2014 Annual Report

I. Management’s Discussion and Analysis

The Year in Review

INSURANCE

The FDIC insures bank and savings association deposits. As insurer, the FDIC must continually evaluate and effectively manage how changes in the economy, the financial markets, and the banking system affect the adequacy and the viability of the Deposit Insurance Fund (DIF).

Long-Term Comprehensive Fund Management Plan

In 2010 and 2011, the FDIC developed a comprehensive, long-term DIF management plan designed to reduce the effects of cyclicality and achieve moderate, steady assessment rates throughout economic and credit cycles, while also maintaining a positive fund balance, even during a banking crisis. That plan is combined with the Restoration Plan, originally adopted in 2008 and subsequently revised, which is designed to ensure that the reserve ratio (the ratio of the fund balance to estimated insured deposits) will reach 1.35 percent by September 30, 2020, as required by the Dodd-Frank Act¹. These plans include a reduction in assessment rates that the FDIC Board adopted to become effective once the reserve ratio reaches 1.15 percent.

To increase the probability that the fund reserve ratio will reach a level sufficient to withstand a future crisis, the FDIC Board has—under the long-term DIF management plan—set the Designated Reserve Ratio (DRR) of the DIF at 2.0 percent. The FDIC views the 2.0 percent DRR as a long-term goal and the minimum level needed to withstand future crises of the magnitude of past crises. Under provisions of the Federal Deposit Insurance Act (FDI Act) that require the FDIC Board to set the DRR for the DIF annually, the FDIC Board voted in October 2014 to maintain the 2.0 percent DRR for 2015—the DRR that has been in effect every year since 2011.

As part of the long-term DIF management plan, the FDIC also suspended dividends indefinitely when the fund reserve ratio exceeds 1.5 percent. Instead, the plan prescribes progressively lower assessment rates that will become effective when the reserve ratio exceeds 2.0 percent and 2.5 percent. These lower assessment rates serve much the same function as dividends, but provide more stable and predictable effective assessment rates over time.

State of the Deposit Insurance Fund

Estimated losses to the DIF were $0.4 billion from failures occurring in 2014; these losses were lower than losses from failures in each of the previous six years. The fund balance continued to grow through 2014, as it has every quarter starting first quarter 2010, for a total of 20 consecutive quarters. Lower than estimated losses for past bank failures together with assessment revenue contributed to the increase in the fund balance in 2014. The fund reserve ratio rose to 1.01 percent at December 31, 2014, from 0.79 percent at the previous year-end.

Deposit Insurance Assessment System

In November 2014, the FDIC finalized a rule that revises the deposit insurance system to be consistent with changes in the regulatory capital rules that go into effect January 1, 2015, and January 1, 2018. The rule conforms the capital ratios and ratio thresholds in the deposit insurance assessment system to the Basel III rule prompt corrective action capital ratios and thresholds. The rule also conforms the assessment base calculation for custodial banks to the new asset risk weights under the Basel III rule’s standardized approach. In addition, for highly complex institutions, the rule requires counterparty exposure for assessment purposes to be measured using the Basel III rule’s standardized approach, with a modification for certain cash collateral securing derivative exposures.

¹The Act also requires that the FDIC offset the effect on institutions with less than $10 billion in assets of increasing the reserve ratio from 1.15 percent to 1.35 percent. The FDIC will publicize a rulemaking that implements this requirement at a later date to better take into account prevailing industry conditions at the time of the offset.