2017 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, financial markets, and 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 was 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. Under the plan, a reduction in assessment rates took effect in the third quarter of 2016 as a result of the reserve ratio’s having surpassed 1.15 percent in the previous quarter.
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 2017, the Board voted to maintain the 2.0 percent ratio for 2018. 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. In lieu of dividends, the plan prescribes progressively lower assessment rates that will become effective when the reserve ratio exceeds 2.0 percent and 2.5 percent.
State of the Deposit Insurance Fund
Estimated losses to the DIF from bank failures that occurred in 2017 totaled $1.1 billion. The fund balance continued to grow through 2017, as it has every quarter after the end of 2009. Assessment revenue was the primary contributor to the increase in the fund balance in 2017. The fund reserve ratio rose to 1.28 percent at September 30, 2017, from 1.18 percent a year earlier.
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 IDIs with total consolidated assets of less than $10 billion. The final rule implementing these requirements took effect on July 1, 2016. It imposes surcharges on the quarterly assessments of insured depository institutions (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 additional adjustments for banks with affiliated IDIs. The FDIC expects the reserve ratio to reach 1.35 percent in 2018. 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), the final rule requires the FDIC to 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 contributes 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.