‘Risk-based’ premiums – including development, evolution – outlined in new study

A comprehensive history of how the 85-year-old fund for insuring bank deposits was built – particularly through use of risk-based premiums – is outlined in a new study prepared by the agency that administers the fund, the agency said Monday.

In a release, the Federal Deposit Insurance Corp. (FDIC) said the study – the first in a series of such staff studies prepared for public consumption – recounts the evolution of how the agency set premiums that reflect the risk banks pose to the Deposit Insurance Fund (DIF), the fund that backs up depositors’ savings in banks and savings institutions.

The study – A History of Risk-Based Premiums at the FDIC – traces decisions and motivations of the evolution of the fund. The FDIC notes that the fund began as “an assessment system where all banks paid the same rate” but developed over time into today’s risk-based system.

“For nearly 60 years, the FDIC assessed all insured institutions at the same rate, regardless of the degree of risk they posed to the fund,” the agency said in releasing the study. “Following banking crises in the 1980s and early 1990s, Congress required the FDIC to implement its first risk-based system in 1993, based on an institution’s capital levels and supervisory ratings. Since then, the FDIC has incorporated data and experience gained over nearly 25 years – including two banking crises – with the goal of improving the system and making assessments fairer and more accurate.”

The agency said the study also outlines policy debates leading to each change, how the assessment system was revised to incorporate new experience, and the FDIC’s evaluation of the changes against the system in place at the time. “As the banking industry evolves, the FDIC will continue to monitor the assessment system’s ability to measure risk and consider ways to improve risk-based pricing,” the agency wrote.

Report 2020-01: A History of Risk-Based Premiums at the FDIC