An Update on Emerging Issues in Banking 

FDIC Notifies Banks that Higher Insurance Premiums 

Are Possible

March 1, 2002 

The Board of Directors of the FDIC today alerted insured institutions to the 

possibility of higher deposit insurance premiums in the second half of 2002. The 

higher premiums–if they prove necessary–would likely affect only those banks 

and thrifts with deposits insured by the Bank Insurance Fund (BIF), and the 

amount of any such increase would be at most 5 basis points of BIF-assessable 

deposits per annum.

The FDIC Board also considered, and rejected, seeking public comment on 

possible premium rate increases of more than 5 basis points in the second half of 

the year.

The BIF balance for year-end 2001 stood at $30.6 billion (unaudited), which 

includes the effect of a $1.75 billion reserve for calendar-2002 insurance losses. 

BIF-insured deposits at year-end 2001 are about $2.41 trillion. Based on these 

figures, the ratio of the BIF to its insured deposits is expected to fall to 1.27 

percent at year-end 2001. 

The FDIC is required to maintain a BIF balance of at least 1.25 percent of BIFinsured deposits (the "Designated Reserve Ratio," or DRR). If the BIF falls below 

the DRR, the FDIC must collect premiums sufficient to restore the shortfall within 

a year after the higher premiums are set, or it must collect premiums of at least 

23 basis points. 

The FDIC Board must notify insured institutions of any increase in premiums for 

the second half by May 15, 2002. In 1996 the Board reserved for itself, by 

regulation, the option to increase premiums by as much as 5 basis points at any 

one time.1 Larger premium increases require the Board to solicit public comment.

Based on the information presently available, higher premiums would not be 

needed in the second half of the year. In today's economic climate, however, 

predictions are difficult and actual outcomes have the potential to deviate 

significantly from expected or most likely outcomes, both for the economy 

generally and for individual companies.

The FDIC will use the time between now and May 15 to analyze any additional 

information that becomes available. There remains a possibility that such new 

information would require the Board to exercise its discretion to increase 

premiums by up to 5 basis points. 

Table 1 shows the ranges for insured deposit growth and insurance losses that 

the staff presented to the Board, and the impact on the year-end 2002 BIF 

reserve ratio assuming no increase in premiums. The 2 percent to 6 percent 

range for annualized insured deposit growth is within the range suggested by 

recent experience. The $100 million to $2.8 billion range for insurance losses is 
subject to the most uncertainty, but is consistent with recent increases in the 

number and assets of problem banks (for information about recent bank 

performance see the Preliminary Bank Earnings Report. 

Table 1 

BIF Ratio Projections 

Depend on Insurance 

Losses and Insured 

Deposit Growth *

December 31, 2002

Projected Losses = $100M to 

$2.8B

2% annual 

deposit growth

6% annual 

deposit growth

Low: 1.17% Low: 1.12%

High: 1.28% High: 1.23%

* Assumes BIF fund balance as of 

12/31/01 of $30.6 billion and BIFinsured deposits of $2.41 trillion, 

resulting in a BIF ratio of 1.27 percent. 

If insured-deposit growth and insurance losses fall within these ranges, the yearend 2002 BIF reserve ratio would be between 1.12 percent and 1.28 percent if 

premiums are not increased in the second half. 

1. Deposit insurance premiums are assessed against adjusted domestic deposits.