Order Code RS20724
Updated June 9, 2005
CRS Report for Congress
.Received through the CRS Web
Federal Deposit and Share Insurance:
Proposals for Change
William D. Jackson
Specialist in Financial Institutions
Government and Finance Division
Summary
Deposit insurance for holders of accounts at banks and thrift institutions has been
under scrutiny for the last several Congresses. Successive Congresses have seen
introduced legislation to change the pricing of insurance, the coverage for customers’
accounts, and the finances of the insuring Federal Deposit Insurance Corporation
(FDIC). Changes could affect the condition of insured depository institutions, the
strength of the insurance funds, and competition among financial institutions. Increases
in some kinds of financial risks have led some to suggest that deposit insurance may
need reform. The 108th Congress reexamined these issues. H.R. 522, the Federal
Deposit Insurance Reform Act of 2003, revisited an even earlier House-passed measure.
It sought to restructure the FDIC, change the pricing of insurance, increase basic per-
account coverage to $130,000, indexed for future inflation, and increase insurance of
municipal deposits. H.R. 522 passed the House on April 2, 2003, but went no further.
In the 109th Congress, H.R. 1185, the Federal Deposit Insurance Reform Act of 2005,
received approval from the House by 413-10 on May 4, 2005. The Administration
continues to support reform in similar terms, but opposes raising basic coverage of
accounts to $130,000. This report will be updated as warranted.
What is Deposit Insurance and
How is It Administered?
The full faith and credit of the United States stands behind more than $3.7 trillion
of insured deposits at banks and savings associations. This insurance guards savers’
accounts up to $100,000, providing stability to banks and to the economy. Congress
legislated deposit insurance in the 1930s, and modified it in 1989 and 1991 in response
to financial crises. All banks and savings associations must carry this insurance. The
insurance does not cover deposits held in foreign offices, nor deposits above the legislated
ceiling, despite their importance to very large banks. Smaller institutions find deposit
insurance, including extra coverage for certain special accounts, very valuable.
Congressional Research Service ˜ The Library of Congress

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Pursuant to P.L. 101-73 and P.L. 102-242, the independent agency Federal Deposit
Insurance Corporation (FDIC) has two funds. Both funds are interest-earning accounts
maintained with the U.S. Treasury. The Bank Insurance Fund (BIF) dates from 1934.
Congress intended it and its ancestor the Permanent Insurance Fund to cover commercial
bank deposits. BIF members are predominantly commercial and savings banks supervised
by the FDIC, the Office of the Comptroller of the Currency (OCC), or the Federal Reserve
(Fed). Some are “industrial loan companies” not otherwise federally regulated. (See CRS
Report RL32767.) The Savings Association Insurance Fund (SAIF) is the successor to
a failed fund (the Federal Savings and Loan Insurance Corporation) covering savings
institution deposits. SAIF members are predominantly thrift institutions supervised by
the Office of Thrift Supervision. Many institutions have deposits that the “other” fund
insures because of mergers. Institutions do not “own” either fund. BIF and SAIF
balances are on-budget assets of the federal government. Except for the specific
institutions covered, BIF and SAIF are essentially identical.
Federal law requires institutions to pay semiannual assessments reflecting their own
risk and other factors, and makes premiums reflect the relative sizes of BIF and SAIF.
Both funds have target reserve ratios of 1.25% ($1.25 per $100) of insured deposits. That
percentage is the statutory Designated Reserve Ratio (DRR). When either fund exceeds
that value, its members do not have to pay assessments, unless capital or managerial
deficiencies place them in a risk category above the safest. Institutions regard fund
balances much above than 1.25% as “excess deposit insurance” that the FDIC should
refund to them. Institutions argue that, in the general spirit of tax cuts, that banks having
paid into their respective fund should get back their “surplus.” In the other direction,
should either fund fall below its DRR, institutions must pay to fill the fund’s shortfall.
That would greatly increase the near-zero cost of deposit insurance. Many would prefer
to smooth out assessments over time as needed to maintain adequate fund balances, which
as Table 1 shows, have fluctuated markedly since 1990. Since 2003, fund ratios have
been trending downward.
A separate organization has insured accounts at credit unions since 1970: the
National Credit Union Share Insurance Fund (NCUSIF). The National Credit Union
Administration administers the fund. While all federally chartered credit unions must
belong to NCUSIF, state-chartered ones may elect it. Credit unions, owning NCUSIF,
have put 1% of their total “shares” (deposits) into NCUSIF, beginning in 1985. Their
contributions remain assets of the credit unions. While it may levy a premium, the NCUA
has done so only when three large New England credit unions failed in 1992. NCUSIF’s
reserve ratio is 1.28% of insured deposits, based on a balance of $6.4 billion, within its
targeted 1.25% to 1.30% range. Like the FDIC funds, the “full faith and credit of the U.S.
Government” backs it. Its coverage is essentially identical to that of both FDIC funds.
Observers have universally deemed federally backing essential, as history has shown
that guarantees short of the national level are inadequate to prevent panics, runs, and
severe economic damage when called upon. The original state funds insuring bank
deposits, and most of their descendants, collapsed under pressure, and, while private
deposit insurance remains vestigially available, it is not significant.

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Table 1. Financial Position of Bank and Savings Association
Insurance Funds, 1990-2005
BIF
SAIF
End of Year
Balance,
Reserve
Balance,
Reserve
$Billions
Ratio, %
$Billions
Ratio, %
1990
$4.0
0.21%
$0.0
0.00%
1991
-7.0
-0.36
0.1
0.01
1992
-0.1
-0.01
0.3
0.04
1993
13.1
0.69
1.2
0.17
1994
21.8
1.15
1.9
0.28
1995
25.5
1.30
3.4
0.47
1996
26.9
1.34
8.9a
1.30a
1997
28.3
1.38
9.4
1.36
1998
29.6
1.39
9.8
1.39
1999
29.4
1.37
10.3
1.45
2000
31.0
1.35
10.8
1.43
2001
30.4
1.26
10.9
1.36
2002
32.1
1.27
11.7
1.37
2003
33.8
1.32
12.2
1.37
2004
34.8
1.30
12.7
1.34
2005: Q1
34.8
1.27
12.8
1.32
Source: Federal Deposit Insurance Corporation.
a. After recapitalization pursuant to the Deposit Insurance Funds Act, P.L. 104-208.
Issues
The current round of congressional consideration of changes in federal deposit
insurance began in February 2000 when the House Banking Subcommittee on Financial
Institutions held hearings. Questions raised included:
! Should Congress increase the $100,000 coverage for deposits at banks
and savings associations, and shares at credit unions? Should inflation
adjustment, perhaps retroactively since 1980, and in future years, “index”
FDIC coverage?
! Should government and retirement deposits be insured at a greater level?
! What should institutions pay for deposit insurance coverage and
associated regulation? Should premiums be smoothed out over time?
! If the balances in BIF and SAIF exceed amounts necessary to provide
adequate coverage, what should be done with the excess? Would refunds
weaken the FDIC?
! Is no- or very low-cost deposit insurance a subsidy to banks in their
competition with nonbank financial firms? Or does it offset costs of
bank-only regulations?
! Should BIF merge with SAIF, as P.L. 104-208 planned in 1996?
! Are there better avenues to monitor and restrain risk-taking before it
results in FDIC payouts? Are some institutions too-big-to-fail?

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! Should rapidly-growing banks who have paid little or no assessments, the
so-called free riders, be assessed premiums to compensate for their
increased exposure to payouts and decrease in fund reserve ratios?
! What changes affecting FDIC operations might apply to credit unions?
Policy Considerations
Policymakers must weigh many factors. A key issue is how to provide the benefits
of deposit insurance without lessening the incentives for managers to engage in prudent
operating practices. Owners and managers at covered institutions may take on greater
risks, in the expectation of greater rewards, if they know that customers are unlikely to
withdraw their insured deposits. Observers call such behavior a “moral hazard.” The
effectiveness of examination and supervision arrangements thus has an important bearing
on risk exposure of the insurance funds. Regulation of banks and savings associations to
prevent failure ideally would prevent the FDIC from having to make good on its
guarantee. No system is failure-proof, however. In a competitive economy, bad business
decisions resulting in closure guide future capital investment away from practices that
failed. Banks and savings associations are not exempt from this fact.
Tradeoffs exist among proposals for change. For example, increased account
coverage could require greater reserves at BIF and SAIF, making it less likely that the
costs of FDIC insurance remain low. Alternatively, should risk increase in financial
markets, or the funds’ coverage of insured deposits become very thin, institutions might
have to pay larger assessments. Competitive equality is an important consideration for
different institutions (large versus small, banks and savings associations versus credit
unions, for example). Expansion of the federal safety net through the FDIC would have
to be funded. Payment would come from institutions; taxpayer funding appears unlikely.
FDIC Recommendations and Congressional Activity
2001. In the 107th Congress, outgoing FDIC Chairman Tanoue said the agency
would like Congress to make improvements. It sought to merge the BIF and SAIF funds.
It sought to charge regular premiums based on institutions’ risks, whatever the level of
the reserve ratio of the fund(s). It suggested adjusting premiums gradually up or down as
the health of the fund(s) changes. If it made rebates, the agency would base them on past
contributions. It also suggested indexing the basic account coverage, to keep pace with
future inflation, not necessarily boosting standard account coverage to $130,000.
2002. New FDIC Chairman Powell carried the effort forward. H.R. 3717, the
Federal Deposit Insurance Reform Act of 2002, passed the House by 408-18 on May 22,
2002. The House-passed bill would have done several things: (1) Created a range of
reserve ratios, rather than the DRR of 1.25%. The range could float between 1.15% and
1.40%. (2) Merged BIF with SAIF, into a single Deposit Insurance Fund. (3) Increased
basic account protection to $130,000. (4) Indexed future basic coverage to inflation every
five years. (5) Covered many retirement (IRA and “401(k)”) accounts for $260,000. (6)
Increased coverage of within-state municipal deposits, to a maximum of $2 million. (7)
Given banks refunds of premiums should the Deposit Insurance Fund exceed 1.35%,

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ending their payments now required when the ratio of insured deposits to their fund falls
short. (8) Provided FDIC flexibility for reserving against future losses, recapitalizing the
new Fund, and adjust basic account coverage according to inflation. (9) Credited
institutions for assessments based on their insured deposits at the end of 1996, reducing
their net assessments. (10) Raised protection at credit unions to that of banks.
2003. In the 108th Congress, H.R. 522 was very similar to S. 229. Both mirrored
the bills noted above from the 107th Congress. H.R. 453, introduced by Representative
Gillmor, sought FDIC coverage of municipal (federal, state, local, etc.) governmental
bodies up to $2 million per account or lesser coinsured amounts. The Administration
sought merging of the two FDIC funds; making a new floating reserve ratio for the
merged fund so that it would remain adequately capitalized; and requiring all institutions
— despite capital rating — to pay assessments. The agency, which Congress would have
granted more discretionary power under the plan, has been prohibited since 1996 from
charging premiums to well-capitalized and well-run institutions, leaving fewer than 10%
of depositories paying insurance premiums. Banks controlled by Citigroup and Merrill
Lynch, for example have large amounts of insured deposits, yet have paid little or no
premiums because of their safety and soundness ratings.
The Oxley-Frank Managers’ Amendment to H.R. 522 aimed to do the same things
as H.R. 3717 of the prior year. On April 2, 2003, the House approved the bill. Fears
persisted that general coverage of $130,000, with indexing to inflation, would increase
FDIC’s liability in failures. Members defeated an amendment of Representatives Ose and
Maloney to remove that coverage increase.
2004. Smaller banks, and at least potentially, retirees, were thought to be the main
beneficiaries of higher deposit protection. Yet, the Administration and Fed were
concerned that the increase would raise risk without much benefit. (The vast majority of
depositors have fully insured accounts.) Larger institutions and many government
officials opposed an increase as costly: to the FDIC, and to the industry paying for more
insurance. In the Administration’s view, more coverage would have lessened depositors’
care in monitoring banks, which could lead to costly bank failures. Disagreement over
the proposed $130,000 ceiling thus immobilized legislation in the Senate.
2005. In the 109th Congress, Chairman Powell suggested that a two-tiered safety net
might cover differing sizes of banks. The largest institutions might enter a risk pool
appropriate for systemic risk protection. Community banks could remain in much the
current arrangement. In addition, the Administration’s budget for FY2006 proposed that
the BIF and SAIF Funds be merged, with the FDIC being allowed to set premiums as user
charges for increasing insured deposits or above-average risk.
In the House, sponsors effectively merged two bills. H.R. 1185 was essentially
identical to House-passed H.R. 522 of the 108th and H.R. 3717 of the 107th Congresses.
H.R. 544, now folded into H.R. 1185, added a doubling of insurance on municipal
deposits. The current Federal Deposit Insurance Reform Act of 2005, H.R. 1185, would

— merge the two funds into the new Deposit Insurance Fund,
— create a range of 1.15% to 1.40% for the FDIC to set the reserve ratio,
— require minimum assessments for all institutions,

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— give the FDIC flexibility in setting assessments, including penalties,
— provide for dividends if the new fund exceeded 1.35%, and credits for
institutions insured in 1996,
— increase coverage limits for individual accounts to $130,000,
— index future coverage limits to inflation,
— double coverage limits for certain types of retirement accounts and 401(k)s,
— increase coverage for instate municipal deposits up to the lesser of $2 million
or $130,000 per account plus 80% greater than $130,000 (as in H.R. 544),
— increase credit union share insurance to conform to FDIC coverage, and
— require studies of deposit and share insurance and related matters.
The Financial Services Committee approved H.R. 1185 by voice vote on April 27,
2005. It received House floor approval by a vote of 413-10, essentially the same margin
as did its predecessors. An amendment of Representative Rohrabacher to maintain the
basic coverage of accounts at $100,000 was defeated.
For a framework to evaluate FDIC financing, see CRS Report RL31552. The
potential for BIF premiums being levied on banks because of the downtrending reserve
ratio and deposit growth has been an important driver of legislative activity. For analysis
of premiums through 2004, some of which have been very high, see CRS Report
RS21719. Increasing the coverage of most accounts remains contentious; see CRS Report
RL31463. The latest Congressional Budget Office analysis of deposit insurance policy
options appeared as Modifying Federal Deposit Insurance on May 9, 2005.

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