2015 Annual Report

I. Management’s Discussion and Analysis

The Year in Review

DEPOSIT INSURANCE

As insurer of bank and savings association deposits, 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 complements 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) reaches 1.35 percent by September 30, 2020, as required by the Dodd-Frank Act. (As discussed in the Minimum Reserve Ratio section below, the 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.) These plans include a reduction in assessment rates that the FDIC Board of Directors (FDIC Board) adopted to become effective once the reserve ratio reaches 1.15 percent.

Under the long-term DIF management plan, to increase the probability that the fund reserve ratio will reach a level sufficient to withstand a future crisis, the FDIC Board has 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 2015 to maintain the 2.0 percent DRR for 2016—the ratio that has been in effect every year since 2011.

Also as part of the long-term DIF management plan, the FDIC has 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 from bank failures that occurred in 2015 totaled $829 million.  The fund balance continued to grow through 2015, as it has every quarter after the end of 2009, for a total of 24 consecutive quarters. Lower than estimated losses for bank failures together with assessment revenue contributed to the increase in the fund balance in 2015. The fund reserve ratio rose to 1.09 percent at September 30, 2015, from 0.88 percent a year earlier.

Minimum Reserve Ratio

In October 2015, the FDIC approved an NPR that would implement section 334 of the Dodd-Frank Act, which increases the minimum reserve ratio from 1.15 percent to 1.35 percent, requires that the reserve ratio reach that level by September 30, 2020, and mandates that the FDIC “offset the effect of (the increase in the minimum reserve ratio from 1.15 percent to 1.35 percent) on IDIs with total consolidated assets of less than $10 billion.”

To implement these requirements, the proposed rule would impose surcharges on the quarterly assessments of IDIs with total consolidated assets of $10 billion or more. The surcharges would begin the calendar quarter after the reserve ratio of the DIF first reaches or exceeds 1.15 percent—the same time that lower regular quarterly deposit insurance assessment (regular assessment) rates take effect under current regulations—or the quarter in which a final rule takes effect, whichever occurs later, and would continue through the quarter that the reserve ratio first reaches or exceeds 1.35 percent. In general, the surcharge would equal an annual rate of 4.5 basis points applied to the institution’s regular quarterly deposit insurance assessment base, after making certain adjustments specifically for the surcharge. The FDIC expects that eight quarterly surcharges would be needed for the reserve ratio to reach 1.35 percent.

If, contrary to the FDIC’s expectations, the reserve ratio does not reach 1.35 percent by December 31, 2018 (but has reached at least 1.15 percent), the NPR would impose a shortfall assessment on IDIs with total consolidated assets of $10 billion or more on March 31, 2019.

Because the Dodd-Frank Act requires that the FDIC offset the effect of the increase in the reserve ratio from 1.15 percent to 1.35 percent on IDIs with total consolidated assets of less than $10 billion, the NPR would provide assessment credits to these institutions for the portion of their regular assessments that contribute to growth in the reserve ratio between 1.15 percent and 1.35 percent.

Deposit Insurance Assessment System

In June 2015, the FDIC approved an NPR to refine the deposit insurance assessment system for established small banks (generally, those with less than $10 billion in total assets that have been federally insured for at least five years). In January 2016, the FDIC approved a second NPR that would revise parts of the proposal adopted by the FDIC in June 2015. The primary purpose of these NPRs is to improve the risk-based deposit insurance assessment system applicable to established small banks to more accurately reflect risk. The NPRs would incorporate newer data from the recent financial crisis and base assessment rates for all established small banks on a statistical model that estimates a bank’s probability of failure within three years. The NPRs propose that the revisions would go into effect the quarter after the reserve ratio of the DIF reaches 1.15 percent (or the first quarter after a final rule is adopted and the rule can take effect, whichever is later). The NPRs would maintain the range of assessment rates that will apply once the DIF reserve ratio reaches 1.15 percent, 2 percent, and 2.5 percent, and would be implemented in a manner such that aggregate assessment revenue collected from established small banks under the NPRs would be approximately the same as would be collected under the current small bank pricing method for calculating assessments after the reserve ratio reaches 1.15 percent.