Funding Deposit Insurance Systems: The FDIC Experience

1. Asia Regional Committee Meeting and International Conference Financing Deposit Insurance Systems - The FDIC Experience - Goa, India January 19, 2010 Fred Carns, Director Office of International Affairs Federal Deposit Insurance Corporation

2. Bank Insurance Fund: 1934 - 1988 Funding Deposit Insurance SystemsThe FDIC Experience The FDIC Deposit Insurance Fund: 1934 – September 30, 2009 BIF + SAIF:1989 - 2005 DIF: 2005 – 3Q09 3Q09 Reserve Ratio: -0.16%

3. Funding Deposit Insurance SystemsThe FDIC Experience Rates paid by banks while fund was being revitalized Rates paid by banks once fund was restored

4. Funding Deposit Insurance SystemsThe FDIC Experience Plus Risk Differentiation Adjustments to Base Rate Initial base rates assessed to all institutions

5. Funding Deposit Insurance SystemsThe FDIC Experience • Deposit Insurance Fund (DIF) • Congress requires the FDIC to maintain a reserve ratio between 1.15% and 1.50% of estimated insured deposits. • In 3Q09, the DIF balance declined by $18.6 billion to negative $8.2 billion. The FDIC projects the DIF will remain negative over the next several years because of approximately $75.0 billion in expected failure costs from the end of the third quarter 2009 through the end of 2013. • A five-year fund restoration plan to return the reserve ratio to 1.15 was first implemented October 2008. It has since been amended several times to account for unexpected and extraordinary circumstances. Critical milestones and measures include: • February 2009 – plan extended to seven years • September 2009 – plan extended to eight years • Maintain assessment rates at current levels through 2010, then adopt a uniform 3 basis point increase in rates beginning in 2011. • Heightened risk differentiation to align incentives: • reduction in assessment rates for institutions that hold long-term unsecured debt • higher rates for institutions with a significant reliance on secured liabilities and brokered deposits • Increased borrowing line with US Treasury from $30 to $100 billion and, under certain circumstances, up to $500 billion. • June 30, 2009 – levied a one-time 5 basis point special assessment on each insured depository institution, calculated as their total assets minus Tier 1 capital. • The FDIC finalized a rule requiring institutions to prepay their estimated risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012 to be paid on December 30, 2009. The FDIC estimates that the prepaid assessments will total approximately $45 billion.

6. Funding Deposit Insurance SystemsThe FDIC Experience • Deposit Insurance Fund • Dividends: • By statute, the FDIC must, under most circumstances, declare dividends when the DIF reserve ratio at the end of a calendar year equals or exceeds 1.35 percent. • With a reserve ratio between 1.35 and 1.50 percent the FDIC must declare a dividend equal to half of the amount in excess of that needed to maintain the reserve ratio at 1.35 percent. If the reserve ratio exceeds 1.50 percent, a dividend equal to the excess needed to maintain the ratio at 1.50 percent must be declared. • The total dividend in any year would be divided into two parts: • one allocated based on the ratio of each institution’s 1996 assessment base compared to the total of all existing eligible institutions’ 1996 assessment bases, and • the other allocated based on each institution’s ratio of cumulative eligible premiums over the previous five years to the total of cumulative eligible premiums paid by all existing institutions over the previous five years. • The FDIC Board of Directors may suspend or limit dividends to be paid if it determines that the DIF faces significant risk of loss over the next year, and it is likely that those losses will be sufficiently high to justify that the reserve ratio should temporarily be allowed to grow without requiring dividends.