FDIC And Congress Take Action To Bolster FDIC Deposit Insurance Fund (DIF)

FDIC Imposes Special Assessment To Increase DIF

The FDIC had previously publicly acknowledged that the FDIC Deposit Insurance Fund (DIF) which protects depositors at failed banks had fallen to a dangerouly low level.

The FDIC believes that it is important that the fund not decline to a level that could undermine public confidence in federal deposit insurance. A fund balance and reserve ratio that are near zero or negative could create public confusion about the FDIC’s ability to move quickly to resolve problem institutions and protect insured depositors.

Recent and anticipated failures of FDIC-insured institutions resulting from deterioration in banking and economic conditions have significantly increased losses to the Deposit Insurance Fund (the fund or the DIF). The reserve ratio of the DIF declined from 1.19 percent as of March 31, 2008, to 1.01 percent as of June 30, 0.76 percent as of September 30, and 0.40 percent (preliminary) as of December 31. Twenty-five institutions failed in 2008, and the FDIC projects a substantially higher rate of institution failures in the next few years, leading to a further decline in the reserve ratio.

The FDIC had previously attempted to levy a special assessment of 20 basis points on the banking industry’s deposits.  The cost of the deposit insurance increase angered many of the smaller banking institutions who felt that they were being unfairly taxed.   The smaller banks began lobbying Congress to reduce the special assessment and to increase the FDIC’s line of credit with the Treasury to cover unexpected failed bank costs.   Sheila Bair indicated that if the FDIC’s line of credit with the Treasury was increased, it would not be necessary to assess the full 20 basis point fee.  A compromise was reached on the special assessment and Congress increased the FDIC’s line of credit with the Treasury.  The compromise bill passed both houses and the new legislation was signed into law by the President on May 20, 2009.

Special FDIC Assessment Announced By FDIC

The FDIC announced the final rules on the special assessment to bolster the DIF on May 22, 2009 as follows:

The Board of Directors of the Federal Deposit Insurance Corporation today voted to levy a special assessment on insured institutions as part of the agency’s efforts to rebuild the Deposit Insurance Fund (DIF) and help maintain public confidence in the banking system. The final rule establishes a special assessment of five basis points on each FDIC-insured depository institution’s assets, minus its Tier 1 capital, as of June 30, 2009. The special assessment will be collected September 30, 2009.

With the special assessment adopted today, the FDIC projects that the DIF will remain low but positive through 2009 and then begin to rise in 2010. However, Chairman Bair also cautioned that given the inherent uncertainty in these projections and the importance of maintaining a positive fund balance and reserve ratio, “it is probable that an additional special assessment will be necessary in the fourth quarter, although the amount of such a special assessment is uncertain.”

FDIC Borrowing Authority Increased With Treasury

The new law increases the FDIC’s line of credit at the Treasury to $100 billion from $30 billion.  The FDIC’s viewpoint on the line of credit with the Treasury was recently spelled out by the FDIC as follows:

Even though the FDIC has significant authority to borrow from the Treasury to cover losses, a fund balance and reserve ratio that are near zero or negative could create public confusion about the FDIC’s ability to move quickly to resolve problem institutions and protect insured depositors.  The FDIC views the Treasury line of credit as available to cover unforeseen losses, not as a source of financing projected losses.

Should extraordinary circumstances arise, the FDIC also has the authority to more up to $500 billion from the Treasury with the consent of both the Federal Reserve and the Treasury Department.

The special assessment to increase the DIF along with the large increase in FDIC borrowing authority should restore much of the confidence that is needed for the banking system to function properly.