Order Code RS20724
Updated August 3, 2006
CRS Report for Congress
Received through the CRS Web
Federal Deposit and Share Insurance:
Proposals for Change
Walter W. Eubanks
Specialist in Public Economic Policy
Government and Finance Division
Summary
Several Congresses have seen legislation that would change the finances of the
Federal Deposit Insurance Corporation (FDIC), the pricing of deposit insurance, and its
coverage for customers’ accounts. In the 109th Congress, H.R. 1185, the Federal Deposit
Insurance Reform Act of 2005, was passed by the House on May 4, 2005. S. 1562, the
Safe and Fair Deposit Insurance Act of 2005, a more limited measure, was reported by
the Senate Banking Committee on October 18, 2005. Both measures became part of the
prolonged budget reconciliation process. On February 8, 2006, the resulting package
became P.L.109-171, (120 Stat. 9). The Federal Deposit Insurance Conforming
Amendments Act of 2005, P.L. 109-173 (119 Stat. 3601), was enacted on February 15,
2006. Collectively, these laws are referred to as the Reform Act of 2005. The Reform
Act increases certain retirement accounts’ insurance coverage to $250,000 and sets up
adjustments that authorize increasing coverage limits for inflation every five years. The
Reform Act also lessens premium volatility for banks, gives premium credits to
institutions that paid in funds in past years, gives dividend returns, establishes a risk-
based premium system, and merges the two bank and thrift insurance funds into a single
Deposit Insurance Fund. This report will be updated as events warrant.
What is Deposit Insurance and
How is It Administered?
The full faith and credit of the United States stands behind about $4.0 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
ceilings, despite their importance to very large banks. Smaller institutions find deposit
insurance, including extra coverage for certain special accounts, very valuable. 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
Congressional Research Service ˜ The Library of Congress

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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.
Pursuant to P.L. 101-73 and P.L. 102-242, the independent agency Federal Deposit
Insurance Corporation (FDIC) had two funds. Both funds were 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, predominantly commercial and savings banks, were
supervised by the FDIC, the Office of the Comptroller of the Currency (OCC), or the
Federal Reserve (Fed). The FDIC insures some “industrial loan companies” not otherwise
federally regulated. (See CRS Report RL32767, Industrial Loan Companies/Banks and
the Separation of Banking and Commerce: Legislative and Regulatory Perspectives, by
Eric Weiss.) The Savings Association Insurance Fund (SAIF) was the successor to a
failed fund (the Federal Savings and Loan Insurance Corporation) covering savings
institution deposits. The Office of Thrift Supervision supervised SAIF members,
predominantly thrift institutions. Many institutions have deposits that the “other” fund
insured because of mergers. Institutions do not “own” either fund. BIF and SAIF
balances were on-budget assets of the federal government. Except for the specific
institutions covered, BIF and SAIF were 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 fund reserves.
Both funds had 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 exceeded
that value, its members did not have to pay assessments, unless capital or managerial
deficiencies placed them in a risk category below the safest. 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 prefer to smooth out
assessments over time as needed to maintain adequate balances, which as Table 1 shows,
have fluctuated markedly since 1990. Since 2003, fund ratios have been trending
downward. In the first quarter of 2006, the funds were combined, which resulted in a
DRR of 1.23%.
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. All federally chartered credit unions must belong
to NCUSIF, however, state-chartered ones may elect to join 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. Although it may levy a premium,
the NCUA has done so only when three large New England credit unions failed in 1992.
The “full faith and credit of the U.S. Government” backs it as well.

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Table 1. Financial Position of Bank and Savings Association
Insurance Funds, 1990-2005
BIF
SAIF
End of Year
Balance
Reserve Ratio
Balance
Reserve Ratio
(billions)
(percent)
(billions)
(percent)
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
35.4
1.23
13.0
1.29
Source: Federal Deposit Insurance Corporation.
a. After recapitalization pursuant to the Deposit Insurance Funds Act, P.L. 104-208.
Issues
The contemporary congressional review of deposit insurance began around 2000.
Observers began asking questions that persisted for years, as follows:
! 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 Congress insure government and retirement deposits 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?

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! Are there better avenues to monitor and restrain risk-taking before it
results in FDIC payouts? Are some institutions too-big-to-fail?
! 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. It also suggested indexing the basic account coverage,
to keep pace with future inflation.
2002. New FDIC Chairman Powell carried the effort forward. H.R. 3717, the
Federal Deposit Insurance Reform Act of 2002, passed the House 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

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banks refunds of premiums should the Deposit Insurance Fund exceed 1.35%, 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, 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.
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 immobilized legislation (including H.R. 522) 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 second session of
the 109th Congress, H.R. 1185, the Federal Deposit Insurance Reform Act of 2005,
received approval from the House in May. S. 1562, the Safe and Fair Deposit Insurance
Act of 2005, a more limited measure, was approved in Banking Committee markup in
October.
2006. The Federal Deposit Insurance Reform and the Safe and Fair Deposit
Insurance Acts became part of the prolonged budget reconciliation process. On February
8, 2006, the resulting package became P.L. 109-171 (120 Stat. 9). The Federal Deposit
Insurance Conforming Amendments Act of 2005, P.L. 109-173 (119 Stat. 3601), was
enacted on February 15, 2006. Collectively, these laws are referred to as the Reform Act.
The Reform Act would raise FDIC collections from insured institutions, according to the
Congressional Budget Office (CBO). As it appears in the Deficit Reduction Act of 2005,
CBO estimated that it would boost net receipt by $2.5 billion over the next 10 years.
Table 2 is a brief summary of the current law and the key provisions of the Reform Act.
Since its enactment, the FDIC has merged BIF and SAIF into the DIF, and has issued
notices of proposed rulemaking (NPR) and requests for comment on several of the act’s
provisions, including establishing a risk-based assessment system and the DRR.
In short, the Reform Act takes effect this year; it will merge BIF with SAIF into
the new DIF, will allow coverage to be adjusted for inflation, and will insure retirement
accounts up to $250,000. It will give banks that paid into the funds in past years credits
that can be applied against future premiums. The Reform Act retains the standard
coverage ceiling of $100,000 but will index coverage for inflation starting April 1, 2010,
effective the following January 1.

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Table 2. Current Law and Key Reform Act Provisions

Current Law
Reform Act
BIF and SAIF are the deposit insurance
Merges BIF and SAIF into the new
funds for federally insured banks and
Deposit Insurance Fund.
thrifts.
Standard deposit coverage ceiling is
Increases deposit insurance coverage to
$100,000 with no inflation adjustment.
$250,000 on retirement accounts,
keeping the standard accounts at
$100,000, and subsequent inflation
adjustments at five-year intervals. FDIC
shall determine whether or not to make
these adjustments.
Requires the FDIC to keep the funds at
Gives the FDIC flexibility in setting
or above a minimum level (1.25% of the
minimum assessments for all
estimated insured deposits) and to adjust
institutions, including penalties. The
premiums to achieve this target.
FDIC is to consider expenses and
income of DIF, capital, and earnings of
the institutions in making assessments,
repealing special rules relating to
minimum assessment and free deposit
insurance.
BIF and SAIF fund reserves are both set
Replaces the fixed designated reserve
at 1.25%.
ratio with a reserve ratio range. The
range is 1.15% to 1.5%.
The FDIC uses nine risk categories in a
Requires the establishment of a risk-
two-step process based on capital
based assessment system. The FDIC
grouping and supervisory groupings
must consult with other federal
with zero given to the lowest-risk and
regulators in its development, and
five for the highest-risk institutions.
insured institutions are required to
provide the information for its creation.
BIF may refund part or all of the
Gives the FDIC discretion to pay
assessments to lowest-risk members.
refunds and dividends, depending on
SAIF has no authority to do so.
level of the Deposit Insurance Fund.
There is no one-time credit.
Gives a one-time credit up to 10.5 basis
points based on total assessments at
year-end 2001.
The FDIC is to increase assessments
The FDIC is to plan the funds’
whenever BIF or SAIF falls below
restoration if the reserve ratio of DIF
1.25%. The FDIC has up to 15 years to
falls below its minimum. It has up to
restore each.
five years to restore the DRR, or a
longer period as the FDIC many
determine to be necessary.

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