2016 Annual Report
I. Management’s Discussion and Analysis
The Year in Review
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, 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. The plan includes a reduction in assessment rates to take effect when the reserve ratio reaches 1.15 percent, which occurred in the second quarter of 2016 (as discussed in the Deposit Insurance Fund Reserve Ratio section).
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 set the Designated Reserve Ratio (DRR) of the DIF at 2.0 percent. In September 2016, the Board voted to maintain the 2.0 percent ratio for 2017. 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.
Additionally, 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 2016 totaled $47 million. The fund balance continued to grow through 2016, as it has every quarter after the end of 2009. Assessment revenue was the primary contributor to the increase in the fund balance in 2016. The fund reserve ratio rose to 1.18 percent at September 30, 2016, from 1.09 percent a year earlier.
Deposit Insurance Fund Reserve Ratio
On June 30, 2016, the DIF reserve ratio rose to 1.17 percent from 1.13 percent on March 31, 2016. FDIC regulations provide for three major changes to deposit insurance assessments the quarter after the reserve ratio first reaches or exceeds 1.15 percent. Beginning the third quarter of 2016:
- the range of initial regular assessment rates for all institutions declined (from 5-35 basis points to 3-30 basis points) based on final rules approved by the FDIC Board on February 7, 2011, and April 26, 2016;
- surcharges on insured depository institutions with total consolidated assets of $10 billion or more (large banks) began, pursuant to a final rule approved by the Board on March 15, 2016 (discussed in the Minimum Reserve Ratio section below); and
- a revised method to calculate risk-based assessment rates for established small banks went into effect, pursuant to the final rule approved by the FDIC Board on April 26, 2016, (discussed in the Deposit Insurance Assessment System section).
Minimum Reserve Ratio
Section 334 of the Dodd-Frank Act, which increased the minimum reserve ratio of the DIF from 1.15 percent to 1.35 percent, requires that the reserve ratio reach that level by September 30, 2020. Section 334 also mandates that the FDIC “offset the effect of [the increase in the minimum reserve ratio] on insured depository institutions (IDIs) with total consolidated assets of less than $10 billion.” In March 2016, the FDIC approved a final rule to implement these requirements. The final rule imposes surcharges on the quarterly assessments of IDIs with total consolidated assets of $10 billion or more. The surcharges will continue through the quarter in which the reserve ratio first reaches or exceeds 1.35 percent. The surcharge equals an annual rate of 4.5 basis points applied to an institution’s regular quarterly deposit insurance assessment base after subtracting $10 billion, with certain exceptions for banks with affiliated insured depository institutions. The FDIC expects that eight quarterly surcharges will 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 is still at least 1.15 percent), under the final rule the FDIC will 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 final rule exempts these smaller banks from the surcharges and provides 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. Credits will be automatically applied to these small banks’ assessments when the reserve ratio is at or above 1.38 percent.
Deposit Insurance Assessment System
In April 2016, the FDIC approved a final rule to improve the risk-based deposit insurance assessment system applicable to established small banks to reflect risk more accurately. The final rule incorporates data from the recent financial crisis and bases assessment rates for all established small banks (generally, those with less than $10 billion in total assets that have been federally insured for at least five years) in a statistical model that estimates a bank’s probability of failure within three years. The revisions went into effect the third quarter of 2016. The final rule maintains the previously adopted ranges of assessment rates that apply once the DIF reserve ratio reaches 1.15 percent, 2 percent, and 2.5 percent, and was implemented so that aggregate assessment revenue collected from established small banks under the final rule was approximately the same as would have been collected under the small bank pricing method being replaced.