The Deposit Insurance Fund
One way the FDIC maintains stability and public confidence in the U.S. financial system is by providing deposit insurance. The primary purposes of the Deposit Insurance Fund (DIF) are: (1) to insure the deposits and protect the depositors of insured banks and (2) to resolve failed banks. While the DIF is backed by the full faith and credit of the United States government, it has two sources of funds: assessments (insurance premiums) on FDIC-insured institutions and interest earned on funds invested in U.S. government obligations. Revenue from assessments and interest on investments add to the DIF balance (or fund net worth), while losses (primarily from bank failures) and operating expenses reduce the balance.
The DIF is funded mainly through quarterly assessments on insured banks. A bank's assessment is calculated by multiplying its assessment rate by its assessment base. A bank's assessment base and assessment rate are determined and paid each quarter. The assessment base has always been more than just insured deposits. From 1935 to 2010, a bank's assessment base was about equal to its total domestic deposits. As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), however, the FDIC amended its regulations in 2011 to define a bank's assessment base as its average consolidated total assets minus its average tangible equity. Therefore, a bank pays assessments on its total liabilities, not just insured deposits.
By statute, assessment rates must be risk based. The method for determining a bank's risk-based assessment rate differs for small banks and large banks, however. See Scorecards for more on the small, large, and highly complex scorecards. See “A History of Risk-Based Pricing” for more on the history of the FDIC’s risk-based pricing system.
The FDIC manages the level of the DIF to maintain public confidence in the financial system and to resolve failed banks. In addition to assessments, the DIF receives interest income on its securities. The DIF is reduced by loss provisions associated with failed banks and by FDIC operating expenses.
The Dodd-Frank Act revised the FDIC's fund management authority by setting requirements for the Designated Reserve Ratio (DRR) and redefining the assessment base, which is used to calculate banks' quarterly assessments. In response to these statutory revisions, the FDIC developed a comprehensive, long-term management plan for the DIF designed to reduce pro-cyclicality and achieve moderate, steady assessment rates throughout economic and credit cycles while also maintaining a positive fund balance even during a banking crisis. The FDIC Board adopted the existing assessment rate schedules and a 2.0 percent DRR pursuant to this plan. The DIF balance and reserve ratio are published in the Quarterly Banking Profile.
Since its creation in 1933, the FDIC has charged assessments and maintained a deposit insurance fund. These systems have evolved over time, based on data and experience over two banking crises. For more, see these historical reference materials related to assessments and the management of the DIF.