Federal Deposit Insurance Reform Legislation (Including Budgetary Implications)

Federal Deposit Insurance Reform Legislation (Including Budgetary Implications)

Order Code RL33143
CRS Report for Congress
Received through the CRS Web
Federal Deposit Insurance Reform Legislation
(Including Budgetary Implications)
November 9, 2005
Barbara Miles and William Jackson
Specialists in Financial Institutions
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

Federal Deposit Insurance Reform Legislation
(Including Budgetary Implications)
Summary
Two major deposit insurance reform bills are currently before Congress. The
Federal Deposit Insurance Reform Act of 2005, H.R. 1185, was initially approved by
the House on May 4, 2005. The Safe and Fair Deposit Insurance Act of 2005, S.
1562, was reported as amended by the Committee on Banking, Housing, and Urban
Affairs on October 18, 2005.
Because both bills would effectively raise assessments paid by banks and
savings associations to the deposit insurance funds, they contribute to the budget
reconciliation process. The House bill reduces net direct spending by about $200
million over five years ($2.5 billion over 10 years), whereas the Senate bill scores
reductions of $300 million over five years ($2.46 billion over 10 years). As a result,
both bills have been attached to the budget reconciliation process. S. 1562 is Title
II, Subtitles A and B of S. 1932, the Deficit Reduction Omnibus Reconciliation Act
of 2005, passed by the Senate on November 3, 2005. In the House, H.R. 1185 is
Title IV of H.R. 4241, the Deficit Reduction Act of 2005. Both deposit insurance
bills, as passed (House) and as reported (Senate), are identical to their respective
reconciliation versions.
These measures, culminating years of congressional attention, share many
provisions, yet differ significantly in others. Both would merge the Bank Insurance
Fund (BIF) and the Savings Association Insurance Fund (SAIF) into a new Deposit
Insurance Fund (DIF) for all depository institutions (except credit unions, which
would continue with their own insurance fund). Both would replace the designated
reserve ratio with a range within which the Federal Deposit Insurance Corporation
(FDIC) would operate DIF. Both would raise the $100,000 coverage limit for deposit
insurance for at least some accounts. Credit union coverage would change in step
with banks and thrifts. Both bills would allow for refunds of excess reserves to well-
capitalized banks. Both bills would require the FDIC to give credit to institutions for
past premium payments if the FDIC must make new assessments, thus accounting for
the disparity between old and newer institutions.
The bills differ in important respects. Insurance coverage limits rise
immediately for most accounts in the House bill and would be indexed for inflation
automatically at five-year intervals in the future. The Senate bill increases coverage
limits immediately for retirement accounts and allows the FDIC, at its discretion, to
increase limits for all accounts at five-year intervals in the future. The House allows
for both one-time and ongoing credit pools against future premiums, whereas the
Senate allows only an initial credit. The House, but not the Senate, would limit
premiums paid by well-capitalized and operated banks, so long as the new insurance
fund was within the reserve range.
This report will be updated as warranted by events.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Regulatory Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Budgetary Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Major Differences Between House and Senate Bills . . . . . . . . . . . . . . . . . . . . . . . 3
List of Tables
Table 1. Provisions of Deposit Insurance Reform Legislation . . . . . . . . . . . . . . . 5

Federal Deposit Insurance Reform
Legislation (Including Budgetary
Implications)
Introduction
Two major deposit insurance reform bills are currently before Congress. The
Federal Deposit Insurance Reform Act of 2005, H.R. 1185, was approved by the
House on May 4, 2005.1 The Safe and Fair Deposit Insurance Act of 2005, S. 1562,
was reported as amended by the Committee on Banking, Housing, and Urban Affairs
on October 18, 2005. Because of their budgetary implications, both bills have
subsequently been attached to the budget reconciliation process in the House and
Senate. The House bill is unchanged from the version that was passed in May.
These measures, culminating years of congressional attention, share many provisions,
yet differ significantly in others.
Regulatory Considerations
The impetus for reform legislation lies in the structure of the current deposit
insurance system. The Federal Deposit Insurance Corporation (FDIC) oversees
deposit insurance operations for banks and savings associations. (The National
Credit Union Association [NCUA] is responsible for credit unions.) The FDIC runs
two separate funds — the Bank Insurance Fund (BIF) for banks and the Savings
Association Insurance Fund (SAIF) for thrift institutions — and assesses premiums
according to the adequacy of the separate funds as determined by a “designated
reserve ratio.”
For several years, the best capitalized and managed banks and thrifts have paid
nothing into the fund because regulators rate them in the highest categories of safety
and soundness, and because both BIF and SAIF were above their reserve ratios.
During the same period, however, deposits have grown, both at long-established
banks and at newly started banks, so that insurance reserves have fallen as a
percentage of total covered deposits. Should the reserves fall below the designated
reserve ratio (1.25% of covered deposits for each fund), the FDIC will be forced to
raise premiums charged to fund members to maintain capitalization of the insurance
1 For background information on deposit insurance and its legislative issues, see CRS Report
RS20724, Federal Deposit and Share Insurance: Proposals for Change, by William
Jackson; CRS Report RL31552, Deposit Insurance: The Government’s Role and Its
Implications for Funding, by Gillian Garcia, William Jackson, and Barbara Miles; and CRS
Report RS21719, Bank and Thrift Deposit Insurance Premiums: The Record from 1934 to
2004, by Barbara Miles and William Jackson.

CRS-2
funds. Because financial institutions operate on low profit margins but a large dollar
volume of transactions, small percentage changes in premiums can result in large
profitability swings.

This situation has produced a series of issues.
!
Should Congress merge the BIF with the smaller, better capitalized SAIF?
A merger would be largely a matter of bookkeeping, there being little or
no regulatory difference between banks and savings associations. A
merger would delay, for a short time, the need to raise premiums on BIF-
covered institutions.
!
Should Congress raise coverage for some or all types of accounts to reflect
the effects of inflation since the last increase (in 1980, to $100,000 for
general accounts)? Higher coverage would allow greater protection to
depositors. It also would raise the moral hazard risk for the insurer, in that
banks would arguably take greater risks in their lending to produce greater
rewards, knowing that depositors had no reason to be concerned about the
safety of their savings.2 Any increase in coverage would also further dilute
the insurance reserve(s) and cause banks to pay higher premiums sooner.
!
Should the designated reserve ratio remain at its current, statutorily set
minimum percentage of covered deposits or at a range within which the
fund(s) operate(s)? A range would allow the FDIC greater discretion in
assessing premiums and would add a ceiling to the allowable reserves,
above which bankers would pay no premiums and might receive refunds
of excessive reserves.
!
Should de novo (newly formed) banks, which have never paid premiums,
be required to pay premiums before requiring new premiums from older
institutions that have recapitalized the funds over the years? Alternatively,
should older institutions receive some credit for premiums they have paid
in earlier years?
!
Should there be a limit on assessments made on banks in the highest
categories of safety and soundness? Should there be refunds to such banks
when the insurance fund is above the designated reserve ratio?
2 Moral hazard is the natural result of the major purpose of deposit insurance, which is to
protect banks from panics in which depositors, fearing bank failures, withdraw their funds
and leave banks unable to make new loans or even maintain outstanding loans. Because
banks hold only fractional reserves, no bank, not even one that is healthy, could long
withstand a serious “run” on deposits. Lending would contract, and the economy with it,
as occurred most notably in the 1930s, when there was no deposit insurance to allay
depositor concerns.

CRS-3
Budgetary Considerations
The Federal Deposit Insurance Corporation accounts are on-budget. Because
both bills would effectively raise assessments paid by banks to the deposit insurance
funds, they contribute to the budget reconciliation process by reducing net direct
spending by about $200 million over five years or by $2.5 billion over 10 years for
the House bill, and $300 million over five years or $2.46 billion over 10 years for the
Senate bill.3 S. 1562 provided the Senate Banking Committee’s reconciliation
recommendation and is part of the Deficit Reduction Omnibus Reconciliation Act of
2005 (S. 1932, Title II, Subtitles A and B). The Senate approved S. 1932 on
November 3, 2005.
Similarly, the Financial Services Committee voted on October 27 to recommend
H.R. 1185 to the House budget reconciliation process. The House provisions appear
in Title IV of H.R. 4241, the Deficit Reduction Act of 2005. The House Budget
Committee approved its measure on November 3.
Major Differences Between House and Senate Bills
The House and Senate bills agree on most points: both would merge BIF and
SAIF into a new Deposit Insurance Fund (DIF) for all depository institutions (except
credit unions, which would continue with their own insurance fund). Both would
replace the designated reserve ratio with a range within which the FDIC would
operate DIF. Both would raise the $100,000 coverage limit for deposit insurance for
at least some accounts. Credit union coverage would change in step with banks and
thrifts. Both bills would allow for refunds of excess reserves to well-capitalized
banks, and both would require the FDIC to give credit to institutions for past
premium payments if the FDIC must make new assessments, thus accounting for the
disparity between old and newer institutions.
The bills differ in some important details. The Senate-designated reserve range
is wider (with a higher ceiling) than that of the House. The House would raise
coverage for nearly all deposits and index future increases for inflation. The Senate
would restrict initial coverage increases to retirement accounts and allow the FDIC
discretion to increase coverage generally, beginning in 2010 and at five-year intervals
thereafter. The House would allow for continuing premium credits for banks that
have paid into the funds in the past, whereas the Senate proposes a one-time only
credit. The House limits the FDIC to a one-basis-point ceiling on the percentage of
covered deposits to be paid as premiums by banks in the best safety and soundness
categories.4 The Senate has no limit.
3 Congressional Budget Office Cost Estimates for H.R. 1185, Apr. 29, 2005, and
Reconciliation Recommendations of the Senate Committee on Banking, Housing, and Urban
Affairs, Oct. 24, 2005.
4 A basis point is one one-hundredth of a percent, or 0.0001 times covered deposits.

CRS-4
The differences between the two bills led to separate cost estimates from the
Congressional Budget office with respect to budget reconciliation. The major
difference between the versions lies in the coverage increases included in the House
bill, but not the Senate bill. These increases raise liabilities to the insurance fund
and, therefore, increase the anticipated cost of resolving institutions that may fail in
the future. The combination of expected premiums and credit in the House bill are
also scored as producing higher revenues for the insurance fund than in the Senate
bill, but not by enough to offset the increased future expected payouts. The merger
of BIF and SAIF produces a temporary timing change in premium receipts that
disappears over time. During a 10-year budget window, the House measure is scored
as increasing collections by $3.8 billion, whereas the Senate bill boosts receipts by
$2.8 billion, both net of credits. The House bill would increase future costs of
resolving failed financial institutions by $1.4 billion; the Senate would increase
resolution costs by $350 million.
The following table provides a side-by-side summary of the two proposals.
Neither was changed when included in their respective budget reconciliation
packages.

CRS-5
Table 1. Provisions of Deposit Insurance Reform Legislation
H.R. 1185 (as attached to H.R.
S. 1562 (as attached to S. 1932,
Provision
4241, Title IV)
Title II)
Short Title
Federal Deposit Insurance
Safe and Fair Deposit Insurance
Reform Act of 2005
Act of 2005
Deposit Insurance Funds
Merge BIF
Merges BIF and SAIF into new
Same.
and SAIF
Deposit Insurance Fund (DIF).
Effective Date
First day of first calendar quarter
Same.
after the end of the 90-day
period beginning on date of
enactment.
Deposit Insurance Coverage
Increase
Increases from $100,000 to
No increase in standard
Standard
$130,000 for institutions covered
coverage. By April 1, 2010, and
Deposit
by DIF and the NCUA. Provides
the first day of each subsequent
Insurance
that agencies must calculate an
5-year period, the FDIC shall
Ceiling
inflation adjustment starting
determine whether to increase
April 1, 2007, and the first day
the standard deposit insurance
of each subsequent 5-year
ceiling, based on economic
period, using the change from
conditions affecting insured
enactment to the preceding end-
depositories; risk to the DIF;
of-year Personal Consumption
demonstrated need by
Expenditures Chain Index of the
depositories for inflation
Department of Commerce,
adjustment; ability of
rounded to the nearest $10,000.
depositories to identify and
Agencies must publish the new
obtain alternative funding
maximum insurance amount in
sources; ability of depositories to
the Federal Register and report
meet community credit needs;
to Congress no later than April 5
potential problems affecting
of any calendar year in which an
depositories; and other factors
adjustment is required.
deemed appropriate. Similar
calculation to House bill.
Retirement
Increases retirement account
Increases coverage to $250,000.
Accounts
insurance from $100,000 to
Provides for inflation adjustment
twice the standard insurance
at 5-year intervals beginning
ceiling ($260,000 initially).
with 2010.
Passthrough
Insurance coverage on a prorated
Same.
Insurance for
basis to participants in an
Employee
employee benefit plan.
Benefit Plans
Institutions not “well” or
“adequately” capitalized may not
accept these plan deposits.

CRS-6
H.R. 1185 (as attached to H.R.
S. 1562 (as attached to S. 1932,
Provision
4241, Title IV)
Title II)
Municipal
For municipal depositors in the
No change. No inflation
Deposits
same state as the office or branch
adjustments.
of the depository where they
hold the deposits, the insurance
ceiling is raised to the lesser of
$2,000,000 or the sum of the
standard insurance amount and
80% of deposits above the
standard insurance amount. No
state may deny any depository in
its jurisdiction the authority to
accept such deposits, nor
prohibit in-state municipal
depositors from making deposits
in such depository.
Effective Date
Coverage changes are effective
Same.
on the date that final regulations
take effect. Regulations must be
final by 270 days after
enactment.
FDIC Assessments
Setting
In setting assessments for
Similar.
Assessments
insured depositories, the FDIC is
to consider the estimated
operating expenses of the DIF;
estimated case resolution
expenses and income of the DIF;
projected effects of paying
assessments on capital and
earnings of insured depositories;
risk and other factors under the
risk-based system; and other
factors the FDIC deems
appropriate.
Base Rate
A base rate of not more than one
No provision.
basis point (exclusive of any
credit or dividend) for
depositories in the lowest-risk
category. No institution is
barred from the lowest-risk
category solely because of size.
The one-basis-point limit may be
set aside if the DIF is below
1.15% of aggregate insured
deposits.

CRS-7
H.R. 1185 (as attached to H.R.
S. 1562 (as attached to S. 1932,
Provision
4241, Title IV)
Title II)
Record-
The period a depository must
Same.
Keeping
keep assessment-related records
Period
is shortened to three years from
assessment due date or
resolution of a dispute between
the depository and the FDIC,
whichever is later.
Penalty for
Except in cases of dispute,
Same.
Late
failure to pay any assessment is
Assessment
subject to a penalty of not more
Payments
than 1.0% of the assessment due
for each day the payment is late.
Lifeline
Lifeline accounts are to be
No provision.
Accounts
assessed at half the rate that
would otherwise apply.
Designated Reserve Ratio
Replace Ratio
The FDIC shall at least annually
Range for the reserve ratio is
with a Range
determine a ratio not to exceed
1.15% to 1.5% of insured
1.4% nor fall below 1.15% of
deposits. Otherwise similar.
insured deposits. The FDIC is to
take into account risk of losses to
the DIF in the current and future
years; economic conditions
affecting depositories to allow
the ratio to rise during favorable
conditions and to decrease in
less favorable conditions;
prevention of sharp swings in
assessment rates; and other
factors as appropriate.

CRS-8
H.R. 1185 (as attached to H.R.
S. 1562 (as attached to S. 1932,
Provision
4241, Title IV)
Title II)
Risk-based Assessment System
Information
In determining risk of losses at
No provision.
and
depositories and economic
Modification
conditions affecting them, the
FDIC is to collect information
from all federal banking
agencies as well as available
data from state bank supervisors,
insurance and securities
regulators, the Securities and
Exchange Commission,
Secretary of the Treasury,
Commodity Futures Trading
Commission, Farm Credit
Administration, Federal Trade
Commission, Federal Reserve
Banks and Home Loan Banks,
and other regulators, and credit
rating entities and other private
economic or business analysts.
Consultation with federal
banking agencies is required in
assessing risk of loss to the DIF.
Modifications to the risk-based
assessment system may be final
only after a period of notice and
comment.
Refunds, Dividends, and Credits from Deposit Insurance Fund
Refunds
Overpayments of assessments
No provision.
may be refunded or credited
toward subsequent assessments.

CRS-9
H.R. 1185 (as attached to H.R.
S. 1562 (as attached to S. 1932,
Provision
4241, Title IV)
Title II)
Dividends
Dividends are payable to
Similar, except full dividends
depositories according to the
occur when the reserve ratio
reserve ratio: when the ratio
exceeds 1.5%, and half
exceeds 1.4% of insured
dividends when the ratio equals
deposits, the fund pays the full
1.4% up to 1.5%.
amount in excess of 1.4% to
depositories; when it is at or
above 1.35%, up to 1.4%, the
fund pays half the amount
needed to maintain 1.35%.
Distribution of dividends
depends on (1) the ratio of a
depository’s assessment base on
December 31, 1996, to the
aggregate base of all eligible
depositories on that date; (2) the
total amount of assessments paid
on or after January 1, 1997 by
the depository to DIF (or BIF or
SAIF); (3) assessments paid that
reflect higher levels of risk at the
depository; (4) other factors
deemed appropriate.
One-time
One-time credit based on total
Same except the aggregate
Credit Pool
assessment base, year-end 1996:
credits available are based on a
by 270 days after enactment, the
9-basis point assessment instead
FDIC shall provide for a credit
of 12.
to eligible depositories, based on
the assessment base of the
institution on December 31,
1996, compared with the
aggregate base of all eligible
depositories. Aggregate credits
shall equal what the FDIC could
collect if it imposed a 12-basis
point assessment on the
combined base of the BIF and
the SAIF as of December 31,
2001. Eligible depositories are
those that were in existence on
December 31, 1996 (or
successors), and paid an
assessment before that date.

CRS-10
H.R. 1185 (as attached to H.R.
S. 1562 (as attached to S. 1932,
Provision
4241, Title IV)
Title II)
Application of
Credits are applied to
Similar, but institutions with
Credits
assessments due after effective
weaknesses are not mentioned in
date of regulations. Institutions
this context.
with financial, operational, or
compliance weaknesses ranging
from moderately severe to
unsatisfactory, or that are not
adequately capitalized, may use
credits only up to the amount
calculated by applying the
average assessment rate for all
depositories.
Ongoing
Besides the one-time credit, the
No provision.
Credit Pool
FDIC is to apply a system of
credits to future assessments on
the same basis as dividends. No
credits are awarded if the reserve
ratio of the DIF is below the
designated ratio, or if the reserve
ratio is less than 1.25% of
insured deposits.
Deposit Insurance Fund Restoration
DIF
The FDIC shall implement a
No provision.
Restoration
restoration plan within 90 days
whenever it projects that the
reserve ratio of DIF will fall
below the minimum ratio within
six months; or if the ratio falls
below minimum. The plan is
adequate if it provides for
reaching the minimum within 10
years. The agency may restrict
application of credits during
such restoration period to the
lesser of any assessment or three
basis points.
Regulations Required
Regulations
Within 270 days, the FDIC shall
Similar, except adds regulations
issue final regulations (1)
for qualifications and procedures
designating the reserve ratio for
that the FDIC may use to provide
DIF, (2) effecting increases in
the one-time assessment credits.
insurance coverage, (3)
implementing the one-time
credit, and (4) providing for
assessments under restoration
conditions.

CRS-11
H.R. 1185 (as attached to H.R.
S. 1562 (as attached to S. 1932,
Provision
4241, Title IV)
Title II)
Studies
By the
Study and report within one year
No provision.
Comptroller
on (1) efficiency and
General
effectiveness of prompt
corrective action programs and
(2) appropriateness of FDIC’s
organizational structure
considering size and complexity
of depositories, how agency
structure affects operational
costs, and effectiveness of
internal controls.
By the FDIC
Study and report within one year
Study and report within one year
and NCUA
on (1) feasibility of voluntary
on (1) voluntary insurance as in
deposit insurance system for
House bill and (2) increasing
deposits above the maximum
coverage of “general local
federal coverage and (2)
government” accounts.
feasibility of privatizing deposit
insurance.
By the FDIC
Study and report within one year
Study and report within one year
on feasibility of using actual
on the feasibility of using
domestic deposits rather than
alternatives to estimated insured
estimated insured deposits for
deposits in calculating the
DIF reserve ratios. Study and
reserve ratio of the Deposit
report within six months on
Insurance Fund.
reserve methodology and loss
accounting used between
January 1, 1992, and December
31, 2004 with respect to troubled
institutions.
Bi-Annual
The FDIC shall conduct a
No provision.
Survey on the
biannual survey on efforts by
Unbanked
depositories to bring the
“unbanked” into the
conventional finance system.