Bank Insurance Fund Reserve Ratio Above 

Statutory Minimum - For Now

September 12, 2002 

The Federal Deposit Insurance Corporation reported today in the Quarterly Banking Profile that the Bank 

Insurance Fund (BIF) reserve ratio rose to 1.26 percent at the end of June, just slightly above the 

statutorily mandated Designated Reserve Ratio (DRR) target of 1.25 percent. At March 31, the BIF 

reserve ratio stood at 1.23 percent.1

The increase in the BIF reserve ratio in the second quarter resulted from both an increase in the BIF 

balance and a decrease in BIF-insured deposits. (The BIF reserve ratio is determined by dividing the BIF 

balance by the estimated amount of deposits insured by the BIF.) The BIF balance grew by 1.6 percent 

($490 million) during the second quarter of 2002, ending the quarter with a balance of $31.19 billion 

(unaudited). The strong second quarter growth in the BIF, as compared to the first quarter growth of 

$258 million, was primarily due to higher interest income from investments and greater unrealized gains 

on securities. BIF-insured deposits decreased by 0.1 percent during the second quarter.

The BIF reserve ratio figures significantly in setting BIF deposit insurance premium rates. Under current 

law, if the BIF reserve ratio is below 1.25 percent, the FDIC's Board of Directors must charge premiums 

that are sufficient to restore the reserve ratio to the DRR within a year, or it must charge premiums that 

average at least 23 basis points until the reserve ratio meets the DRR. Currently, most institutions do not 

pay premiums for deposit insurance.

When the FDIC's Board meets later this year to set deposit insurance premium rates for the first half of 

2003, the June 30, 2002, BIF reserve ratio may be the most current available ratio. Estimated insured 

deposits are calculated from Call Reports that are filed up to 45 days after the end of each quarter. 

Editing the Call Reports and calculating estimated insured deposits can take an additional two to three 

weeks. Therefore, estimated insured deposits—and, hence, the reserve ratio—for the end of September 

may not be finalized when the FDIC's Board meets.

The FDIC's Board will not be limited solely to looking at the June BIF reserve ratio, however. Although 

the September 30 reserve ratio may not be final, the Board will have data available on the factors that go 

into determining the reserve ratio. The September 30 BIF balance will be available and the FDIC is 

working to enhance its estimates of insured deposit growth.

Predicting how the reserve ratio will change from one quarter to the next is difficult. The trend in the BIF 

reserve ratio over the past few years has been downward (see Chart 1), but fluctuations in the reserve 

ratio from quarter to quarter are not uncommon. These quarterly changes in the reserve ratio have varied 

between -4.5 percent and 2.4 percent over the past few years.

D

This volatility stems from fluctuations in the factors that determine the reserve ratio. Estimated insured 

deposits, which by definition are inversely related to the reserve ratio, are one of the major determinants 

of the reserve ratio. BIF-insured deposits have generally been growing, but the level has been volatile 

over the past few years. Growth rates of insured deposits have varied between -0.5 percent and 3.4 

percent per quarter. The volatility in the growth rate of insured deposits has contributed to fluctuations in 

the BIF reserve ratio (see Chart 2). 
D

Fluctuations in the BIF balance can also lead to fluctuations in the reserve ratio. Several factors 

determine changes in the BIF balance from quarter to quarter, including changes in the contingent loss 

reserve—the amount set aside to cover losses from probable failures; actual losses resulting from 

insured institution failures when they are different from the amounts set aside in the loss reserve; 

assessment income; interest income; and changes in the value of Treasury securities in the BIF's 

available-for-sale portfolio. On balance, these factors have interacted to produce a fluctuating BIF 

balance over the past few years (see Chart 3). 

Under current law, because the BIF ratio is near the DRR, even small fluctuations in the reserve ratio can 

have financial consequences for BIF-insured institutions. For example, large insured deposit growth 

during the third quarter or losses from bank failures that exceed expectations could result in the BIF ratio 

falling below 1.25 percent. In that event, the FDIC Board may determine that premiums are necessary to 

maintain the target DRR.

To keep small fluctuations in the reserve ratio from greatly affecting premiums, and to solve other 

problems with the current system, the FDIC published Recommendations for Deposit Insurance Reform

in April 2001. Among other things, the FDIC is seeking greater discretion from Congress to establish a 

range for the reserve ratio and to set risk-based deposit insurance premium levels to reflect actual risk in 

the industry and to the insurance funds. The House acted on the FDIC’s recommendations by passing 

legislation, H.R. 3717, on May 22. Another reform bill, S. 1945, was introduced in the Senate earlier this 

year. Both bills would grant the FDIC significantly greater discretion to set the DRR. H.R. 3717 would 

allow the FDIC to set the DRR between 1.15 and 1.40 percent; S. 1945 would allow the FDIC to set the 

DRR between 1.0 and 1.5 percent. Both bills would allow the FDIC to determine the factors it considers 

important when setting risk-based premium levels, and would end the hard-and-fast rule that premiums 

for all institutions must increase when the reserve ratio falls below 1.25 percent.

In the absence of new legislation, however, existing law combined with the volatility of the BIF reserve 

ratio could force the FDIC to increase premiums for BIF-insured institutions in the near future.

FDIC Chairman Donald Powell addresses the need for deposit insurance reform and discusses the 

current adequacy of the BIF in a speech today before the Fall Conference of the Financial Services 

Roundtable. 

The full text of Chairman Powell's remarks will be available immediately following the speech at 

http://www.fdic.gov/news/news/speeches/archives/2002/sp12sep02.html.

1 The March 31 BIF reserve ratio was revised from 1.24 percent, as a result of amendments to the amount of insured deposits reported by 

BIF-insured institutions. 
Chart 1

The BIF Reserve Ratio Has Generally Been 

Declining Over the Past Few Years

Percent of 

Insured Deposits

9/98 1.41

12/98 1.39

3/99 1.41

6/99 1.4

9/99 1.39

12/99 1.37

3/00 1.36

6/00 1.33

9/00 1.35

12/00 1.35

3/01 1.33

6/01 1.33

9/01 1.32

12/01 1.26

3/02 1.23

6/02 1.26

Source: FDIC
Chart 2

The Volatility of Insured Deposit Growth Has 

Contributed to Fluctuations in the BIF 

Reserve Ratio

Insured 

Deposits 

Quarterly

Change, in %

Reserve 

Ratio 

Quarterly 

Change, in %

12/98 3.4 -1.4

3/99 -0.5 1.4

6/99 0.3 -0.7

9/99 0.0 -0.7

12/99 1.0 -1.4

3/00 1.9 -0.7

6/00 2.2 -2.2

9/00 1.3 1.5

12/00 1.4 0.0

3/01 3.1 -1.5

6/01 0.5 0.0

9/01 0.9 -0.8

12/01 0.2 -4.5

3/02 3.2 -2.4

6/02 -0.1 2.4

Source: FDIC
Chart 3

The BIF Balance Has 

Fluctuated Over the Past 

Few Years

Billions of Dollars

9/98 $29.1

12/98 $29.6

3/99 $29.9

6/99 $29.8

9/99 $29.5

12/99 $29.4

3/00 $29.7

6/00 $29.8

9/00 $30.6

12/00 $31.0

3/01 $31.4

6/01 $31.7

9/01 $31.8

12/01 $30.4

3/02 $30.7

6/02 $31.2

Source: FDIC