Colin Barr

Following the money in banking, economics, and Washington

FDIC looks to boost insurance fund

October 19, 2010: 3:19 PM ET

Regulators plan to spend the next 17 years fattening up the federal deposit insurance fund.

The Federal Deposit Insurance Corp. proposed rules Tuesday that eventually will nearly double the normal size of the taxpayer-backed fund that stands behind insured bank deposits, while gradually reducing the rates banks pay for insurance coverage.

Slow and steady wins the race

As part of the plan, the FDIC rescinded a rate increase it had planned for Jan. 1, in the name of minimizing the profit impact on banks that are still recovering from the recent downturn. The agency said that reduction was made possible by a 13% decline in projected bank cleanup costs through 2014.

"I am pleased that we are able to provide some assessment rate relief now in light of our lower loss projections," said FDIC Chairman Sheila C. Bair. "While it is difficult to make long-term projections, we are trying to give the industry greater certainty regarding what rates will be over the long run. The trade off we are proposing is lower, more stable and predictable premiums, but a higher reserve."

The FDIC said the idea is to create a deposit fund that can withstand the stress of a major downturn without resorting to running the fund at a deficit. The FDIC fund has run a negative balance for the past year as the agency cleans up after the worst run of bank failures in two decades.

The FDIC said it aims to build the fund up to 2% of the banking industry's assessment base, but conceded that it doesn't expect to reach that target till 2027.

In recent years the FDIC has been obliged to maintain a deposit insurance fund balance of at least 1.15%. But even in good times, when the banks were minting money and there were few bank failures, the fund balance rarely rose very much, because of rules that forced the FDIC to pay dividends to member banks and capped the fund's size.

Under the new proposal, drafted in response to the Dodd-Frank Act signed by President Obama in July, the FDIC will get the deposit insurance fund's balance back to the new minimum of 1.35% by 2020. As the fund grows, the assessments on banks will decline – presumably reducing the crunch felt by the industry in the next downturn.

The new rules also put the burden of the higher standing fund requirements on larger banks, but don't specify how the FDIC might accomplish that.

"Our action now will establish standards for sound fund management for a long time to come and better position the FDIC to resist future calls to reduce assessment rates or pay large dividends at the expense of prudent fund management," Bair said.

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Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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