FDII 

Federal Deposit Insurance Corporation 

550 17th Street NW, Washington, D.C. 20429-9990 Division of Insurance and Research 

MEMORANDUM TO: 

FROM: 

SUBJECT: 

SUMMARY 

August 30, 2017 

The Board of Directors 

Diane Ellis 

Director 

Division of Insurance and Research 

Update of Projected Deposit Insurance Fund Losses, Income, and 

Reserve Ratios for the Restoration Plan . 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) 

increased the minimum reserve ratio for the Deposit Insurance Fund (D IF) from 1.15 percent to 

1.35 percent and requires that the reserve ratio reach 1.35 percent by September JO, 2020. 1 The 

FDIC is operating under a DIF Restoration Plan while the reserve ratio remains below the 

minimum target.2 The Restoration Plan requires the FDIC to update DIF loss and income 

projections at least semiannually, which allows the FDIC to evaluate whether growth in the DIF 

under current assessment rates is likely to be sufficient to meet the statutory requirements. This 

memorandum is the second semiannual update for 2017. 

The DIF balance has risen for the past 71⁄2 years and stood at $87.6 billion as of June 30, 

2017, resulting in a reserve ratio of 1.24 percent. Because the reserve ratio surpassed 1.15 

percent in the second quarter of last year, lower regular assessment rates went into effect 

beginning in the third quarter under final rules approved by the Board of Directors (Board) in 

2011 and reaffirmed in 2016.3 Revenue from regular assessments declined by about one-third 

when the lower rates took effect. Large banks, however, became subject to temporary 

assessment surcharges beginning in the third quarter of last year. These surcharges were 

imposed to implement the Dodd-Frank requirement that institutions with total assets of $10 

billion or more bear the cost of increasing the reserve ratio from 1.15 percent to 1.3 5 percent. 4 

1 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 334(d), 124 Stat. 1376, 

1539 (2010) (codified at 12 U.S.C. § 1817(nt)). 

2 Adoption of Federal Deposit Insurance Corporation Restoration Plan, 75 Fed. Reg. 66293 (Oct. 27, 2010). 

3 See 12 C.F.R. 327.l0(b); see also 76 Fed. Reg. 10672, 10718 (Feb. 25, 2011) and 81 Fed. Reg. 32180, 32202 (May 

20, 2016). 

4 Section 334(e) of Dodd-Frank provides: "In setting the assessments necessary to meet the requirements of 

subsection ( d), the Corporation shall offset the effect of subsection ( d) on insured depository institutions with total 

consolidated assets ofless than $10,000,000,000." Dodd-Frank Act, Pub. L. No. 111-203, § 334(e), 124 Stat. 1539 

(codified at 12 U.S.C. § 1817(nt)). (Subsection (d) raised the minimum DIF reserve ratio from 1.15 percent to 1.35 

percent and requires that the reserve ratio reach this level by September 30, 2020.) 
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Staff projects that the reserve ratio will reach the 1.35 percent minimum target in 2018, after 

which surcharges will cease. 

The outlook for the DIF reserve ratio depends on forecasts and assumptions for several 

financial measures, including: (1) losses from past and future bank failures; (2) changes in bank 

risk profiles, which affect assessment rates; (3) growth in the assessment base; (4) DIF 

investment income; (5) operating expenses; and (6) growth in estimated insured deposits. All of 

these forecasts and assumptions are subject to considerable uncertainty. 

 

BACKGROUND

Revisions to the Restoration Plan 

In October 2010, the Board adopted a revised Restoration Plan to incorporate changes 

arising from the enactment of Dodd-Frank, including the higher minimum designated reserve 

ratio and the extension of time to reach it from the end of 2016 to September 30, 2020.5

 

Recent trends affecting the DIF 

The U.S. economy has expanded for just over eight years at a modest pace of about 2 

percent annually, on average. In 2016, real GDP slowed to 1.5 percent, reflecting the effects of a 

strong dollar and low oil prices on exports and investment. The Blue Chip consensus forecast 

for economic growth is 2.2 percent for 2017 and 2.4 percent for 2018. 

Banking industry performance generally has been positive. The second quarter of 2017 

marked the fifth consecutive quarter where earnings posted a year-over-year increase. In the 

second quarter of 2017, 63 percent of banks reported improvement in quarterly net income from 

one year earlier. Only 4.2 percent of banks were unprofitable, down from 4.5 percent in the 

second quarter of 2016. Second quarter earnings were higher than a year earlier on the strength 

of higher net interest income. Asset quality, as measured by the volume of noncurrent loans and 

leases, improved in the second quarter. At June 30, 2017, 1.2 percent of loan and lease balances 

were noncurrent, the lowest percentage since the third quarter of 2007. 

However, the operating environment remains challenging for banks. Interest rates have 

been exceptionally low for an extended period, and there are signs of growing credit risk through 

concentrations and looser underwriting. Revenue growth has been modest and net interest 

 

5 In October 2008, the Board adopted an initial five-year Restoration Plan to return the DIF to 1.15 percent, which 

was then the statutory minimum for the designated reserve ratio. 73 Fed. Reg. 61598 (Oct. 16, 2008). The Board 

amended the Restoration Plan twice in 2009 in response to revisions in the outlook for bank failures and to account 

for legislative changes. 74 Fed. Reg. 9564 (Mar. 4, 2009) and 74 Fed. Reg. 51062 (Oct. 2, 2009). For more detail 

on the Amended Restoration Plans in 2009, see Memorandum to the Board of Directors from Arthur J. Murton 

(Director, Division of Insurance and Research) dated April 3, 2012 (http://www.fdic.gov/news/board/2012/2012-04-

23_notice_no5.pdf).
3

margins remain narrow relative to historical levels despite banks’ investments in longer-term 

assets to mitigate the effect of low rates. The average quarterly net interest margin for the 

industry has declined by 49 basis points since the fourth quarter of 2010, to 3.22 percent in the 

second quarter of 2017. 

The total number of institutions on the FDIC’s Problem Institution List fell to 105 as of 

June 30, 2017, down from 123 at the end of 2016. The number of problem banks, which peaked 

at 888 in March 2011 and has declined in every quarter since then, is now at its lowest level 

since the second quarter of 2008. The improvement in the number of problem institutions 

reflects a continuing trend of supervisory rating upgrades exceeding downgrades. Also, bank 

failures remain at low levels. Six banks failed in the first six months of 2017, compared to three 

failures in the first six months of 2016. 

 

The DIF has continued to grow in tandem with the improvement in U.S. banking industry 

performance. The DIF balance stood at $87.6 billion at June 30 2017, up $4.4 billion from the 

end of 2016 and $9.7 billion from June 30, 2016. Assessment income accounted for most of the 

increase in the DIF balance over the past four quarters. Cumulatively, the DIF balance has risen 

by over $108 billion from its negative $20.9 billion low point at the end of 2009. At June 30, 

2017, the contingent loss reserve for anticipated failures was $117 million, down from $477 

million at December 31, 2016. 

PROJECTIONS

DIF balance and reserve ratio 

 The staff projects that failures in 2017 and 2018, including failures that have occurred so 

far this year, will cost the DIF $1.5 billion. The projections are based on available information 

about banks expected to fail in the near term, on analyses of other troubled banks, and on trends 

in CAMELS ratings, failure rates, and loss rates. The losses projected for 2017 and 2018 follow 

estimated losses of $72 billion for banks that failed from 2008 through 2016. Staff expects that, 

through 2018, failures will remain at low levels and the number of troubled banks will continue 

to decline modestly. 

The DIF earned assessment income of $5.4 billion in the first half of 2017, of which 

surcharges on banks with $10 billion or more in assets accounted for $2.5 billion. For all of 

2017, staff projects that revenue from regular assessments and surcharges will total 

approximately $11 billion. 

 

The reserve ratio stood at 1.24 percent at June 30, 2017, up from 1.20 percent at the end 

of 2016 and 1.17 percent at June 30, 2016. Staff projects that surcharges, combined with regular 

assessments, will be sufficient to raise the reserve ratio to 1.35 percent in 2018. Once the reserve 

ratio first reaches or exceeds 1.35 percent, quarterly surcharges on large banks will cease. In the 
4

event that the reserve ratio does not reach the 1.35 percent minimum target by the end of 2018, 

large banks will be required to pay a shortfall assessment in early 2019 to cover the gap. 6 

Additionally, small banks will receive credits to offset the portion of their regular 

assessments that help to raise the reserve ratio from 1.15 percent to 1.35 percent. Provided the 

reserve ratio is at least 1.38 percent, the FDIC will automatically apply credits to reduce each 

small bank’s regular assessment up to the entire amount of its assessment. 7 

DIF cash balance 

The DIF had liquid assets of $78.8 billion at June 30, 2017. Based on staff projections of 

the DIF future cash balance, current liquid assets together with future assessment cash 

collections and dividends from receiverships should be sufficient to meet all FDIC obligations 

during the next five years. 

Risks to the outlook for the DIF 

Key risks to the economic outlook include the effects of interest rate increases on 

economic growth, and adverse global developments. In the event of an economic slowdown, 

bank failures could rise above projections. Nonetheless, staff’s best estimate is that the DIF 

balance remains on track to meet the requirements of the Restoration Plan and Dodd-Frank. 

Staff will continue to update the Board on a semiannual basis. 

Staff contact: 

 

Robert Grohal 

Chief, Fund Analysis and Pricing Section, Division of Insurance and Research

(202) 898-6939 

 

6 See 12 C.F.R. 327.11(b); see also 81 Fed. Reg. at 16070.

7 See 12 C.F.R. 327.11(c); see also 81 Fed. Reg. at 16071.