Deposit Insurance Reform 

ft:ou·n-dtabt 

April 25, 2000 
-----=--P~ri~ci~ng ____ _ 
SAIF 

BIF 

Refunds --
• The DIFA imposes a zero premium for most 

institutions that are well-capitalized. 

• FDIC has limited flexibility to charge wellcapitalized institutions unless they are rated 

CAM ELS 3, 4, or 5. 
i 1 

C. 

~ 2 

3 

~ 1 

~ u 2 

3 

January, 1993 

Supervisorv SubaroUD 4.9 --.,.,-,: 

A B C 

23 26 29 

26 29 30 

29 30 31 

Today 

Supervisory Subgroup 

A B C 

0 3 17 

3 10 24 

10 24 27 

O Other 

• 1A 

• 18 

01c 

O Other 
• Fairness in sharing the costs of deposit insurance 

• Is the pricing system sufficiently forward-looking? 

• Do premiums adjust appropriately to reflect 

emerging risks and changes in industry structure? 
• Deposit Growth -

• Risk Differentiation 
• Sudden deposit growth could significantly dilute 

the reserve ratio. This scenario is increasingly 

realistic with blending of financial services and 

advances in technology. 

• $100 billion increase in insured deposits would 

reduce the BIF reserve ratio from 1.37to 1.31. 

• $100 billion increase in insured deposits would 

reduce the SAi F reserve ratio from 1.45 to 1.27 
Deposit Growth: Disparities among 

institutions 

• The top 25°/4 in terms of deposit growth have added 

$178 billion since the funds were capitalized. 

• Since 1996, 814 new banks, now with $44 billion of 

insured deposits, have never paid insurance . premiums. 

• Based on experience, we can expect some of these 

new banks to fail without having contributed to the BIF 

or the SAIF. 

• The lowest 25°/4 in terms of deposit growth have lost 

$69 billion since the funds were capitalized. 
Risk Differentiation: Characteristics of 

1 A-rated banks may differ significantly. 

First Decile Avg 

Non-Performing Loans/ 0.0% 

Loans & Leases 

Charge-Offs I 0.0% 

Loans & Leases 

Loan Yield 5.1 % 

Commercial Loan Growth -42.1% 

Volatile Liability Growth -41.4% 

Total Equity/ Assets 23.0% 

• Growth rates are 3 year merger adjusted 

Tenth Decile Avg 

3.2% 

10.2% 

11.1% 

565.7% 

721.0% 

6.0% 
1999 
Risk Differentiation: Large institutions are 

engaged in more diverse activities. 

To12 10% B1 

All Others Asset Size 

Number 847 7,624 

Off-Balance Sheet Derivatives/ 23.8% 0.1% 

Total Assets 

Core Deposits / 67.3% 81.2% 

Total Liabilities 

Average Subordinated Debt 

($ million) 

$82 $0 

Maintaining the Funds 
History of the BIF Fund Balance and 

Reserve Ratio 

_ e,F Fund ealance (left axis) 

- Reserve Ratio (right axis) 
• Avoid delay in resolving failures 

• Spread losses over time, and avoid charging 

institutions the most when they can least afford to 

pay. 
Assessments as a Percentage of Bank Net 

Income 

• sank Net Income 

(I efl) 

- Asse ssments as a % 

or NI (right) 

" 
• The ORR sets a hard floor at 1.25, with a 

minimum premium of 23 bp if ORR cannot be 

achieved in one year. 

• The ORR has a short-run focus. The FDIC 

can raise the ORR for a particular year by 

pointing to a "significant risk of substantial 

future losses." 
Annual bank failures have fluctuated 

significantly 

• Assets (left) 

- Number (righO 
The volatility of deposit gro\.'Vth also affects 

the reserve ratio. 

Year Over Year B IF-Insured 

De osit Growth 
-

R ese 1V e Ra tio (1ig hta x6 ) 
• Systemic risk assessments would be 

charged to all institutions and can come 

on top of regular assessments. 
• Rebates directly from the fund or from 

current assessments 

• Discretionary versus mandatory 

• Rebates directly to banks and thrifts or 

to make FICO payments 
Insurance Coverage 
The real value of insured deposit coverage 

has declined. 

• Nom in al Insu ran ce 

Cov erage 

- Insu ra nce Coverage i n 

1980 D ollars 

••••••••••• ~10111111111~11 
------JI • An inflation adjustment would have raised 

deposit insurance coverage to $60,000. 

• Why $100,000? 

- Response to interest rates and changes in the 

financial industry 

- Draw funds into thri1ts 

• Some have cited the increased coverage as a 

contributing factor to the S&L crisis. 

- Additional liabilities increased resolution costs. 

- Exacerbated "Moral Hazard" problem 

- Removal of Reg Q ceilings 
• Current level of uninsured deposits= $1 trillion 

• High-end estimate of the increase in insured 

deposits with $200,000 limit= $400 billion 

• This would reduce the ratio of the combined fund 

from 1.38 to 1.22 percent. 
International Comparisons: 

Coverage Ratio to Per Ca~ita GDP in 1999 

• Average coverage ratio= 3X per capita GDP 

• Africa has the highest coverage: 6.2X per capita 

GDP 

• Europe has the lowest coverage: 1.6X per capita 

GDP 

• U.S. deposit coverage= 3.2X per capita GDP 

• IMF Rule of Thumb: 1 to 2X per capita GDP