FDIC Assessment Rates Likely to Remain the Same

In January 1934, the Federal Deposit Insurance Corporation (FDIC) created its Deposit Insurance Fund (DIF) — the first-ever national system to protect depositors. Initially, the DIF totaled $11B, intended to insure up to $2.5K per depositor at FDIC-insured banks, though just six months later Congress increased coverage to $5K per depositor. The fund was first tapped in August of 1934 after the failure of Fond Du Lac State Bank in East Peoria, Illinois, and Lydia Lobsiger became the first depositor to receive an FDIC payment — restoring her life savings of $1,250.Community banks have reason to celebrate: the FDIC will likely not have to raise bank assessment rates again to make the fund whole, as the agency says the DIF’s reserve ratio is on track to reach the statutory minimum of 1.35% by 2026 — two years ahead of schedule.“Reaching the statutory minimum reserve ratio in advance of the statutory deadline strengthens the DIF so that it can better withstand unexpected losses and reduces the likelihood of pro-cyclical assessment increases,” FDIC Chair Martin J. Gruenberg said in a statement.The Origin of the Assessment Rate IncreaseThe Federal Deposit Insurance Act requirement to increase the DIF to a satisfactory level is part of the FDIC’s restoration plan, triggered in 2020 at the height of the pandemic when Americans pocketed their government stimulus checks and spent less. As a result, FDIC-insured institutions across the country experienced “extraordinary growth” in insured deposits, causing the DIF reserve ratio — the ratio of the total amount of the fund to insured deposits — to fall to 1.3%. As required by statute, the FDIC then had eight years to raise the reserve ratio to at least 1.35%, setting the deadline at September 30, 2028.On June 21, 2022, the FDIC board realized that the agency was in danger of not meeting that deadline unless it raised bank assessment rates. As such, the board amended its restoration plan to increase the initial base deposit insurance assessment rate schedules by 2bp.Then came the high-profile failures of several regional banks in 2023. The FDIC board invoked a “systemic risk exception” to protect uninsured deposits at the failed banks, reducing the DIF by $19.6B. To mitigate this hit, the agency implemented a special assessment on the banks that “benefited most from the assistance” — mainly other regionals and big banks — with no institutions under $5B in assets having to pay the additional fee.The Special Assessment RescueDue to the special assessment as well as the 2bp increase across the board, the DIF balance rose to $129.2B by June 30, 2024, up $7.5B from year-end 2023. The growth in the DIF balance coupled with slower-than-average insured deposit growth caused the DIF reserve ratio to increase by 6bp, from 1.15% at the end of 2023 to 1.21% on June 30, 2024.The FDIC board’s 2022 decision to raise rates for all FDIC-insured institutions proved beneficial for the entire industry. The board might have needed to implement a larger rate increase to restore the 1.35% reserve ratio with a shortened timeline if the rate increase had occurred after the three regional bank failures. Moreover, the accelerated increase in the DIF reserve ratio means that bank assessment rates likely will not have to be raised again ahead of the deadline — barring unexpected faster growth in insured deposits or more banks failing, according to Gruenberg. This is good news for community banks, as steady assessment rates will provide the following:

Now that a further hike in your deposit insurance assessment rate is likely not in the cards for now, leverage the liquidity you have to grant profitable loans to your borrowers and strengthen your community with investments — a win-win for everyone.