Insurance Program

Program Description
Deposit insurance is a fundamental part of the FDIC’s commitment to maintain stability and public confidence in the U.S. financial system. Promoting industry and consumer awareness of deposit insurance helps the FDIC protect depositors at banks and savings associations of all sizes. When insured depository institutions fail, the FDIC ensures that financial institution customers have timely access to their insured deposits and other services. To keep pace with the evolving banking industry and maintain its readiness to promptly protect insured depositors, the FDIC prepares and maintains contingency plans to address a variety of insured depository institution failures.

The deposit insurance funds must remain viable so that adequate funds are available to protect insured depositors in the event of an institution’s failure. The FDIC maintains sufficient deposit insurance fund balances by collecting risk-based insurance premiums from insured depository institutions and through prudent fund investment strategies. The FDIC continually evaluates the adequacy of the deposit insurance funds. It identifies risks to the insurance funds by analyzing regional, national, and global economic, financial, and financial institution developments, and by collecting and evaluating information through the supervisory process.

The FDIC is engaged in a comprehensive review of the deposit insurance system. Statutory requirements constrain the FDIC’s ability to charge institutions for the risk they pose to the insurance funds and require potentially high deposit insurance premiums during downturns, when institutions can least afford to pay. In addition, the existing process for adjusting coverage levels to keep pace with inflation is not automatic, unlike other important government programs for which the benefits are indexed to well-understood benchmarks.

Customers of failed insured depository institutions have timely access to insured funds and financial services

Means & Strategies:
When an institution fails, the FDIC fulfills its role as insurer by either facilitating the transfer of the institution’s insured deposits to an assuming institution or by paying insured depositors directly. The FDIC’s goal is to provide customers with access to their insured deposits within one to two business days.

The FDIC continually monitors changes in financial institution operations and products to ensure its ability to handle potential financial institution failures. The FDIC develops, tests and maintains contingency plans to be prepared to handle potential failures, including the failure of a large financial institution; simultaneous, multiple failures; and technological failures (for example, an Internet bank failure).

To educate consumers and institutions about deposit insurance coverage, the FDIC maintains a toll-free call center² to respond to questions related to deposit insurance. The FDIC provides a list of all FDIC-insured institutions and an Electronic Deposit Insurance Estimator (EDIE), which is an interactive tool to help determine deposit insurance coverage amounts, on its Web site, www.fdic.gov. The FDIC conducts training on various aspects of deposit insurance for financial institution employees. The FDIC also provides financial institutions with educational tools and materials that are designed to assist the institutions in providing their customers with information they need to understand their deposit insurance coverage.

External Factors:
The failure of a large, complex institution or a sudden failure due to fraudulent activities could affect the FDIC’s goal of paying insured depositors within one to two business days. However, no depositor would lose an insured deposit.

²877-ASK-FDIC (877-275-3342); 800-925-4618 (TDD)

The FDIC promptly identifies and responds to potential risks to the insurance funds

Means & Strategies:
The FDIC, in cooperation with the other primary federal regulators, proactively identifies and evaluates the risk and financial condition of every insured depository institution. The FDIC also identifies broader economic and financial risk factors that affect all insured institutions. The availability of timely banking information is critical to ensuring the FDIC's ability to assess risk to insured financial institutions and the deposit insurance funds. The FDIC is committed to providing accurate and timely bank data related to the financial condition of the banking industry. Industry-wide trends and risks are communicated to the financial industry, its supervisors and policymakers through a variety of regularly produced publications and ad hoc reports.Risk-management activities include approving the entry of new institutions into the deposit insurance system, off-site risk analysis, assessment of risk-based premiums, and special insurance examinations and enforcement actions .

Risk management begins with the FDIC’s review of applications for deposit insurance to ensure that the applying institution is well-capitalized, possesses a qualified management team, and is capable of operating in a safe and sound manner.

Off-site risk analysis activities include reviewing examination reports and using a variety of information system models and tools. The purposes of these activities are to understand the risk profile of individual financial institutions and to identify trends and emerging risks affecting groups of financial institutions and the insurance funds. The information may be used to target institutions for examination or other follow-up activities; focus the scope of an examination; assist in setting risk-based premiums for individual institutions; determine the adequacy of the deposit insurance funds; develop new policy initiatives; and determine corporate strategies for supervision, staffing, communication and other resource decisions.

The FDIC assesses risk-based insurance premiums by assigning a risk classification to each insured institution. The risk classifications are adjusted periodically to reflect the relative risk posed by institutions. Accordingly, institutions that represent greater supervisory risks to the insurance funds pay higher premiums, subject to the statutory requirements constraining the FDIC’s ability to charge appropriate premiums to these institutions.

In fulfilling its role as insurer, the FDIC has special insurance examination over all insured institutions and, at times, participates in examinations with the other federal regulators. In order to prevent or minimize losses to the funds, the primary federal regulator is required to take prompt corrective action when an FDIC-insured institution is determined to have capital problems. Depending on the institution’s capital classification, these actions range from imposing restrictions or requirements on an institution’s operations to the appointment of a receiver or conservator.

External Factors:
A sudden or large fraud perpetrated on a financial institution could result in an unforeseen loss to the insurance funds. Also, natural disasters, public policy changes, and sudden economic financial market crises could cause losses to financial institutions and pose risk to the deposit insurance funds.

The deposit insurance funds and system remain viable

Means & Strategies:
The FDIC maintains separate insurance funds for banks and for savings associations. It maintains the viability of each fund by investing the funds, monitoring the reserve requirements, collecting risk-based premiums, and evaluating the deposit insurance system in light of an evolving financial services industry.

The FDIC analyzes the growth or shrinkage of estimated insured deposits, the current assessment base, loss expectations, interest income earned on the funds and operating expenses. This information is used to estimate the level of assessment revenue necessary to cover projected losses while maintaining the designated reserve ratio (DRR).³ Assessment revenue is provided through the collection of risk-based deposit insurance premiums assessed on individual institutions by the FDIC.

The FDIC has identified four aspects of the current deposit insurance system that need to be addressed. Deposit insurance is provided by two insurance funds at potentially different prices; deposit insurance cannot be priced effectively to reflect risk; deposit insurance premiums are highest at the wrong point in the business cycle; and the value of insurance coverage does not keep pace with inflation in a predictable fashion. The FDIC solicited and analyzed the input from its stakeholders and developed the following recommendations:

• Merge the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF).
• Eliminate the statutory restriction on the FDIC's ability to charge risk-based premiums to all institutions; the FDIC should charge regular premiums for risk regardless of the level of the fund.
• Eliminate sharp premium swings triggered when the reserve ratio deviates from the DRR. If the fund falls below a target level, premiums should increase gradually. If it grows above a target level, funds should be rebated gradually.
• Base rebates on past contributions to the fund, not on the current assessment base.
• Index the deposit insurance coverage level to maintain its real value.

External Factors:
Industry consolidation presents benefits and risks to the deposit insurance funds. While the risks to the funds are diminished because of the diversification benefits of consolidation (along geographic and product lines), the concentration of deposits in fewer insured depository institutions increases the risks to the funds in the event a large insured depository institution fails.

Implementation of the FDIC’s recommendations to revise the deposit insurance system will require legislative action by the Congress.

³The FDIC Improvement Act of 1991 requires each fund to maintain a designated reserve ratio of 1.25% of estimated insured deposits.