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Reserve Ratio

The Federal Deposit Insurance Act requires the FDIC's Board to set a target or DRR for the DIF annually. Since 2010, the Board as adopted a 2.0 percent DRR each year. An analysis using historical fund loss and simulated income data from 1950 to 2010 showed that the reserve ratio would have had to exceed 2.0 percent before the onset of the two crises that occurred during the past 30 years to have maintained both a positive fund balance and stable assessment rates throughout both crises. 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.

Elevated levels of bank failures, especially in 2009 and 2010, resulted in a decline in the reserve ratio. The Dodd-Frank Act establishes a minimum DRR of 1.35 percent and requires that the FDIC return the reserve ratio to that level by September 30, 2020. In October 20101, under the comprehensive plan, the FDIC adopted a Restoration Plan to ensure that the reserve ratio reaches 1.35 percent by this deadline. Pursuant to the Restoration Plan, the FDIC's Board adopted the current set of assessment rates, which are designed to ensure that the reserve ratio reaches the statutory minimum by the statutory deadline. Pursuant to the long-term fund management plan, the Board also adopted a lower set of assessment rates that will automatically become effective once the reserve ratio reaches 1.15 percent.2

Although the Dodd-Frank Act allows the FDIC's Board to issue dividends from the DIF if the reserve ratio exceeds 1.5 percent, the Board has suspended dividends indefinitely under the comprehensive plan to increase the probability that the reserve ratio will reach a level sufficient to withstand a future crisis. In lieu of dividends, the Board adopted a set of progressively lower assessment rates when the reserve ratio exceeds 2.0 percent and 2.5 percent. These lower rates serve much the same function as dividends, but provide more stable and predictable effective assessment rates.

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1After having reached 1.35 percent, if the reserve ratio falls below 1.35 percent, or if the FDIC projects that the reserve ratio will, within 6 months, fall below 1.35 percent, the FDIC must adopt a restoration plan that provides that the DIF will return to 1.35 percent within 8 years (or longer if the FDIC finds it necessary due to extraordinary circumstances).

2The Act also requires that the FDIC offset the effect on banks with less than $10 billion in assets of increasing the reserve ratio from 1.15 percent to 1.35 percent. The FDIC will promulgate a rulemaking that implements this requirement at a later date to better take into account prevailing industry conditions at the time of the offset.