FDIC could potentially reimburse its bank failure funds early
The Federal Deposit Insurance Corporation (FDIC) has announced that its Deposit Insurance Fund (DIF) is on track to reach the statutory minimum of 1.35% earlier than the required deadline. This development comes after a series of events, including an increase in the assessment rates and the amendment of the assessment rate schedules, which took effect on January 1, 2023.
The rise in the DIF reserve ratio is due to growth in the DIF balance and slower growth in insured deposits. As of June 30, 2024, the reserve ratio stands at 1.21%, marking a 6 basis points increase since the last update on Dec. 31, 2023.
The FDIC's efforts to strengthen the DIF have been bolstered by the fact that it has hit the target ahead of schedule. This early achievement will help the DIF better withstand unexpected losses. However, it's important to note that this progress is subject to certain uncertainties, such as potential increases in losses from past and future bank failures or significant insured deposit growth exceeding staff estimates.
The FDIC's vigilance is underscored by the five bank failures in 2023, which resulted in estimated losses to the DIF of $19.7 billion. The single bank failure of Philadelphia lender Republic First, which cost the DIF an estimated $667 million, is a stark reminder of the risks involved.
Despite these challenges, the FDIC's proactive measures seem to be paying off. The FDIC's 'problem bank' list totaled 66 financial institutions by the end of the second quarter of 2024, higher than the tally of 52 at the end of the fourth quarter of 2023, but still within the normal range of 1 to 2% during non-crisis periods.
It's worth noting that the FDIC board is required to adopt a restoration plan if the DIF reserve ratio falls below 1.35%, or is expected to within six months. The reserve ratio's recent rise indicates that such a plan may not be necessary in the immediate future. However, the FDIC board members last approved a resolution to implement a recovery plan to keep DIF reserves below 1.35% on May 2, 2023.
As of June 30, 2024, the DIF totaled $129.2 billion. The FDIC did not discuss the FDIC staff's projection of the reserve ratio reaching 1.35% in 2026, or the potential uncertainty around that projection. The deadline to reach the minimum requirement is Sept. 30, 2028.
In conclusion, the FDIC's Deposit Insurance Fund is on a positive trajectory, with the reserve ratio steadily increasing. However, the FDIC remains vigilant, aware of the potential risks and uncertainties that lie ahead.
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