Bank deposit insurance fund remains on track to hit reserve target in second half of 2018; larger banks will see surcharges disappear

The federal insurance fund for bank deposits is expected to reach its statutory reserve target by the second half of this year – good news for larger banks, which will see quarterly surcharges end when the fund attains a 1.35% ratio of reserves to estimated deposits insured.

The Federal Deposit Insurance Corp. (FDIC) Board, in its quarterly meeting Tuesday in Washington, heard the report that outlined the reserve ratio estimate. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), the Deposit Insurance Fund (DIF) is mandated to reach the 1.35% ratio by September 2020. According to the estimates given to the board by FDIC staff at Tuesday’s meeting, the fund will reach that level about two years ahead of schedule.

Larger banks (those with $10 billion or more in assets) became subject to temporary assessment surcharges beginning in the third quarter of 2016. These surcharges, according to the FDIC, were imposed to implement the Dodd-Frank requirement that institutions at or above that asset size bear the cost of increasing the DIF reserve ratio from 1.15% to 1.35%.

Once the higher reserve ratio is reached (after the second half of this year), the larger banks will no longer be subject to the surcharge.

Smaller banks (those under the $10 billion threshold) will also benefit, according to FDIC staff: Under current regulations, they told the board, the smaller banks will receive credits to offset the portion of their regular assessments that helped to raise the reserve ratio from 1.15% to 1.35%. Staff told the board that the agency will apply the credits to offset each small bank’s assessment when the reserve ratio is at least 1.38%.

Outgoing FDIC Chairman Martin Gruenberg noted the significance of reaching the reserve ratio target. “By meeting this target earlier than the mandate, we reduce the risk that the FDIC will have to raise rates unexpectedly in the event of a future period of distress and help ensure stable and predictable assessments for the industry,” he said at the meeting, reading from a prepared statement. “The improvement in the insurance fund last year reflected the generally positive performance of the banking industry,” he said.

Along those lines, staff reported that:

  • The number of institutions on the FDIC’s problem list fell to 95 as of Dec. 31, 2017, down from 123 at the end of the previous year.
  • The number of problem banks, which peaked at 888 in March 2011 and has declined in every quarter since then, is at its lowest level since the first quarter of 2008.
  • Eight banks failed last year, marking the third year in a row in which the number of failures remained in single digits. No banks have failed so far in 2018.
  • The DIF balance stood at $92.7 billion at the end of 2017, up $9.6 billion from one year earlier.
  • Bank failures this year and in 2019 are likely to remain at low levels and cost the fund approximately $500 million.

In addition to Gruenberg, outgoing Vice Chairman Thomas Hoenig, Comptroller of the Currency Joseph Otting and Acting Director of the Consumer Financial Protection Bureau (CFPB) Mick Mulvaney (by phone) participated in the meeting.