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What to expect as FDIC rebuilds DIF
Posted on October 21, 2010

Changes to the deposit insurance fund prompted in part by the Dodd-Frank Act were discussed at a Strategic Issues Session during ABA’s mid-October Annual Convention in Boston. One critical change is that the minimum ratio of reserves to covered deposits was pushed up to 1.35% from 1.15% as part of a last-minute deal to cover the cost of Dodd-Frank without taxing large banks, as originally planned.


ABA’s Wayne Abernathy told convention delegates that FDIC, fearing a congressional raid on the fund if it grows too large, favors dividends—down the road.

Long road planned for return to higher ratio
The fund ratio is currently negative, but moving up, noted Wayne Abernathy, ABA’s executive vice-president, financial institution policy and regulatory affairs. Last year FDIC took steps to rebuild the fund by increasing premiums. The new law, however, “moved the goalposts,” said Abernathy. The increase comes in two steps. FDIC estimates that on the current path, the ratio will come to 1.15% by 2017. The ratio must get to 1.35% by 2020, and the difference, he said, will come from premium increases for banks with assets greater than $10 billion.

An important concern for banks is whether FDIC will reinstate dividends once the fund ratio rises to its mandated level. Despite ABA’s concerted efforts, a rebate—or dividend—requirement was left out of Dodd-Frank. The decision is left up to the FDIC. The good news, said Abernathy, is that the agency has indicated in recent conversations that it wants to reinstate the dividend to prevent the fund from becoming too large and being “raided” by Congress for other purposes. However, for now the agency is talking about no dividends until the fund reaches a ratio of 2%. As Abernathy said, FDIC never again wants to see the deposit insurance fund fall to zero or below, as it did this time.

“We would emphasize,” Abernathy said, “that FDIC has a very large ability to borrow from the Treasury, and that we just went through, hopefully, the worst stress on the fund we’ve ever seen on the fund, and they never did have to go to the Treasury.” He added that Dodd-Frank is supposed to make such situations less likely.

“We don’t want to underfund—the industry takes great pride in funding the insurance fund and never having to rely on federal funds,” Abernathy continued. “Where we want to get to—and the FDIC agrees—is a steady premium year-in, year-out… and not have this very pro-cyclical situation we just went through.”

ABA’s estimate is that bank failures are trailing off and losses per bank declining, said Abernathy, so the association is asking FDIC to adjust its cost estimates and take that into account in scheduling the fund recapitalization plan. He said that ABA estimates 160 banks will fail this year at a cost to the fund of $22 billion, compared with a cost of $37 billion last year.

Another chore: What is “core”?

Another point about deposits that Abernathy raised is that FDIC is required to study what “core deposits” are.

Formerly, the definition used to be deposits of $100,000 or less, and ABA maintains that, at the least, the agency should redefine “core” to include deposits up to $250,000. Further, it has asked FDIC to take a look at deposit-aggregation programs such as the ABA-backed CDARS program offered by Promontory Interfinancial Network LLC, because such deposits are stable.

Overall, Abernathy expects that at least in the short term, the market for insured deposits will become much more competitive.

Thomas Vartanian, an attorney with Dechert, LLP, who spoke during the same session, noted that regulators right now want banks to build core deposits from branches. The regulators dislike internet deposits and wholesale funding, he said.
—Bill Streeter, editor-in-chief

[This article was posted on October 21, 2010, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2010 by the American Bankers Association.]
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