Order Code RS20724
Updated April 18, 2008
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, the Federal Deposit Insurance
Reform Act of 2005 and the Federal Deposit Insurance Conforming Amendments Act
of 2005, P.L. 109-173 (119 Stat. 3601), were enacted on February 15, 2006.
Collectively, these laws are referred to as the Reform Act of 2005. In the 110th
Congress, the FDIC has been implementing the provisions of the Act. 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 provisions already implemented include merging the two bank and thrift
insurance funds into a single Deposit Insurance Fund (DIF), establishing a risk-based
premium system, giving premium credits to institutions that paid in funds in past years.
On March 14, 2008, the FDIC board of directors approved the final rule for
implementing methods of calculating the refund of excess DIF premiums as mandated
by the Reform Act of 2005. The proposed rules will take effect on January 1, 2009.
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 $8.0 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 federal backing essential, as history has shown that guarantees

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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.
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
N. 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 2007, the funds were combined, which resulted in a
DRR of 1.20%. In November 2006, the FDIC board suggested that it expects DRR will
reach 1.25% in mid-2009.
A separate organization has insured accounts at credit unions since 1970: the
National Credit Union Share Insurance Fund (NCUSIF). The National Credit Union
Administration (NCUA) 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, 1990-2007
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
The Deposit Insurance
Fund Balance
(billions)
Reserve Ratio (Percent)
2005 (End of Year)
48.59
1.25
2006 (End of Year)
50.17
1.21
2007 (End of Year)
52.41
1.22
Source: Federal Deposit Insurance Corporation.
a. After recapitalization pursuant to the Deposit Insurance Funds Act, P.L. 104-208.
Issues
Leading up to the passage of the FDIC Reform Act of 2005, there was a
contemporary congressional review of deposit insurance that 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?

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! 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?
! Should rapidly growing banks that 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
2005. In the 109th Congress, Chairman Don 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 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 on May 9, 2006. S. 1562, the Safe and Fair Deposit
Insurance Act of 2005, a more limited measure, was approved in Banking Committee
markup in October.

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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 regulatory environment before the reform act 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.
2007. On September 11, 2007, the FDIC asked for comments on an Advance
Notice of Proposed Rulemaking (ANPR) to establish a system for providing rebates to
insured financial institutions in the event that the DIF reaches the upper limit of the
reserve ratio. The Reform Act, which allows the FDIC to manage DIF within the range
of 1.15% and 1.5%, must refund the excess payments in the form of dividends to
depository institutions that support DIF. If the fund reaches 1.5%, all the excess must be
refunded. One part of the ANPR requires that the system take into account a bank’s
assessment base at the end of 1996, which is a proxy for the assessments paid by
institutions to recapitalize the fund following the deposit insurance crisis of the 1980s and
the early 1990s. The FDIC named this the “fund balance method, which would tend to
befit older institutions. The second part’s “payment method” would take into account
only the premiums paid over a prior period that is designated by the board rather than all
eligible premiums. This second approach tends to put new institutions on an equal basis
with older institutions more quickly.
Other regulatory and legislative developments concerning the FDIC include the
FDIC board approving a two-year pilot project to test banks’ and consumers’ receptivity
to small-dollar lending programs, which would compete against the unfair, deceptive, and
expensive credit terms offered by payday lending organizations. Legislatively, the House
of Representative reported out H.R. 3526 that would give the FDIC, Office of the
Comptroller of the Currency the power to write rules to identify and prohibit unfair or
deceptive practices. In addition, the House of Representatives approved H.R. 2547 to ban
the misrepresentation of financial products as having the protection of federal deposit
insurance if they do not have such coverage.
2008. On March 14, 2008, as mandated by the Reform Act of 2005, the FDIC board
of directors approved the rule for calculating a payment of dividends to insured
institutions if and when the DIF reserve ratio exceeds 1.35%. The banking industry seems
to be less concern about getting back the additional premiums it paid in, preferring the
FDIC not to allow the reserve ratio to exceed 1.35%. The FDIC board argued that the
methods it approved are simple, transparent and do not require constant FDIC
intervention and decision-making, which is similar to what the industry advocated.

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Table 2. Before the Reform Act and Key Reform Act Provisions

Before the Reform Act
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
groupings 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 may
determine to be necessary.
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