- . 

FDII 

Federal Deposit Insurance Corporation 

550 17th Street NW, Washington, D.C. 20429-9990 

MEMORANDUM TO: 

FROM: 

SUBJECT: 

The Board of Directors 

Diane Ellis 

Director 

Division of Insurance and Research 

Designated Reserve Ratio for 2018 

Summary and Recommendation 

Division of Insurance and Research 

August 30, 2017 

The Federal Deposit Insurance Act (FDI Act) requires that the FDIC Board of Directors 

(Board) designate a reserve ratio for the Deposit Insurance Fund (DIF or fund) and publish the 

designated reserve ratio, or DRR, before the beginning of each calendar year. 1 On September 

22, 2016, the Board approved for publication a notice setting the DRR at 2 percent for 2017.2 

Staff recommends maintaining the DRR at 2 percent for 2018 and requests that the Board 

authorize publication of the attached notice to that effect in the Federal Register. 

The Board must set the DRR in accordance with its analysis of certain statutory factors: 

risk oflosses to the DIF; economic conditions generally affecting insured depository institutions; 

preventing sharp swings in assessment rates; and any other factors that the Board determines to 

be appropriate. 3 Staff has identified one "other factor" for the Board's consideration: viewing 

the DRR as a minimum goal that will allow the fund to grow sufficiently large in good times to 

increase the likelihood of the DIF remaining positive during bad times, consistent with the 

FDIC's comprehensive, long-term fund management plan. 

The manner in which the Board evaluates the statutory factors may depend on its view of 

the role of the DRR. Governing statutes do not direct the Board on how to use the DRR. Based 

on current circumstances and historical analysis, staff continues to view the DRR as a long1 12 u.s.c. § 1817(b)(3)(A). 

2 81 Fed. Reg. 66,275 (Sept. 27, 2016). The DRR is expressed as a percentage of estimated insured deposits. The 

DRR was first set at 2 percent for 2011 in a final rule approved by the Board on December 14, 2010. See 75 Fed. 

Reg. 79,286 (Dec. 20, 2010), codified at 12 C.F.R. § 327.4(g). The Board has set the DRR at 2 percent for every 

year since 2011. 

3 12 U.S.C. § 1817(b )(3)(C). 

Concur: 

Charles y( ....-

General Counsel 
2

range, minimum target for the reserve ratio, consistent with the comprehensive, long-range fund 

management plan contained in the October 2010 proposed rulemaking to raise the DRR to 2 

percent (October 2010 NPR).4 

Background 

Governing statutes 

Under the FDI Act, the FDIC has broad discretion to manage the DIF, including where to 

set the DRR. The required minimum DRR is 1.35 percent, but there is no upper limit on the 

DRR (and, thus, no statutory limit on the size of the fund).5 The Act provides for dividends from 

the fund when the reserve ratio exceeds 1.5 percent, but grants the FDIC sole discretion in 

determining whether to suspend or limit the declaration or payment of dividends.6

The FDI Act also requires that the Board consider the appropriate level for the DRR 

annually and, if the Board is changing the DRR, to engage in notice-and-comment rulemaking 

before the beginning of the calendar year.7

 

In effect, while the FDI Act requires that the Board consider specific factors and other 

factors that the Board determines are appropriate, it grants the Board broad discretion to set the 

DRR, so long as it is set no lower than 1.35 percent. The FDI Act does not establish a statutory 

role for the DRR as a trigger, whether for assessment rate determinations, recapitalization of the 

fund, or dividends. 

Comprehensive, long-range management plan for the DIF 

The October 2010 NPR proposed raising the DRR to 2 percent. After consideration of 

comments received, a final rule adopted by the Board in December 2010 set the DRR at 2 

percent.8 The Board has voted annually since then to maintain the 2.0 percent DRR. 

The October 2010 NPR also set out a comprehensive, long-range management plan for 

the DIF that was designed: (1) to reduce pro-cyclicality in the risk-based assessment system by 

allowing moderate, steady assessment rates throughout economic and credit cycles; and (2) to 

 

4 75 Fed. Reg. 66,272 (Oct. 27, 2010).

5 12 U.S.C. § 1817(b)(3)(B).

6 12 U.S.C. § 1817(e)(2)(B). Dodd-Frank also required that the fund reserve ratio reach 1.35 percent by September 

30, 2020 (rather than 1.15 percent by the end of 2016, as formerly required) and that the FDIC offset the effect of 

increasing the reserve ratio from 1.15 percent to 1.35 percent on institutions with less than $10 billion in total 

consolidated assets. 12 U.S.C. § 1817(nt). The FDIC issued a final rule implementing these requirements in March 

2016. See 81 Fed. Reg. 16,059 (Mar. 25, 2016).

7 12 U.S.C. § 1817(b)(3)(A). 

8 75 Fed. Reg. 79,286 (Dec. 20, 2010).
3

maintain a positive fund balance even during a banking crisis by setting an appropriate target 

fund size and a strategy for assessment rates and dividends.9 

During an economic and banking downturn, insured institutions can least afford to pay 

high deposit insurance assessment rates. Moreover, high assessment rates during a downturn 

reduce the amount that banks can lend when the economy most needs new lending. For these 

reasons, it is important to reduce pro-cyclicality in the assessment system and allow moderate, 

steady assessment rates throughout economic and credit cycles.10 

It is also important that the fund not decline to a level that could risk undermining public 

confidence in federal deposit insurance. Although the FDIC has significant authority to borrow 

from the Treasury to cover losses, the FDIC has viewed the Treasury line of credit as appropriate 

for covering unforeseen losses, not as a source of financing projected losses. 

A 2 percent DRR is an integral part of the FDIC’s comprehensive, long-range 

management plan for the DIF. A fund that is sufficiently large is a necessary precondition to 

maintaining a positive fund balance during a banking crisis and allowing for long-term, steady 

assessment rates.

In developing the long-range management plan, staff analyzed historical fund losses and 

income data from 1950 to 2010 to determine how high the reserve ratio would have had to have 

been before the onset of the two banking crises that occurred during this period to maintain a 

positive fund balance and stable assessment rates. The analysis, which was detailed in the 

October 2010 NPR, concluded that moderate, long-term average industry assessment rates, 

combined with an appropriate dividend or assessment rate reduction policy, would have been 

sufficient to prevent the fund from becoming negative during the crises. Staff also found that the 

fund reserve ratio would have had to exceed 2 percent before the onset of the crises to achieve 

these results.11

 

9 75 Fed. Reg. at 66,272. Pursuant to the comprehensive plan, the FDIC also adopted a new Restoration Plan to 

ensure that the DIF reserve ratio reaches 1.35 percent by September 30, 2020, as required by Dodd-Frank. See 75 

Fed. Reg. 66,293 (Oct. 27, 2010). 

10 At a September 24, 2010 roundtable organized by the FDIC, bank executives and industry trade group 

representatives uniformly favored steady, predictable assessments and found high assessment rates during crises 

objectionable. The proceedings of the roundtable can be viewed in their entirety at: 

http://www.vodium.com/MediapodLibrary/index.asp?library=pn100472_fdic_RoundTable. 

11 The analysis set out in the October 2010 NPR sought to determine what assessment rates would have been needed 

to maintain a positive fund balance during the last two crises. This analysis used an assessment base derived from 

domestic deposits to calculate assessment income. Dodd-Frank, however, required the FDIC to change the 

assessment base to average consolidated total assets minus average tangible equity. In the December 2010 final rule 

establishing a 2 percent DRR, staff undertook additional analysis to determine how the results of the original 

analysis would change had the new assessment base been in place from 1950 to 2010. Both the analyses in the 

October 2010 NPR and the December 2010 final rule show that the fund reserve ratio would have needed to be 

approximately 2 percent or more before the onset of the crises to maintain both a positive fund balance and stable 

assessment rates. The updated analysis in the December 2010 final rule, like the analysis in the October 2010 NPR, 

assumed, in lieu of dividends, that the long-term industry average nominal assessment rate would be reduced by 25 
4

Staff views the 2 percent DRR as the minimum level needed to withstand a future crisis of 

the magnitude of past crises. Because analysis shows that a reserve ratio higher than 2 percent 

increases the chance that the fund will remain positive during such a crisis, the 2 percent DRR 

should not be treated as a cap on the size of the fund. 

Analysis of Statutory Factors 

As discussed above, the FDI Act requires that the Board set and publish the DRR 

annually in accordance with its analysis of statutory factors.12 The analysis that follows 

considers each statutory factor, including one "other factor": maintaining the DIF at a level that 

can withstand substantial losses and allowing it to grow sufficiently large in good times to 

increase the likelihood of the DIF remaining positive during bad times, consistent with the 

FDIC’s comprehensive, long-range fund management plan. 

Risk of losses to the DIF 

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

2017. Cumulatively, the DIF balance has risen by over $108 billion from its negative $20.9 

billion low point at the end of 2009. Primary factors contributing to the cumulative increase in 

the fund balance since 2009 include assessment income and a reduction in estimated losses 

associated with past and anticipated failures. At June 30, 2017, the contingent loss reserve for 

anticipated failures was $117 million, down from $437 million at June 30, 2016. 

The increase in the DIF balance reflects improvements in banking industry performance 

and condition. The second quarter of 2017 marked the fifth consecutive quarter where earnings 

posted a year-over-year increase. Over three-fifths (63 percent) of banks reported improvement 

in quarterly net income from one year earlier, while less than 5 percent were unprofitable. Asset 

quality, as measured by the volume of noncurrent loans and leases, improved in the second 

 

percent when the reserve ratio reached 2 percent, and by 50 percent when the reserve ratio reached 2.5 percent. 

Eliminating dividends and reducing rates successfully limits rate volatility whichever assessment base is used. See 

75 Fed. Reg. at 79,288.

12 Specifically, in setting the DRR for any year, the Board must consider the following factors:

(1) The risk of losses to the DIF in the current and future years, including historic experience and potential 

and estimated losses from insured depository institutions.

(2) Economic conditions generally affecting insured depository institutions so as to allow the DRR to 

increase during more favorable economic conditions and to decrease during less favorable economic 

conditions, notwithstanding the increased risks of loss that may exist during such less favorable conditions, 

as the Board determines to be appropriate. 

(3) That sharp swings in assessment rates for insured depository institutions should be prevented.

(4) Other factors as the FDIC’s Board may deem appropriate, consistent with the requirements of the 

Reform Act.

12 U.S.C. § 1817(b)(3)(C). 
5

quarter. At June 30, 2017, 1.2 percent of loan and lease balances were noncurrent, the lowest 

percentage since the third quarter of 2007. 

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. 

Although the banking industry’s financial condition has improved since the most recent 

crisis, challenges remain. 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 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. 

 

In staff’s view, high deposit insurance fund losses incurred during the crisis of the 1980s 

and early 1990s and during the more recent crisis suggest that the Board should set a DRR at a 

level that would have maintained a positive fund balance during both crises. Adoption of this 

long-range, minimum goal would improve the DIF’s ability to handle losses during any future 

periods of severe industry stress and reduce the possibility of increased deposit insurance 

assessment rates during a banking downturn. 

Economic conditions affecting FDIC-insured institutions

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. 

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. 

Although near-term economic prospects and recent trends in banking industry 

performance can inform the Board’s decision on the DRR, staff believes that the DRR should be 

viewed in a longer-term perspective. Twice within the past 30 years, serious economic 

dislocations have resulted in a significant deterioration in the condition of many insured 

depository institutions and in a large number of insured depository institution failures at high 

cost to the DIF. In staff’s view, the DRR should, therefore, be viewed as a minimum goal 

needed to achieve a reserve ratio that can withstand these periodic economic downturns and their 

attendant insured depository institution failures. Taking these longer-term economic realities 
6

into account, a prudent and consistent policy would set the DRR at a minimum of 2 percent, 

because that is the lowest level that would have prevented a negative fund balance at any time 

since 1950 without raising assessment rates during the crises. 

Preventing sharp swings in assessment rates 

The FDI Act directs the Board to consider preventing sharp swings in assessment rates 

for insured depository institutions when setting the DRR. Setting the DRR at 2 percent as a 

minimum goal would signal that the Board plans for the DIF to grow in good times so that funds 

are available to handle multiple bank failures in bad times. This plan would help prevent sharp 

fluctuations in deposit insurance premiums over the course of the business cycle. In particular, it 

would help reduce the risk of large rate increases during crises, when insured depository 

institutions can least afford an increase. 

Maintaining the DIF at a level that can withstand substantial losses 

Staff again recommends, as it did in 2010 and every year since then, that the Board 

consider one additional factor when setting the DRR: viewing the DRR as a minimum goal that 

will allow the fund to grow sufficiently large in good times to increase the likelihood of the DIF 

remaining positive during bad times. This aim is consistent with the FDIC’s comprehensive, 

long-term fund management plan. Having adequate funds available when entering a financial 

crisis should reduce the likelihood that the fund will become negative or that the FDIC will need 

to increase assessment rates, levy special assessments on the industry, or borrow from the U.S. 

Treasury. 

Balancing the statutory factors 

In staff’s view, the best way to balance all of the statutory factors (including the 

additional factor identified above) is to maintain the DRR at 2 percent. Based on the analysis 

described above, staff continues to recommend viewing a 2 percent DRR as a long-range, 

minimum target. 

 

Staff Contacts: 

 

Division of Insurance and Research: 

Munsell St. Clair 

Chief, Banking and Regulatory Policy Section 

(202) 898-8967 

Robert Grohal 

Chief, Fund Analysis and Pricing Section 

(202) 898-6939 
7

Legal Division: 

Sheikha Kapoor 

Senior Counsel 

(202) 898-3960