Federal Deposit
Insurance Corporation

2008 Annual Report

IV. Financial Statements and Notes

Deposit Insurance Fund (DIF)

1. Legislation and Operations of the Deposit Insurance Fund
Overview
The Federal Deposit Insurance Corporation (FDIC) is the independent deposit insurance agency created by Congress in 1933 to maintain stability and public confidence in the nation’s banking system. Provisions that govern the operations of the FDIC are generally found in the Federal Deposit Insurance (FDI) Act, as amended, (12 U.S.C. 1811, et seq.) In carrying out the purposes of the FDI Act, as amended, the FDIC insures the deposits of banks and savings associations (insured depository institutions), and in cooperation with other federal and state agencies promotes the safety and soundness of insured depository institutions by identifying, monitoring and addressing risks to the deposit insurance fund. An active institution’s primary federal supervisor is generally determined by the institution’s charter type. Commercial and savings banks are supervised by the FDIC, the Office of the Comptroller of the Currency, or the Federal Reserve Board, while thrifts are supervised by the Office of Thrift Supervision.

The FDIC is the administrator of the Deposit Insurance Fund (DIF). The DIF is responsible for protecting insured bank and thrift depositors from loss due to institution failures. The FDIC is required by 12 U.S.C. 1823(c) to resolve troubled institutions in a manner that will result in the least possible cost to the deposit insurance fund unless a systemic risk determination is made that compliance with the least-cost test would have serious adverse effects on economic conditions or financial stability and any action or assistance taken under the systemic risk determination would avoid or mitigate such adverse effects. The systemic risk provision requires the FDIC to recover any related losses to the DIF through one or more emergency special assessments from all insured depository institutions. See Note 14 for a detailed explanation of 2008 systemic risk transactions.

The FDIC is also the administrator of the FSLIC Resolution Fund (FRF). The FRF is a resolution fund responsible for the sale of remaining assets and satisfaction of liabilities associated with the former Federal Savings and Loan Insurance Corporation (FSLIC) and the Resolution Trust Corporation. The DIF and the FRF are maintained separately to carry out their respective mandates.

Recent Legislation
The Emergency Economic Stabilization Act of 2008 (EESA), legislation to help stabilize the financial markets, was enacted on October 3, 2008, and significantly affects the FDIC. The legislation requires that the FDIC participate, through a consultation role, in the establishment of the troubled asset relief program (known as TARP) and provides that the FDIC is eligible to act as an asset manager for residential mortgage loans and residential mortgage-backed securities on a reimbursable basis.

In addition, the legislation identifies the FDIC as a Federal property manager with respect to mortgage loans and mortgage-backed securities held by any bridge depository institution pursuant to section 11(n) of the FDI Act. As a Federal property manager, the FDIC is responsible for implementing a plan that maximizes assistance for homeowners and encourages servicers to take advantage of programs to minimize foreclosures for the affected assets.

The legislation also directly affects the FDIC as deposit insurer by providing for 1) a temporary increase in FDIC deposit insurance coverage from $100,000 to $250,000 from the date of enactment of the legislation through December 31, 2009 and 2) a temporary removal of limitations on borrowing in sections 14(a) and 15(c) of the FDI Act for purposes of carrying out the increase in the maximum deposit insurance amount for the duration of the increased coverage. EESA expressly provides that the temporary deposit insurance increase is not to be taken into account by the FDIC in setting assessments under section 7(b) of the FDI Act. (See Note 15, Subsequent Events – Legislative Update.)

The Federal Deposit Insurance Reform Act of 2005 (Title II, Subtitle B of Public Law 109-171, 120 Stat. 9) and the Federal Deposit Insurance Reform Conforming Amendments Act of 2005 (Public Law 109-173, 119 Stat. 3601) were enacted in February 2006. Pursuant to this legislation (collectively, the Reform Act), the Bank Insurance Fund and the Savings Association Insurance Fund were merged into the DIF, and the FDIC permanently increased coverage for certain retirement accounts to $250,000. Additionally, the Reform Act: 1) provides the FDIC with greater discretion to charge insurance assessments and to impose more sensitive risk-based pricing; 2) annually permits the designated reserve ratio (DRR) to vary between 1.15 and 1.50 percent of estimated insured deposits; 3) generally requires the declaration and payment of dividends from the DIF if the reserve ratio of the DIF equals or exceeds 1.35 percent of estimated insured deposits at the end of a calendar year; 4) grants a one-time assessment credit for each eligible insured depository institution or its successor based on an institution’s proportionate share of the aggregate assessment base of all eligible institutions at December 31, 1996; and 5) allows the FDIC to increase all deposit insurance coverage, under certain circumstances, to reflect inflation every five years beginning January 1, 2011. See Note 8 for additional discussion on the reforms related to assessments. (See Note 15, Subsequent Events – Legislative Update.)

Operations of the DIF
The primary purpose of the DIF is to: 1) insure the deposits and protect the depositors of DIF-insured institutions and 2) resolve DIF-insured failed institutions upon appointment of FDIC as receiver in a manner that will result in the least possible cost to the DIF.

The DIF is primarily funded from: 1) interest earned on investments in U.S. Treasury obligations and 2) deposit insurance assessments. Additional funding sources, if necessary, are borrowings from the U.S. Treasury, Federal Financing Bank (FFB), Federal Home Loan Banks, and insured depository institutions. The FDIC has borrowing authority from the U.S. Treasury up to $30 billion and a Note Purchase Agreement with the FFB not to exceed $100 billion to enhance DIF’s ability to fund deposit insurance obligations. (See Note 15, Subsequent Events – Legislative Update.)

A statutory formula, known as the Maximum Obligation Limitation (MOL), limits the amount of obligations the DIF can incur to the sum of its cash, 90 percent of the fair market value of other assets, and the amount authorized to be borrowed from the U.S. Treasury. The MOL for the DIF was $69.0 billion and $83.6 billion as of December 31, 2008 and 2007, respectively. The EESA of 2008 provides that, in connection with the new, temporary increase in the basic deposit insurance coverage limit from $100,000 to $250,000, the FDIC may borrow from the U.S. Treasury to carry out the increase in the maximum deposit insurance amount without regard to the MOL or the $30 billion limit.

Receivership and Conservatorship Operations
The FDIC is responsible for managing and disposing of the assets of failed institutions in an orderly and efficient manner. The assets held by receivership and conservatorship entities, and the claims against them, are accounted for separately from DIF assets and liabilities to ensure that receivership and conservatorship proceeds are distributed in accordance with applicable laws and regulations. Accordingly, income and expenses attributable to receiverships and conservatorships are accounted for as transactions of those entities. Both are billed by the FDIC for services provided on their behalf.