FDIC Quarterly 29 2010, Volume 4, No. 4

from becoming negative during the crises. However, the 

fund’s reserve ratio would have had to have exceeded 

2 percent before the crises began. 

A Brief History of the Deposit Insurance Fund

An examination of historical trends in the deposit 

insurance fund since 1935 helps illustrate the reasons 

for the FDIC’s development of a new long-term policy 

for managing the fund. Twice since 1991, the fund’s 

resources have been insufficient to handle the costs 

associated with large numbers of bank failures without a 

dramatic increase in assessment rates.3 During both 

crises, and indeed ever since 1950, assessment rates 

have been pro-cyclical; that is, insured institutions have 

paid lower premiums during prosperous times and high 

premiums during times of industry distress, when they 

were least able to afford them. Assessment rates since 

the late 1980s have been volatile, rather than steady 

and predictable. As context for the analysis that 

follows, this section will review changes in the fund 

balance, the reserve ratio, the effective assessment rate, 

and the ratio of industry earnings to total assessments 

from 1935 to 2010.4

The banking industry remained highly regulated and 

few banks failed during the FDIC’s first four decades, 

allowing the fund balance to increase steadily from 

1935 through the mid-1980s (see Chart 1).5 By 1946 

the fund had reached $1 billion, and by the early1970s 

it had climbed to about $5 billion. Although losses from 

3

 For 1935 to 1988, the term “fund” refers to the FDIC’s deposit insurance fund; from 1989 to 2005, the term combines the Bank Insurance 

Fund (BIF) and the Savings Association Insurance Fund (SAIF); from 

2006 onward, the term refers to the DIF. (From 1989 to 2005, the 

FDIC managed two deposit insurance funds—the FDIC’s deposit insurance fund, which was renamed the BIF, and the SAIF, which was 

created to insure thrift institutions following the savings and loan 

crisis. The BIF and the SAIF were merged in 2006 to form the DIF.)

4

 Although the FDIC began operations in 1934, it did so under a 

temporary insurance plan that used insured deposits (rather than 

adjusted total domestic deposits) as an assessment base until the 

passage of the Banking Act of 1935. For consistency, all historical data 

presented begin with year-end 1935. 

5

 About 400 mostly small banks failed during the late 1930s and early 

1940s, but very few failed until the 1980s. 

Introduction

In response to the recent financial crisis and passage of 

the Dodd-Frank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank), the Federal Deposit Insurance Corporation (FDIC) has developed a comprehensive, long-range management plan for the Deposit 

Insurance Fund (DIF).1 The plan is designed to reduce 

pro-cyclicality; keep assessment rates moderate, steady, 

and predictable throughout economic and credit cycles; 

and maintain a positive fund balance even during a 

period of large fund losses. It achieves these goals by 

setting an appropriate target fund size and a strategy for 

assessment rates and dividends. The plan covers the near 

term, governed by the statutory requirement that the 

fund reserve ratio reach 1.35 percent by 2020; the 

medium term, when the reserve ratio has recovered to 

precrisis levels; and the long term, when the reserve ratio 

is large enough that the fund would be able to withstand 

a period of fund losses similar in magnitude to that of the 

late 1980s and early 1990s or the current crisis.2

This article presents the FDIC analysis that informed 

the medium- and long-term elements of the plan. The 

first section describes historical changes in DIF 

balances, reserve ratios, and assessment rates. The 

second section uses historical fund loss and simulated 

income data from 1950 to the present to determine how 

high the reserve ratio would have had to have been 

before this period’s two banking crises to have maintained both a positive fund balance and stable assessment rates throughout. The analysis demonstrates that 

a moderate, long-term average industry assessment rate, 

combined with an appropriate dividend or assessment 

rate reduction policy, would have prevented the fund 

1

 See Notice of Proposed Rulemaking on Assessment Dividends, 

Assessment Rates and Designated Reserve Ratio, Federal Register 75 

(October 27, 2010), 66272, http://www.fdic.gov/regulations/laws/

federal/2010/10proposeoct27.pdf; and FDIC Restoration Plan, Federal 

Register 75 (October 27, 2010), 66293, http://www.fdic.gov/regulations/

laws/federal/2010/10noticeoct27.pdf. 2

 Ibid. The FDIC proposes to set the designated reserve ratio (DRR) at 

2 percent; maintain current assessment rates until the reserve ratio 

reaches 1.15 percent; and, in lieu of dividends, adopt progressively 

lower assessment rates when the reserve ratio reaches 1.15 percent, 

2 percent, and 2.5 percent. 

Feature Article:

Toward a Long-Term Strategy for 

Deposit Insurance Fund Management
FDIC Quarterly 30 2010, Volume 4, No. 4

failures increased somewhat in the 1970s, the fund had 

grown to almost $10 billion just before the banking 

crisis of the 1980s and early 1990s. The fund balance 

actually rose during the first half of the crisis, peaking at 

slightly more than $18 billion in 1987. Increasing losses 

from hundreds of bank failures finally caused the fund 

balance to decline rapidly, to negative $6.9 billion in 

1991.6 The fund rebounded swiftly, however, and the 

combination of dwindling failures and high assessment 

rates pushed it to a new high of almost $24 billion in 

1994. A one-time special assessment in 1996 further 

bolstered the fund’s resources.7 Extremely low losses 

for the next decade allowed the fund to grow unimpeded, despite relatively low average assessment rates, 

and at year-end 2007—on the eve of the current 

crisis—it had risen to more than $52 billon. The 

current crisis, however, and the resulting large losses 

from 2008 onward, pushed the fund balance to a record 

low of negative $20.9 billion at year-end 2009. As of 

June 30, 2010, the fund had recovered somewhat but 

was still a negative $15.3 billion. 

The reserve ratio, which compares the fund to estimated insured deposits, is both a measure of the FDIC’s 

exposure and of fund adequacy (see Chart 2). The ratio 

stood at just under 2 percent as the nation entered 

World War II. An increase in insured deposits because 

of record savings rates during the war pushed down the 

6

 More than 1,600 FDIC-insured institutions failed between 1980 

and 1994.

7

 In 1996, to capitalize the SAIF, a special assessment mandated by 

the Deposit Insurance Funds Act of 1996 (DIFA) was levied on SAIFinsured deposits. See FDIC, History of the Eighties: Lessons for the 

Future: An Examination of the Banking Crises of the 1980s and Early 

1990s (1997), 132–35.

ratio, as did the increase in the FDIC’s insurance coverage level from $5,000 to $10,000 in 1950. From 1950 to 

1980, the average ratio was 1.33 percent. Growth in 

insured deposits, particularly after 1966 (resulting partly 

from a series of increases in the coverage level from 

$10,000 to $100,000), contributed to a gradual decrease 

in the ratio, which by 1980 had dropped to 1.16 

percent.8 As losses from failures mounted, the reserve 

ratio dipped below zero, reaching negative 0.25 percent 

in 1991. Starting in 1989 and continuing through 2005, 

the governing statute mandated a hard-target designated reserve ratio (DRR) of 1.25 percent as a measure 

of fund adequacy.9 The reserve ratio reached this level 

by 1996 following rapid recovery in the fund balance 

during the 1990s. During the next decade, the reserve 

ratio declined gradually because fund income was 

limited by the assessment rate policy mandated by the 

Deposit Insurance Funds Act of 1996 (DIFA) (see 

discussion below). The reserve ratio fell to 1.22 percent 

in 2007. The heavy losses associated with the current 

crisis pushed the ratio to an all-time low of negative 

0.39 percent in 2009. These historical shifts in the 

fund’s condition reflect changes in FDIC income and 

expenses. Two of the most important policies affecting 

8

 Congress increased the deposit insurance coverage level five times 

from 1950 to 1980: to $10,000 in 1950, to $15,000 in 1966, to 

$20,000 in 1969, to $40,000 in 1974, and to $100,000 in 1980.

9

 The hard target was statutorily imposed by the Financial Institutions 

Reform, Recovery, and Enforcement Act of 1989 (FIRREA). See FDIC, 

History of the Eighties, 101. Under FIRREA the FDIC could, if circumstances warranted, set the DRR as high as 1.5 percent, but this provision was removed by the FDIC Assessment Rate Act of 1990. In 2006, 

after the passage of the Deposit Insurance Reform Act of 2005 (DIRA), 

the fund no longer had a hard-target DRR, but instead the DRR was 

allowed to range from 1.15 percent to 1.50 percent. The recent 

passage of Dodd-Frank established a minimum DRR of 1.35 percent.

Chart 1

The Fund Balance Has Been Negative Twice since 1991

Deposit Insurance Fund

Billions of Dollars

-30

-20

-10

0

10

20

30

40

50

60

1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Source: FDIC, data through June 30, 2010.

Note: Shaded areas denote periods of crisis and associated high assessment rates.

Chart 2

The Reserve Ratio Peaked at the Same Level

before Both Crises 

Deposit Insurance Fund as a Percentage of Estimated Insured Deposits

Source: FDIC, data through June 30, 2010.

Note: Shaded areas denote periods of crisis and associated high assessment rates.

1.24% 1.22%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
FDIC Quarterly 31 2010, Volume 4, No. 4

Fund Management

income were those on assessment rates and those on 

assessment credits and dividends. 

Both the assessment rate charged and whether (and 

how much) assessment income is refunded or credited 

to insured institutions have affected the FDIC’s fund 

management significantly. From 1935 until 1950, the 

FDIC by law charged a flat assessment rate of 8.33 basis 

points against an assessment base of total adjusted 

domestic deposits—in other words, insured institutions 

paid 8.33 cents for every $100 of deposits they held 

(see Chart 3).10

The banking industry began calling for decreases in this 

rate almost immediately, and such calls became more 

frequent as the fund balance increased and failures 

declined. In 1936, banks reportedly sought assessment 

rate cuts because the FDIC appeared to be accumulating reserves too quickly. In 1940, a prominent banker 

proposed lowering the rate to 6.25 basis points, saying 

that the fund was large enough (at year-end 1940, it 

stood at $496 million) to deal with demands “even of 

crisis proportions.” By 1946, the New Jersey Bankers 

Association called for assessments to be ended altogether so long as the fund exceeded $1 billion. The 

FDIC resisted any decrease, first by citing the uncertainty of the industry’s post-Depression condition, then 

by emphasizing the dangers of converting to a postwar 

economy, and finally by arguing that such change could 

be contemplated only after the FDIC succeeded in 

repaying its initial capital (approximately $289 million) 

and achieved a fund balance of $1 billion.11

With this last condition met, Congress and the FDIC 

agreed to an adjustment in rates. However, the FDIC 

recommended against a permanent change because it 

had neither faced a serious economic downturn nor 

determined an exact level of fund adequacy.12 Therefore, the Federal Deposit Insurance Act of 1950 (FDI 

Act) instead provided a 60 percent credit to insured 

institutions after FDIC expenses when assessment 

10 The initial rate was based on the FDIC’s analysis of losses in 

suspended commercial banks from 1865 to 1934. See FDIC, Annual 

Report of the Federal Deposit Insurance Corporation for the Year 

Ending December 31, 1934 (1935), 73–113. 11 See “Capital Expects Banks to Demand FDIC Rate Cut,” Wall Street 

Journal, August 4, 1936; “Banker Proposes FDIC Cut Its Rate,” New 

York Times, May 23, 1940; and “Bankers Ask End to FDIC Charges,” 

New York Times, May 12, 1946. The fund first reached $1 billion in 

1946, and the FDIC repaid its initial capital by 1948. The FDIC also 

paid the interest foregone on the initial capital during 1950 and 1951.

12 FDIC, Annual Report for the Year Ended December 31, 1950 (1951), 5.

income exceeded expenses.13 The effective assessment 

rate was then approximately halved; however, since the 

nominal rate remained unchanged, the credit could 

decrease if FDIC expenses rose. This policy was inherently pro-cyclical; it resulted in the FDIC’s collecting 

lower assessments when failure levels were low and 

higher assessments when failures increased. Congress 

slightly increased the assessment credit to 66.66 percent 

in 1960, but lowered it to 60 percent in 1980 when the 

credit was linked to the reserve ratio.14 As losses from 

failures mounted during the early 1980s, credits grew 

gradually smaller until they ceased altogether in 1985, 

and the effective assessment rate returned to approximately 8.33 basis points.15

13 Expenses included operating costs, additions to loss reserves, and 

insurance losses sustained plus losses from preceding years in excess 

of reserves.

14 For the change in 1960, see Public Law No. 86–171. Provisions of 

this statute simplified the assessment process but resulted in many 

banks paying somewhat higher assessments. The FDIC therefore 

supported the small increase in the credit. Under the provisions of the 

Depository Institutions Deregulation and Monetary Control Act of 

1980, if the reserve ratio was less than 1.10 percent the FDIC had to 

decrease the assessment credit to an amount that would restore the 

reserve ratio to at least 1.10 percent (although in so doing, the FDIC 

could not retain more than 50 percent of net assessment income). If 

the reserve ratio exceeded 1.25 percent, the FDIC could increase the 

assessment credit, but only in such a way that the reserve ratio 

remained at least 1.25 percent. If the reserve ratio exceeded 1.40 

percent, the FDIC had to increase the assessment credit so that the 

reserve ratio did not exceed 1.40 percent. 

15 Although no institution received credits after 1984, statute provided 

for the possibility of credits until 1994. Later statutes changed the 

terminology over time (to “refunds” in 1996 and to “dividends” in 

2005), but the purpose of these provisions was always the return, 

when deemed appropriate, of some portion of assessments paid by 

insured institutions. 

Chart 3

Effective Assessment Rates Have Been

Volatile and Pro-Cyclical Assessment Rates

Basis Points

Source: FDIC, data through June 30, 2010.

Note: Shaded areas denote periods of crisis and associated high assessment rates.

0

5

10

15

20

25

1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
FDIC Quarterly 32 2010, Volume 4, No. 4

In response to the deepening banking crisis in the late 

1980s, assessment rates rose considerably during the 

early 1990s. Both Congress and the FDIC sought to 

replenish the Bank Insurance Fund (BIF) and capitalize 

the Savings Association Insurance Fund (SAIF) 

through a series of rate increases, and by July 1991, the 

nominal assessment rate for each fund was 23 basis 

points.16 Institutions were charged these high rates at 

the height of the crisis, when they could least afford 

them. The swift recovery from the crisis meant that 

elevated rates lasted only through 1996. It was during 

this period of high rates that the risk-related premiums 

mandated by the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) were introduced (in 1993) so that the FDIC could appropriately 

price for risk-taking.17

The Deposit Insurance Funds Act of 1996 (DIFA) 

included a one-time special assessment on SAIF-assessable deposits to fully capitalize the SAIF and expanded 

the Financing Company’s (FICO) assessment authority 

16 In 1989, FIRREA set BIF rates at 12 basis points for 1990 and 15 

basis points for 1991 and thereafter. SAIF rates were set at 20.8 basis 

points for 1990; 23 basis points for 1991 through 1993; 18 basis 

points for 1994 through 1997; and 15 basis points for 1998 and thereafter. The FDIC was given the authority to impose higher rates if 

appropriate to restore the fund to the DRR within a reasonable period, 

but rates could not exceed 32.5 basis points or be raised by more than 

7.5 basis points in a year (SAIF rates, however, were fixed through 

1994). See FIRREA, §208. The FDIC Assessment Rate Act of 1990 set 

the BIF rate at 15 basis points (or a higher rate at the FDIC’s discretion—FIRREA’s rate limits were removed) to enable the fund to reach 

the DRR within a reasonable period. However, the new law maintained 

the SAIF rates set by FIRREA through 1997 as minimum rates that 

could be increased at the FDIC’s discretion. See Title 2 of the Omnibus 

Budget Reconciliation Act of 1990, §2002. SAIF rates were therefore 

23 basis points for all of 1991. By statute, BIF rates would have been 

15 basis points in 1991, but the FDIC twice used its statutory authority 

to raise them—first to 19.5 basis points in 1990 (for 1991) and then 

to 23 basis points at midyear 1991 (effective July 1, 1991). See FDIC, 

1990 Annual Report (1991), 17, and 1991 Annual Report (1992), 13. 

In the short term, the FDIC’s reasons for raising rates included 

projected decreases in the reserve ratio and the need to pay interest 

on an anticipated $10 billion in borrowing for working capital from the 

Federal Financing Bank. In the longer term, the increases were seen as 

necessary for the recapitalization of the BIF. See Federal Register 56 

(May 7, 1991), 21064.

17 FDICIA required that the FDIC change the flat-rate assessment 

system to one based on an institution’s risk to the deposit insurance 

fund, taking into account a variety of risk measurements, the likelihood 

of loss to the fund, and the fund’s revenue needs. FDICIA also required 

that the design of the required risk-based premium system incorporate 

average effective assessment rates at least at the level they had been 

at on July 15, 1991 (if the fund either had outstanding borrowings or 

was below the DRR). See FDICIA, §302.

to all FDIC-insured institutions.18 In addition, DIFA 

barred the FDIC from charging well-capitalized, highly 

rated institutions for deposit insurance once the DRR of 

1.25 percent was achieved. This provision, backed by 

segments of the banking industry, led to pro-cyclical 

consequences that lasted a decade.19 Because the banking industry recovered much more quickly than anticipated, more than 90 percent of the industry rapidly fell 

into the well-capitalized, highly rated category and paid 

no deposit insurance assessments at all from 1996 to 

2006. The effective assessment rate therefore 

approached zero for about ten years.20 By giving the 

FDIC authority to require all insured institutions to pay 

at least a minimum assessment, the Deposit Insurance 

Reform Act of 2005 (DIRA) corrected the moral hazard 

inherent to this system. However, the low premium 

income from 1996 to 2006 limited both the fund’s 

growth and its ability to withstand the current crisis, 

just as the credit policy in effect from 1950 to 1984 had 

resulted in the FDIC’s having fewer resources during 

the prior crisis. To meet the costs of the current crisis, 

effective assessment rates had to increase significantly 

beginning in 2008. 

In general, the FDIC has charged the lowest assessment rates during prosperous periods and the highest 

rates during and in the wake of crisis periods. These 

policies affected the degree to which insured institutions were burdened by assessment rates over time 

(see Chart 4). From 1987 to 1992, assessments were 

on average 22 percent of industry net income. During 

2009, assessments (including the one-time special 

assessment) were more than 140 percent of industry 

net income.21

18 The FICO was created by the Competitive Equality Banking Act in 

1987 as a vehicle to recapitalize the FSLIC. The expansion of FICO 

assessments to BIF-insured institutions was contentious during the 

legislative debate. See History of the Eighties, 133–35. 19 For example, the American Bankers Association notes that it 

promoted the provision. See http://www.aba.com/Industry+Issues/

FDIC_RBP.htm (accessed November 15, 2010). See Public Law 

104–208, §2708.

20 The annual industry-wide effective assessment rate in 1996 was 

high because of the imposition of the one-time SAIF special assessment mandated by DIFA; without the special assessment, the effective 

rate was approximately 2.4 basis points. In 2007 and 2008 (particularly in 2007), effective assessment rates were decreased by the effect 

of a one-time assessment credit provided for in DIRA. 

21 In 2009, the FDIC imposed a 5 basis point special assessment on 

each insured depository institution’s assets minus Tier 1 capital as of 

June 30, 2009. 
FDIC Quarterly 33 2010, Volume 4, No. 4

Fund Management

Changes under Dodd-Frank

The additional flexibility provided by Dodd-Frank was 

integral to the FDIC’s comprehensive fund management plan and to the approach taken in the simulated 

fund analysis presented in this article. It is therefore 

helpful to briefly summarize the important changes 

made by the law that affect the FDIC’s ability to 

manage the fund. 

Dodd-Frank raised the minimum DRR, which the 

FDIC must set each year, from 1.15 percent to 1.35 

percent and removed the upper limit on the DRR and 

therefore on the size of the fund.22 It also required that 

the fund reserve ratio reach 1.35 percent by September 

30, 2020, instead of 1.15 percent by the end of 2016.23

The statute also significantly changed dividend policy: 

the FDIC is no longer required to provide dividends 

from the fund when the reserve ratio is between 1.35 

percent and 1.5 percent. Moreover, although the law 

continues the FDIC’s authority to declare dividends 

when the reserve ratio at the end of a calendar year is 

at least 1.5 percent, it grants the FDIC sole discretion 

to suspend or limit the declaration or payment of 

dividends.24

22 See footnote 9.

23 Dodd-Frank requires that the FDIC offset the effect on small institutions (those with less than $10 billion in assets) of the statutory 

requirement that the fund reserve ratio increase from 1.15 percent to 

1.35 percent by September 30, 2020. This will entail imposing additional assessments on large institutions (those with at least $10 billion 

in assets). The FDIC plans to determine the mechanism and manner of 

the offset through rulemaking expected to begin in 2011.

24 See Public Law No. 111–203, §§332 and 334.

Analysis of Loss, Income, and Reserve Ratios

The FDIC sought to develop a long-term fund management strategy to reduce pro-cyclicality; keep assessment 

rates moderate, steady, and predictable throughout 

economic and credit cycles; and maintain a positive 

fund balance even during a banking crisis. To explore 

the potential policy options, the FDIC analyzed the 

trade-offs between assessment rates and policies that 

either award dividends or reduce assessment rates by 

creating a simulated deposit insurance fund covering 

the years 1950 to 2010. 

The simulated fund uses FDIC historical data on the 

assessment base (total adjusted domestic deposits) and 

FDIC losses. Fund income is modeled by combining 

assessment base data with an investment portfolio of 

Treasury securities based on FDIC historical experience. 

The simulated fund’s portfolio of securities changes in 

response to the FDIC’s provision for losses, reflecting 

higher and lower anticipated losses over time.25

The analysis varied assessment rates and dividends to 

determine what would have happened to the simulated 

fund’s balance and reserve ratio from 1950 to 2010. 

Below are the results of four of these options in detail. 

Each achieves the goal of maintaining a positive fund 

balance throughout the 60-year period. The first two 

options are on opposite ends of the policy spectrum. 

The first assumes that the FDIC grants no dividends, 

while the second assumes that the FDIC dividends the 

maximum allowable under the law. The third and 

fourth options compare limited dividend and assessment 

rate reduction policies that successfully meet the FDIC’s 

objectives for sound fund management. 

Four Policy Options 

To determine the appropriate level of dividends and 

assessment rates, our analysis first tried to answer a 

straightforward question: What constant average nominal assessment rate during the entire 60-year period 

would have maintained a positive fund balance during 

both crisis periods, assuming a policy that provided no 

dividends? 26 The result is a moderate rate of 7.44 basis 

points, which would have allowed the fund’s reserve ratio 

to reach 2.48 percent (in 1981) before the crisis of the 

1980s and early 1990s, and 2.03 percent (in 2006) before 

the current crisis (see Charts 5 and 6). Failure to reach 

these reserve ratios would have resulted in a negative 

25 See the appendix for a detailed discussion of the methodology and 

assumptions used in the simulations.

26 All assessment rates represent an industry-wide average.

Chart 4

The Burden of Assessments Has Been

Greatest during Crises 

Assessments as a Percentage of Industry Net Income

Source: FDIC, data through June 30, 2010.

Note: Shaded areas denote periods of crisis and associated high assessment rates.

0%

20%

40%

60%

80%

100%

120%

140%

160%

1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
FDIC Quarterly 34 2010, Volume 4, No. 4

balance. Assessment rate volatility was by design 

completely eliminated. This policy is in many ways 

successful, but it eliminates the possibility of dividends 

or rate reductions and potentially allows the fund to 

grow without limit. Although the fund must have sufficient resources to handle a period of large fund losses, 

the fund need not grow larger than necessary to do so.

Moreover, during most years since 1950, federal statutes 

have provided for either a credit or dividend policy 

(although since 1985 no recurring credits or dividends 

have been awarded). Having first examined the consequences of granting no dividends, the analysis sought to 

evaluate the consequences had the full amount of dividends possible under current law been granted from 

1950 to 2010. As amended by Dodd-Frank, the FDI Act 

provides that the FDIC dividend 100 percent of the 

amount in the fund in excess of the amount required to 

maintain the reserve ratio at 1.5 percent, but gives the 

FDIC sole discretion to suspend or limit these dividends. Granting the maximum allowable dividends 

would have resulted in substantial premium volatility 

and pro-cyclical average effective assessment rates 

(see Charts 7 and 8).27 Indeed, granting full dividends 

requires a constant average nominal assessment rate of 

21.96 basis points to maintain a positive fund balance 

during both periods of crisis. Such a rate is historically 

very high and corresponds most closely to the rates 

charged to recapitalize the fund after a crisis. In some 

years, the effective assessment rate would have been 

negative in order to maintain the reserve ratio at 

1.5 percent.

27 Average effective assessment rates are calculated by subtracting 

dividends paid from assessments received.

Chart 5

Zero Dividends Allows the Reserve Ratio to

Reach Adequate Levels

Fund Balance as a Percentage of Estimated Insured Deposits

Source: FDIC, data through June 30, 2010.

Note: No dividends, with 7.44 basis point average nominal assessment rate. 

Shaded areas denote periods of crisis and associated high assessment rates.

2.03%

2.48%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Simulated

Actual

Chart 7

Maximum Dividends Cap Fund Size

Fund Balance as a Percentage of Estimated Insured Deposits

Source: FDIC, data through June 30, 2010.

Note: Dividends equal to 100 percent of the amount in the fund in excess of the amount

required to maintain the reserve ratio at 1.5 percent, with 21.96 basis point average nominal 

assessment rate. Shaded areas denote periods of crisis and associated high assessment rates.

Simulated

Actual

1.50% 1.50%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Chart 6

Rates Are Moderate and Steady

(Nominal Rate = 7.44 basis points)

Assessment Rates

Basis Points

Source: FDIC, data through June 30, 2010.

Note: No dividends, with 7.44 basis point average nominal assessment rate. 

Shaded areas denote periods of crisis and associated high assessment rates.

Simulated

Actual

0

5

10

15

20

25

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Chart 8

Rates Are High, Volatile, and Pro-Cyclical

(Nominal Rate = 21.96 basis points)

Assessment Rates

Basis Points

Source: FDIC, data through June 30, 2010.

Note: Dividends equal to 100 percent of the amount in the fund in excess of the amount 

required to maintain the reserve ratio at 1.5 percent, with 21.96 basis point average nominal 

assessment rate. Shaded areas denote periods of crisis and associated high assessment rates.

Simulated

Actual

-10

-5

0

5

10

15

20

25

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
FDIC Quarterly 35 2010, Volume 4, No. 4

Fund Management

Given the limitations of awarding either no dividends 

or the maximum allowable dividends, the analysis 

examined a third and fourth option. Option three 

limited dividends, while option four reduced assessment 

rates in lieu of dividends; both were consistent with the 

broad set of goals for fund management. The analysis 

showed that these options would achieve the FDIC’s 

goals of maintaining both a positive fund balance and 

moderate, steady assessment rates throughout economic 

and credit cycles. 

The third option awards dividends as a percentage of 

the amount in the fund in excess of the amount 

required to maintain the reserve ratio at a specified 

level. The analysis has already shown that granting 

maximum allowable dividends would have required 

a high constant average nominal assessment rate. 

However, granting limited dividends when the reserve 

ratio reaches 2 percent and somewhat greater dividends 

if the reserve ratio reaches 2.5 percent permits a significantly lower constant average nominal assessment rate 

from 1950 to 2010 to keep the fund balance positive.28

Increasing dividends when the reserve ratio exceeds 

2.5 percent would prevent the fund from growing 

larger than necessary to remain positive during periods 

of high losses.

This option results in a moderate constant nominal 

assessment rate of 8.45 basis points across the entire 

60-year period (see Charts 9 and 10). The reserve ratios 

necessary to maintain a positive fund balance are 2.24 

percent before the crisis of the 1980s and early 1990s, 

and 1.98 percent before the current crisis. These ratios 

are, of course, significantly higher than the level of the 

DRR historically but should be sufficient to withstand a 

future period of large fund losses similar to those the 

FDIC has experienced during the past 30 years. Procyclicality is limited, but this option generates moderate 

premium volatility.

The last option achieves the FDIC’s fund management 

goals of maintaining both a positive fund balance and 

28 Specifically, under this option, dividends would be equal to 25 

percent of the amount in the fund in excess of the amount required to 

maintain the reserve ratio at 2 percent and 50 percent of the amount in 

the fund in excess of the amount required to maintain the reserve ratio 

at 2.5 percent. The nearer a dividend comes to 100 percent of an institution’s assessment, however, the more it introduces moral hazard 

and reduces or eliminates the FDIC’s ability to control and price for 

risk-taking. To avoid the possibility that an insured institution could 

receive a dividend that approaches 100 percent of its assessment, this 

option limits dividends such that no institution can receive a dividend 

greater than 50 percent of its annual assessment.

moderate, steady assessment rates throughout economic 

and credit cycles by reducing the average assessment 

rates in lieu of dividends.29 Rates are reduced by 25 

percent when the reserve ratio reaches 2 percent and by 

50 percent when the reserve ratio reaches 2.5 percent. 

Again, an increased rate reduction would prevent the 

fund from growing larger than necessary to remain positive during periods of high losses.

This option results in a moderate constant nominal 

assessment rate of 8.47 basis points during the entire 

60-year period (except when reduced as a result of the 

29 This method is not without precedent. Under FDICIA (§302(e)(3)), 

the use of assessment credits was eliminated in 1994 and replaced 

with assessment rate reductions. As the fund reserve ratio was under 

the DRR, no rate reductions took place before DIFA replaced rate 

reductions with refunds in 1996.

Chart 9

Limiting Dividends Allows the Reserve Ratio

to Reach Adequate Levels

Fund Balance as a Percentage of Estimated Insured Deposits

Source: FDIC, data through June 30, 2010.

Note: Dividends equal to 25 percent of the amount in the fund in excess of the amount 

required to maintain the reserve ratio at 2.0 percent or 50 percent of the amount in the 

fund in excess of the amount required to maintain the reserve ratio at 2.5 percent, with 

8.45 basis point average nominal assessment rate. Shaded areas denote periods of crisis 

and associated high assessment rates.

Simulated

Actual

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

2.24% 1.98%

Chart 10

Rates Are Moderate and Fairly Steady 

(Nominal Rate = 8.45 basis points)

Assessment Rates

Basis Points

Source: FDIC, data through June 30, 2010.

Note: Dividends equal to 25 percent of the amount in the fund in excess of the amount 

required to maintain the reserve ratio at 2.0 percent or 50 percent of the amount in the 

fund in excess of the amount required to maintain the reserve ratio at 2.5 percent, with 

8.45 basis point average nominal assessment rate. Shaded areas denote periods of crisis 

and associated high assessment rates. 

Simulated

Actual

0

5

10

15

20

25

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
FDIC Quarterly 36 2010, Volume 4, No. 4

fund exceeding the 2 percent threshold), almost identical to the rate required under the third option, which 

limited dividends (see Charts 11 and 12). The reserve 

ratios necessary to maintain a positive fund balance are 

2.31 percent before the crisis of the 1980s and early 

1990s, and 2.01 percent before the current crisis—

similar to the ratios required under the third option. 

Premium volatility and pro-cyclicality are both successfully minimized, but premium volatility is significantly 

lower than under the third option.30 Interestingly, both 

the third and fourth options generate nominal assess30 Additional comparative examples of simulations using varying levels 

of assessment rate reduction and reserve ratios at which rates are first 

reduced are presented in the appendix.

ment rates almost identical to the rate the FDIC 

supported in 1935.31

Since 1935, the assessment base calculation has been 

derived from total domestic deposits. Dodd-Frank, 

however, has significantly altered this calculation to 

one derived from average consolidated total assets 

minus average tangible equity. For purposes of comparison, the analysis for the fourth option was repeated, but 

with the assumption that the new assessment base had 

been in place from 1950 to 2010. This analysis allows 

for an approximation of the long-term moderate rate 

required using the new assessment base.32

This simulation results in peak reserve ratios similar to 

those using the current base (see Chart 13). The simulated fund successfully limits both rate volatility and 

pro-cyclicality. The one significant change—due to the 

alteration in the composition of the assessment base—

is that the constant nominal assessment rate required to 

maintain a positive fund balance from 1950 to 2010 

drops from 8.47 to 5.29 basis points (see Chart 14). The 

rate is lower because for much of the period the assessment base calculated using the new definition is significantly larger than under the old definition.

A final concern is whether the fund will recover 

quickly enough after a period of high fund losses. This is 

of particular importance given the current statutory 

requirement that once the fund drops below a reserve 

ratio of 1.35 percent (or is expected to), the FDIC must 

adopt a restoration plan that provides that the reserve 

ratio will return to 1.35 percent within eight years 

(although the period can be extended under extraordinary circumstances). The speed with which the reserve 

ratio returns to 1.35 percent can be explored by looking 

at the behavior of the simulated fund using the fourth 

option during and after the high losses of the 1980s and 

31 In 1935, FDIC officials believed that the 8.33 basis point rate would 

likely be insufficient to build up the deposit insurance fund but 

endorsed it (and indeed the 8.33 basis point rate was a legislative 

compromise—the House bill included a higher rate) because it would 

allow banks to build up capital. See Banking Act of 1935: Hearings 

on H.R. 5357, February 21, Before the House Committee on Banking 

and Currency, 74th Cong., 48 (1935) (statement of Leo T. Crowley, 

Chairman of the Federal Deposit Insurance Corporation).

32 The Dodd-Frank Act provides that the assessment base be changed 

to average total consolidated assets minus average tangible equity. 

See Public Law No. 111–203, §331. For this simulation, from 1990 to 

2010, the assessment base equals year-end total industry assets 

minus Tier 1 capital. For earlier years (before the Tier 1 capital 

measure existed) it equals year-end total industry assets minus 

total equity. 

Chart 11

Rate Reductions Also Allow the Reserve Ratio to

Reach Adequate Levels 

Fund Balance as a Percentage of Estimated Insured Deposits

Source: FDIC, data through June 30, 2010.

Note: Effective assessment rate reduced by 25 percent when reserve ratio reaches 2 percent

and 50 percent when reserve ratio reaches 2.5 percent, with 8.47 basis point average nominal 

assessment rate. Shaded areas denote periods of crisis and associated high assessment rates.

Simulated

Actual

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

2.31% 2.01%

Chart 12

Rates Are Moderate and Steady

(Nominal Rate = 8.47 basis points)

Assessment Rates

Basis Points

Source: FDIC, data through June 30, 2010.

Note: Effective assessment rate reduced by 25 percent when reserve ratio reaches 2 percent

and 50 percent when reserve ratio reaches 2.5 percent, with 8.47 basis point average nominal 

assessment rate. Shaded areas denote periods of crisis and associated high assessment rates.

Simulated

Actual

0

5

10

15

20

25

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
FDIC Quarterly 37 2010, Volume 4, No. 4

Fund Management

early 1990s. The simulation that charges 8.47 basis 

points (using an assessment base of adjusted total 

domestic deposits) first drops below a reserve ratio of 

1.35 percent in 1989 and recovers to that level in eight 

years (in 1997). The simulation that charges 5.29 basis 

points (using an estimated assessment base of total 

assets minus tangible equity) also first drops below 1.35 

percent in 1989, but takes one additional year to return 

to that level (in 1998). Both versions of the simulation 

demonstrate that the constant nominal rate charged 

would fit the statutory requirements for the restoration 

of the fund from a period of losses similar to that during 

the 1980s and early 1990s. 

Conclusion

The simulated fund analysis has clear implications. 

Historically, a reserve ratio of more than 2 percent 

would have been necessary for the fund to withstand 

crisis periods while maintaining a positive balance. 

Limiting the simulated fund’s growth, either by capping 

the reserve ratio at levels previously thought to be 

appropriate or by granting dividends or rate reductions 

at those levels, led to high nominal assessment rates 

that were both highly pro-cyclical and volatile. 

However, either suspending dividends until the reserve 

ratio reaches 2 percent and then awarding only limited 

dividends or, in lieu of dividends, lowering assessment 

rates when the reserve ratio reaches 2 percent, allows 

the fund to reach a level sufficient to withstand crises of 

the magnitude already experienced with rates that are 

significantly less pro-cyclical. A policy that lowers rates 

in lieu of dividends results in rates that are less volatile. 

Authors: Lee K. Davison, Historian

Division of Insurance and Research

Ashley M. Carreon, Economic Research Assistant

Division of Insurance and Research 

The authors wish to thank Diane Ellis, Paul Kupiec, Marc 

Steckel, Jack Reidhill, Munsell St. Clair, Christine Blair, 

David Lee, and Ahmad Sarsour, all from the FDIC’s 

Division of Insurance and Research, for their advice and 

assistance in developing the simulation analysis and for their 

helpful comments on this article. 

Chart 13

Using the New Assessment Base Results in

Similar Reserve Ratios

Fund Balance as a Percentage of Estimated Insured Deposits

Source: FDIC, data through June 30, 2010.

Note: Effective assessment rate reduced by 25 percent when reserve ratio reaches 2 percent

and 50 percent when reserve ratio reaches 2.5 percent, with 5.29 basis point average nominal 

assessment rate using new assessment base. Shaded areas denote periods of crisis and 

associated high assessment rates.

2.27% 1.95%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Simulated

Actual

Chart 14

Rates Remain Steady Using the New Assessment Base

Assessment Rates

Basis Points

Source: FDIC, data through June 30, 2010.

Note: Effective assessment rate reduced by 25 percent when reserve ratio reaches 2 percent 

and 50 percent when reserve ratio reaches 2.5 percent, with 5.29 basis point average nominal 

assessment rate using new assessment base. Shaded areas denote periods of crisis and 

associated high assessment rates.

Simulated

Actual

0

5

10

15

20

25

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
FDIC Quarterly 38 2010, Volume 4, No. 4

Appendix

This appendix provides supplementary details on the 

method used to generate fund simulations in the FDIC’s 

analysis. It also presents additional comparative examples of simulations using a variety of assessment rate 

policies that combine different constant nominal assessment rates with different levels of assessment rate 

reduction awarded at different reserve ratio thresholds. 

Methodology and Assumptions

Data

Except as specifically noted in the text, the simulated 

fund’s assessment base and fund expenses are actual 

FDIC historical data.33 For the years 1950 to 1988, data 

are from the FDIC insurance fund; from 1989 to 2005, 

data combine the BIF and the SAIF; from 2006 onward, 

DIF data are used. FDIC historical data are altered in 

only one respect: because all depositors in failed banks 

during the current crisis were covered up to $250,000, 

the FDIC deposit insurance coverage level for 2007 is 

assumed to be $250,000 even though the coverage limit 

in effect at the time was $100,000. (The Dodd-Frank 

Act extended the $250,000 coverage limit retroactively 

to depositors in any insured depository institutions for 

which the FDIC was appointed receiver or conservator 

on or after January 1, 2008.) Historical interest rate 

data are from the Board of Governors of the Federal 

Reserve System. 

Treatment of Historical Assessment Credits, 

Special Assessments, and FSLIC/RTC Costs

The simulated fund implements neither the assessment 

credit policies in effect from 1950 to 1984 nor the onetime assessment credit provided under DIRA. In addition, the simulated fund’s income includes neither the 

one-time special assessment to recapitalize the SAIF in 

1996 nor the one-time special assessment imposed in 

2009. The simulated fund does not include as expenses 

the costs of the savings and loan crisis, which were 

borne by the Federal Savings and Loan Corporation 

(FSLIC) and Resolution Trust Corporation (RTC) for 

savings and loan failures during the 1980s and early 

1990s. The inclusion of these costs would require a 

much higher reserve ratio to keep the fund balance 

positive during the late 1980s and early 1990s.

33 The assessment base used in this analysis is adjusted total domestic 

deposits. The Dodd-Frank Act provides that the assessment base be 

changed to average total consolidated assets minus average tangible 

equity.

Investment Strategy

No consistent historical data are available describing 

the FDIC’s investment portfolio over time. Moreover, 

as a simulated fund diverges from the actual fund, the 

FDIC’s actual investment choices become increasingly 

irrelevant to the simulated fund’s likely choices. After 

reviewing available FDIC data, the method chosen for 

the analysis was a modeled investment portfolio with 

the following investment strategy and set of rules for 

the simulated fund. The fund assumes a “default” portfolio mix of Treasury securities to be maintained under 

most conditions: 35 percent in six-month securities; 25 

percent in one-year securities; 25 percent in three-year 

securities; and 15 percent in five-year securities. This 

portfolio mix remains fixed unless the FDIC’s provision 

for losses increases for two consecutive years. In that 

event, all income (proceeds from maturing securities, as 

well as net assessment and interest income) is invested 

in six-month Treasury securities. The simulated fund 

therefore has an increasingly shorter-term bias as anticipated losses from failures rise. When the fund’s income 

exceeds expenses for two years, the fund’s investments 

return to the 35-25-25-15 mix. 

Assessment Rate, Dividend, and 

Reserve Ratio Variables 

Constant nominal industry average assessment rates in 

the analysis range from 7.44 to 25.88 basis points. The 

analysis examines two sets of options: percentage reductions in assessment rates and dividends as a percentage 

of the amount in the fund over a specified reserve ratio. 

Rate reductions and dividend amounts range from zero 

to 100 percent. Reserve ratios at which assessment 

reductions or dividends are first awarded range from 

1.5 percent to 2.5 percent. 

Additional Comparative Examples 

This section provides further detail and examples of the 

trade-offs the FDIC examined in seeking an appropriate 

long-term fund management policy that takes into 

account the goals of maintaining both a positive fund 

balance and moderate, steady assessment rates throughout economic and credit cycles.34 The examples below 

34 Specifically, the analysis sought to implement an assessment rate 

policy (a constant nominal rate in combination with assessment rate 

reductions) that would result in the fund falling to zero in 2009 (the 

fund’s trough during the current crisis). Using assessment rates 

greater than those identified would cause the simulated fund to grow 

higher during periods of benign economic conditions and give the 

fund a capital buffer above zero in 2009.
FDIC Quarterly 39 2010, Volume 4, No. 4

Fund Management

vary assessment rate reductions and the reserve ratio at 

which reductions are first awarded.

Maintaining Relatively Low Assessment Rates

Table A.1 shows the constant nominal assessment rates 

that need to be applied to keep the fund from becoming 

negative during both crises using various levels of assessment rate reduction and reserve ratios at which rates 

are first reduced. 

In general, policies with low reserve ratios at which 

assessment rate reductions are first awarded and high 

rate reductions require relatively high nominal assessment rates, and so fail to keep assessment rates relatively low and steady. Policy options with high reserve 

ratios at which assessment rate reductions are awarded 

and low rate reductions require the lowest nominal 

assessment rates. 

Reducing Pro-cyclical Assessments

In its analysis, the FDIC sought policies that reduced 

pro-cyclical assessments, which are lower during prosperous times but higher when both insured institutions 

and the fund are stressed by significant losses. Table A.2 

compares average effective assessment rates during crisis 

years with average effective assessment rates during 

noncrisis years as a measure of how pro-cyclical effective assessment rates are throughout time.35

Again, policies that reduce rates at lower reserve ratios 

and by higher amounts are less desirable and produce 

greater pro-cyclicality. As a point of reference, the 

average assessment rates of the actual fund (which has 

historically had to implement pro-cyclical assessment 

policies during times of crisis to cover losses and rebuild 

the fund) more than quadrupled during crisis periods. 

An appropriate assessment reduction policy should seek 

relatively small changes in effective assessment rates 

across both crisis and noncrisis periods.

35 Crisis years are defined as 1981 to 1996 (although in terms of bank 

failures this crisis ended by 1994, the industry had to pay high premiums for an additional two years in order to recapitalize the fund) and 

2008 to 2010, while all other years in the sample are noncrisis years: 

1950 to 1980 and 1997 to 2007.

Table A.1

Nominal Assessment Rates Needed to 

Maintain Positive Fund Balance

Percentage 

Reduction 

in Rates

Reserve Ratio at Which Rates 

Are First Reduced

1.50 1.75 2.00 2.25 2.50

100 25.88 14.94 9.23 8.03 7.53 

75 17.84 14.15 8.90 7.98 7.49 

50 12.32 11.70 8.73 7.99 7.46 

25 9.22 9.04 8.47 7.75 7.43 

10 8.03 7.97 7.78 7.54 7.41 

Source: FDIC.

Table A.2

Assessment Rate Multiplier from 

Noncrisis to Crisis Years

Percentage 

Reduction 

in Rates

Reserve Ratio at Which Rates 

Are First Reduced

1.50 1.75 2.00 2.25 2.50

100 4.9 2.4 1.2 1.0 0.9

75 2.6 2.1 1.1 1.0 1.0

50 1.4 1.3 1.1 1.0 1.0

25 1.1 1.1 1.0 0.9 1.0

10 1.0 1.0 1.0 1.0 1.0

Source: FDIC.