The long, winding DIF road

Tom Bengtson

You might remember in late 2009 when the FDIC required banks to pre-pay three years’ worth of deposit insurance premiums. Despite a one-time 5-basis-point special assessment levied against the industry mid-year, the Deposit Insurance Fund was precariously low at a time when more bank failures seemed imminent. The mandated pre-pay, however, flooded the DIF with $45 billion, which proved essential for getting it through the crisis. Protected by massive liquidity migrated from volatile equity markets, banks withstood the financial hit.

In February 2011, the FDIC adopted changes mandated by the Dodd-Frank Act, which had passed mid-2010. Significantly, the formula for determining premiums changed to reflect asset amounts at insured institutions instead of deposit amounts. This move meant large asset-centric banks would contribute a greater portion to the DIF than classic community banks, which were much more focused on deposits.

Dodd-Frank, furthermore, focused on the replenishment of the DIF to at least 1.15 percent of insured deposits, a threshold that was reached in 2016. Smaller banks at that point got an across-the-board premium reduction while banks with more than $10 billion in assets had to pay a surcharge on their premiums. Additionally, smaller banks tallied credits to the extent their payments contributed to the growth of the DIF beyond 1.15 percent.

Smaller banks received letters last January from the FDIC notifying them if they were eligible for the credits. The letters also showed how to figure the amount of the credits that would apply to individual banks. For many institutions, the sum is a budget-impacting figure. By June 30, 2019, those credits totaled $765 million.

The rules permit the credits to be applied when the reserve ratio reaches 1.38 percent. That level was reached sometime during the second quarter, resulting in the application of about 42 percent of the credit amount, or $320 million. The FDIC confirmed the development Sept. 5 when it released second quarter earnings. On June 30, the DIF balance was $107.4 billion covering insured deposits of $7.7 trillion, for a coverage ratio of 1.40 percent.

It has been a slog for the industry to get to this point, and while the credits are appreciated, the environment was still better in the 1990s when many banks paid no premiums at all. But given how much things have changed in the last 25 years, the post-crisis premium structure, which reflects the greater risk posed by the largest banks, seems appropriate.