A plan to return the insurance fund that covers bank deposits to a reserve ratio of 1.35% of total savings insured will stay on course, the governing board of the fund said Tuesday, primarily because the agency believes depositor behavior will return to normal as the coronavirus begins to ebb.
The board of the Federal Deposit Insurance Corp. (FDIC) first adopted the restoration plan for its deposit insurance fund (DIF) last September. It received a semiannual briefing from staff Tuesday on the progress of the restoration plan.
A key component of the plan: assessment rates for banks, which fund the DIF, would remain unchanged. According to the FDIC, BIF reserves stand at more than $119 billion, the most ever. Nevertheless, the reserve ratio of the fund is now at 1.25% – 10 points below the rate mandated by the restoration plan (which calls for a ratio of 1.35% within eight years).
The restoration plan was adopted last fall after the DIF’s dilution by the surge of savings to banks made during the height of the coronavirus crisis, which included government stimulus payments made to many consumers.
In its report to the board, FDIC staff said they continue to project that the reserve ratio would return to 1.35% of insured deposits within eight years. “As economic conditions improve, surge insured deposits associated with the pandemic may recede as the precautionary behavior exhibited by depositors subsides and individuals and businesses redirect deposits toward consumption and higher-yielding investments,” the FDIC staff said in a memo to the board. “The economic outlook has strengthened in recent months and appears more favorable than last September, and the banking system continues to appear better positioned to withstand losses when compared to prior periods of stress.”
Nevertheless, the memo stated, slower than expected economic growth, market volatility or “additional fiscal or monetary stimulus” could result in increased deposit growth at banks – or losses to the DIF.
For example, the memo stated, DIF loss projections may increase if the quality of bank assets quickly deteriorate or capital markets “become severely constrained” – which could both affect income. “Insured deposit growth could be higher or lower based on future economic conditions and the response of fiscal and monetary authorities and depositors,” the staff noted. “Changes in IDI (insured depository institutions) risk profiles or a reduction in the aggregate assessment base, which could be driven by a future flow of surge deposits out of the banking system, could reduce assessment revenue and constrain growth in the DIF,” the memo warned.
FDIC Chairman Jelena McWilliams, in a statement, said that “as both deposit trends and potential losses are difficult to predict, staff will continue to monitor these and other factors” and their impact on the DIF.
FDIC Board Member Martin Gruenberg, in his own statement, urged the staff to increase the frequency of their updates about the DIF, rather than just semiannually. “It will be essential for the FDIC staff to continue to update its projections for the fund balance and reserve ratio at least semiannually while the (Restoration) Plan is in effect, keep the FDIC Board regularly informed, and to recommend rate adjustments as necessary,” he said.