institutions to develop a more robust framework for the future.
1. The Deposit Insurance Fund balance went negative in the early 1990s after the Savings and Loan Crisis and 1990-91 economic recession. The balance again went negative due to the 2008 financial crisis.
2. Federal Deposit Insurance Act, Section 7(b)(3)(A)
4. Federal Deposit Insurance Act, Section 7(b)(3)(B)
5. It is critical for the Board and FDIC staff to continue to monitor updated projections and evolving macroeconomic conditions.