The FDIC Board is considering today an amendment to the Deposit Insurance Fund (DIF) Restoration Plan to incorporate a uniform increase in initial base deposit insurance assessment rates of 2 basis points. In conjunction with the Amended Restoration Plan, the FDIC Board is also considering a notice of proposed rulemaking to implement and seek comment on the proposed 2 basis point increase in assessment rates, which would begin with the first quarterly assessment period of 2023.
As of June 30, 2020, the reserve ratio of the DIF had fallen below 1.35 percent, the statutory minimum. The reserve ratio is the ratio of the DIF to total estimated insured deposits in the United States. As required by the Federal Deposit Insurance Act1, the FDIC Board adopted a Restoration Plan in September 20202 to restore the DIF to at least 1.35 percent by September 30, 2028. The original Plan maintained the assessment rate schedule in place at the time and required staff to update the analysis and projections for the DIF balance and reserve ratio at least semiannually.
A key assumption surrounding the original Restoration Plan was that insured deposit growth would normalize, and the surge of insured deposits associated with the pandemic would recede over time. However, a year has passed since the latest quarter of extraordinary growth in insured deposits prompted by the most recent round of pandemic-related fiscal stimulus. Yet the banking industry has continued to report strong insured deposit growth. In fact, excluding quarters affected by the increase in insured deposit limits in 2009 and the early pandemic, insured deposits increased in the first quarter of 2022 by the largest amount in at least 30 years.
Consequently, growth in insured deposits has outpaced the growth in the DIF, resulting in a decline of the reserve ratio from 1.27 percent to 1.23 percent since the last restoration plan update to the Board in December 2021.3 Updated analysis and projections for the Deposit Insurance Fund balance and reserve ratio indicate that, absent an increase in assessment rates, the reserve ratio is at risk of not reaching the statutory minimum of 1.35 percent by the statutory deadline of September 30, 2028.
Today’s proposed increase in assessment rates is intended to achieve two objectives. First, the proposal would increase the likelihood that the reserve ratio will reach the statutory minimum of 1.35 percent before the statutory deadline. Better to take prudent but modest action earlier in the statutory 8–year period to reach the minimum reserve ratio of the Deposit Insurance Fund than to delay and potentially have to consider a larger increase in assessments at a later time when banking and economic conditions may be less favorable.
In addition to increasing the likelihood of meeting the statutory obligations, the proposed change in assessment rates is also intended to support progress toward the 2 percent Designated Reserve Ratio.4 The Designated Reserve Ratio is designed to reduce the risk that the FDIC might need to consider a pro-cyclical assessment rate increase — that is, charge higher assessment rates during a time of economic stress, when banks can least afford it. Therefore, these assessment rates would remain in effect unless and until the reserve ratio meets or exceeds 2 percent.
The banking industry remains resilient moving into the second half of 2022 despite the extraordinary challenges of the pandemic and other economic and geopolitical stresses. The banking industry’s capital, liquidity and earnings remain strong at this time. The proposal would have a modest effect on banking industry income, resulting in an average estimated annual reduction of less than 2 percent.
I am therefore supportive of this notice of proposed rulemaking and the amendment to the Restoration Plan. Accelerating the time in which the reserve ratio would reach the statutory minimum of 1.35 percent and the Designated Reserve Ratio of 2 percent would allow the banking industry to remain a source of strength for the economy during a potential future downturn, and would promote public confidence in federal deposit insurance.
I look forward to the public comments on the proposal. The proposed increase in assessment rates would be applicable no earlier than the first quarterly assessment period of 2023, providing time for institutions to prepare and plan for the increase.
I would like to thank the FDIC staff for their exceptionally thoughtful work on this proposed rule and Amended Restoration Plan.
1 Section 7(b)(3)(E) of the Federal Deposit Insurance Act, 12 USC 1817(b)(3)(E), available at https://www.fdic.gov/regulations/laws/rules/1000-800.html#fdic1000sec.7b.
2 2020 FDIC Restoration Plan, 85 FR 59306 (Sept. 21, 2020), available at https://www.fdic.gov/news/board-matters/2020/2020-09-15-notice-dis-a-fr.pdf.
3 For information regarding the DIF reserve ratio over the past three years, see the Quarterly Banking Profile, available at https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/2022mar/qbp.pdf#page=1 at page 4.
4 Since 2010, the Board has 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 DRR would had to have exceeded 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. See FDIC Designated Reserve Ratio for 2022, 86 FR 71638 (December 17, 2021), available at https://www.govinfo.gov/content/pkg/FR-2021-12-17/pdf/2021-27382.pdf and related Memorandum to the FDIC Board of Directors, available at https://www.fdic.gov/news/board-matters/2021/2021-12-14-notice-sum-c-mem.pdf.