The FDIC Board is considering today a final rule to increase initial base deposit insurance assessment rate schedules by 2 basis points, beginning in the first quarterly assessment period of 2023.
As of June 30, 2020, near the start of the pandemic, the reserve ratio of the Deposit Insurance Fund (DIF) fell below the statutory minimum of 1.35 percent. Just to be clear, the reserve ratio of the DIF is the DIF balance relative to total estimated insured deposits.
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 the statutory deadline of September 30, 2028, eight years from the implementation of the Restoration Plan. The original Plan maintained the assessment rate schedules and required staff to update the analysis and projections for the DIF balance and reserve ratio at least semiannually.
Two years later, at the June 2022 semiannual update to the Board, staff projected the reserve ratio was at risk of not reaching 1.35 percent by the statutory deadline. Consequently, the FDIC Board adopted an Amended Restoration Plan that incorporated an increase to the deposit insurance assessment rate schedules of 2 basis points to improve the likelihood that the reserve ratio would be restored to the minimum level by September 30, 2028, and concurrently approved a notice of proposed rulemaking to implement the increase.3
The FDIC received 171 comments on the proposed rule and carefully considered all comments in developing the rule before the Board today. In addition, staff updated projections and analysis using data for the second quarter of 2022. The FDIC recognizes that there was a small decrease in insured deposits of 0.7 percent and positive growth in the DIF balance in the second quarter. However, the reserve ratio of 1.26 percent remains below 1.30 percent, where it was when the Restoration Plan was first established over two years ago. While insured deposit growth showed signs of possibly normalizing in the second quarter, aggregate insured deposit balances remain elevated relative to pre-pandemic levels.
Even with possible signs of deposit growth normalizing, insured deposits increased 4.3 percent over the last year. This growth rate is faster than the assumed insured deposit growth rates used for the two different scenarios in the analysis supporting this final rule. Thus, significant risk remains that the reserve ratio may not reach 1.35 percent by the statutory deadline, absent an increase in assessment rates.
The final rule, which adopts the proposal without change, increases the likelihood that the reserve ratio will reach the statutory minimum of 1.35 percent within the deadline set by statute, and is consistent with the Amended Restoration Plan. Importantly, it also decreases the likelihood that the FDIC would have to consider imposing higher, more pro-cyclical assessments before the deadline.
Strengthening the DIF is important because the banking industry faces significant downside risks. Future economic and banking conditions remain uncertain due to high inflation, rising interest rates, slowing economic growth, and geopolitical uncertainty. Any of these uncertainties could present challenges and have longer-term effects on the condition and performance of the economy and the banking industry. It is better to take prudent but modest action earlier in the statutory 8-year period to reach the minimum reserve ratio, than to delay and potentially have to consider a pro-cyclical assessment increase.
For example, in the event that the industry experiences a downturn before the FDIC has exited its current Restoration Plan, the FDIC might have to consider even larger assessment increases to meet the statutory requirement in a more compressed timeframe and under less favorable conditions. We can recall the experience in 2008 and the need for a large increase in assessments during a time of severe economic and financial stress. However, if the FDIC exits its current restoration plan by reaching the 1.35 percent statutory minimum, and a later downturn in the industry results in the need for a new restoration plan, the FDIC would then have an additional eight years to restore the reserve ratio to 1.35 percent, providing greater flexibility in setting assessment rates at a time of industry stress.
The increase to assessment rate schedules also supports growth in the DIF in progressing toward the Designated Reserve Ratio. This long-term goal is designed to increase the likelihood that the Deposit Insurance Fund will remain positive throughout periods of significant losses due to bank failures, and to reduce the risk that the FDIC might need to consider a pro-cyclical assessment rate increase.4
Given the economic uncertainties and the difficulty in projecting insured deposit growth and other factors that may affect the reserve ratio, under the final rule, the FDIC Board will retain the flexibility to adjust assessment rates without further notice-and-comment rulemaking, provided that the Board cannot increase or decrease rates from one quarter to the next by more than 2 basis points. Maintaining the ability to adjust rates within limits should allow the FDIC to act expeditiously if warranted based on changing conditions.
Overall, the banking industry continues to report strong earnings and is well positioned to absorb this modest increase in assessment rates. The increase in assessment rates is projected to have an insignificant effect on institutions' capital levels, is estimated to reduce income slightly by an annual average of 1.2 percent, and should not impact lending or credit availability in any meaningful way.
I am therefore supportive of this final rule. The increased assessment revenue will strengthen the DIF at a time of significant downside risk to the economy and financial system, increasing the likelihood that the reserve ratio will reach the statutory minimum of 1.35 percent by the statutory deadline while reducing the likelihood of a pro-cyclical increase in the future, and promoting public confidence in federal deposit insurance.
Under this final rule, the increase in assessment rate schedules will begin the first quarterly assessment period of 2023, and the first payment date will be June 30, 2023, providing adequate time for institutions to prepare and plan for the increase.
Finally, I would like to thank FDIC staff for their thoughtful work on this final rule.
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 2022 FDIC Amended Restoration Plan, 87 FR 39518 (July 1, 2022), available at https://www.fdic.gov/news/board-matters/2022/2022-06-21-notice-sum-b-fr.pdf. Notice of Proposed Rulemaking on Assessments, Revised Deposit Insurance Assessment Rates, 87 FR 39388 (July 1, 2020), available at https://www.fdic.gov/news/board-matters/2022/2022-06-21-notice-dis-a-fr.pdf.
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.