WASHINGTON — The Federal Deposit Insurance Corp. said on Tuesday it believes despite rising interest rates, recent bank failures and economic uncertainty, that under optimal conditions it will replenish the Deposit Insurance Fund to at least 1.35% of total FDIC insured deposits as soon as next year.
"It is possible the reserve ratio could reach 1.35% as early as 2024 under favorable conditions, including stable interest rates, low losses from bank failures, including the recent bank failures, and a continued moderation in insured deposit growth," said Ashley Mihalik, policy chief at the FDIC.
Staff said that in the second half of 2022, the reserve ratio increased by one basis point to 1.27%. Despite increased uncertainty in the banking industry, and the recent failure of two large banks, agency analysts project that the reserve ratio will hit — or surpass — the statutory minimum of 1.35% ahead of the legally mandated deadline on September 30, 2028, though they say the precise timing is still uncertain and could be complicated by a number of factors.
Chairman Martin Gruenberg made clear recent turmoil in the banking industry would not shake FDIC's concentration on maintaining the Deposit Insurance Fund, perhaps the agency's most crucial duty.
"The bottom line to today's update is that, even with increased uncertainty in the banking industry and the recent failure of two large banks, staff project that the losses from the two failures are not expected to have a material effect on the projected timeline for reaching the statutory minimum reserve ratio," said Gruenberg.
Even before this year, FDIC was already working to increase its reserves. After growth in insured deposits during the first half of 2020 drove the reserve ratio below the statutory minimum, the board
FDIC has already announced that it will, according to law,
Community banks have been adamant that FDIC not extend that special assessment to smaller institutions.
FDIC vice chair Travis Hill said the agency should keep an eye toward building up the DIF at the top of the economic cycle when banks can better afford to meet those needs rather than in leaner times when banks are facing other economic pressures.
"I support the principle of building up the Deposit Insurance Fund during good times to avoid the potential need of procyclical assessment increases during bad times," Hill said. "I also recognize that building of the DIF is not free, and that funds taken from the industry to fund the DIF are funds that would otherwise either be put to productive use in the economy or bolster the resiliency of individual institutions."
FDIC board member and Consumer Financial Protection Bureau Director Rohit Chopra agreed, saying that bigger banks whose size could lead regulators to invoke risk exceptions — midsize regionals like SVB and larger — should pay proportionally for this implicit benefit.
"I think it's clear there are a set of institutions who benefited [from the exception] more than others," Chopra said. "I think we should make sure we fairly allocate those [costs]."
Chopra also noted that the exact timing of restoring the DIF to the statutory minimum very much depends on the scale and extent of
Patrick Mitchell, director of the FDIC Division of Insurance and Research, said that typically insured deposits and uninsured deposits rise and fall together because of prevailing market conditions, but while insured deposits grew throughout 2022, uninsured deposits have been flowing out of the banking system steadily over that same period.
"Insured deposits and uninsured [are] often correlated to growth, but in this case, they acted very differently," Mitchell said. "Insured deposits grew at 3.3% throughout the year, [which] is slightly below historical. I think that's something we expected. With uninsured [deposits], they actually declined all four quarters throughout 2022, and actually declined at a fairly significant pace. So they've acted differently."
Chopra said that the FDIC should keep in mind that the insured and uninsured deposit bases are a moving target, and projections may very well be inaccurate depending on what happens in the future. That fact, as well as the fact that some institutions pose a greater risk to the DIF than others, should inform the board's thinking about how to make DIF replenishment something that happens when times are good rather than taking capital away from banks when they need it most.
"I think we as a board should be clear-eyed, that it is going to be very difficult to predict the pace of where the insured deposit base is," Chopra said. " I think our own experience of the data suggests that for the vast majority of institutions, particularly small ones, they're easy to resolve and therefore do not pose a cost to the fund, and where we have had losses to the fund over the years has been from larger institutions. I think that is a place where we need to continue to pressure test — whether the way we are doing assessments is adequately pricing risk."
