Insurance Program

Program Description
Deposit insurance is a fundamental component of the FDIC’s commitment to maintain stability and public confidence in the U.S. financial system. By promoting industry and consumer awareness of deposit insurance, the FDIC protects depositors at banks and savings associations of all sizes. When insured depository institutions fail, the FDIC ensures that the financial institution’s customers have timely access to their insured deposits and other services. To keep pace with the evolving banking industry and maintain its readiness to protect insured depositors, the FDIC prepares and maintains contingency plans to promptly address a variety of insured depository institution failures and conducts large scale simulations to test its plans.

The Federal Deposit Insurance Reform Act of 2005 removed statutory constraints on the FDIC’s ability to charge institutions for deposit insurance according to the risk they pose to the insurance fund. The FDIC can now manage the reserve ratio (the ratio of the DIF to estimated insured deposits) within a range between 1.15 and 1.50 percent, thus providing more flexibility for the fund to grow under favorable economic conditions and decline under adverse conditions. The Reform Act also implemented an indexing mechanism to ensure that coverage levels keep pace with inflation beginning in January 2011.

On October 3, 2008, President Bush signed the Emergency Economic Stabilization Act of 2008, which temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The temporary increase in deposit insurance coverage became effective immediately upon the President's signature. The legislation provides that the basic deposit insurance limit will return to $100,000 after December 31, 2009.

Strategic Goal 1
Insured depositors are protected from loss without recourse to taxpayer funding.

Strategic Objectives

The means and strategies used to achieve these strategic objectives and the external factors that could impact their achievement are described below.

1.1 Customers of failed insured depository institutions have timely access to insured funds and financial services.

Means & Strategies:
When an institution fails, the FDIC facilitates the transfer of the institution’s insured deposits to an assuming institution or pays insured depositors directly. The FDIC’s goal is to provide customers with access to their insured deposits within one to two business days. The software used to support deposit insurance determinations at bank closings is currently being updated to ensure the FDIC can make quick and accurate claims determinations regardless of the size of the failed institution.

The FDIC continually monitors changes in financial institution operations and products to ensure its ability to handle potential financial institution failures. The FDIC develops, tests and maintains contingency plans to ensure it is prepared to handle a wide range of potential failure scenarios, including the failure of a large financial institution; simultaneous, multiple failures; the failure of an institution with large international holdings; and the failure of an insured institution that operates primarily through the Internet.

External Factors:
The goal of providing customers of failed institutions with access to their insured deposits within one to two business days is very aggressive and might be difficult to achieve in the case of an extremely large or complex institution or a sudden and unexpected failure. However, even if it took somewhat longer to complete all deposit insurance determinations, no depositor would ultimately lose any portion of an insured deposit.

1.2 The FDIC promptly identifies and responds to potential risks to the insurance funds.

Means & Strategies:
The FDIC, in cooperation with the other primary federal regulators, proactively identifies and evaluates the risk and financial condition of individual insured depository institutions. It also identifies broader economic and financial risk factors that affect all insured institutions. It accomplishes these objectives through a wide variety of activities:

• A risk-based deposit insurance assessment system whereby institutions that pose greater risk to the insurance fund pay higher premiums. The FDIC intends to incorporate additional risk measures within the next year.
• A strong examination and enforcement program.
• Collection and publication of detailed banking data and statistics.
• A vigorous research program.
• Off-site risk analysis to target individual institutions for examination or other follow-up activities, focus the scope of an examination or assist in setting risk-based premiums for an institution.
• The Large Insured Depository Institution (LIDI) Program, which includes a comprehensive analysis of the risks in all large financial institutions (those with more than $10 billion in assets) on an ongoing basis.
• Thorough review of applications for deposit insurance.

External Factors:
In spite of the comprehensive efforts undertaken by the FDIC to identify and respond to potential risks to the DIF, natural disasters, public policy changes, and sudden economic or financial market crises could cause broad losses within the financial services industry and the DIF. In addition, a fraud perpetrated on a financial institution could result in a sudden and unforeseen loss to the DIF.

1.3 The Deposit Insurance Fund and system remain strong and adequately-financed.

Means & Strategies:
The FDIC’s continued status as an independent agency is crucial to its ability to objectively assess risks and set appropriate assessment rates. The FDIC maintains the viability of the DIF by investing the fund, monitoring and responding to changes in the reserve ratio, collecting risk-based premiums, and evaluating the deposit insurance system in light of an evolving financial services industry. It analyzes on an ongoing basis the growth or shrinkage of estimated insured deposits, the current assessment base, loss expectations, interest income earned on the fund, and operating expenses. This information is used to develop a schedule of risk-based assessment rates.

The FDIC Board of Directors must establish a designated reserve ratio for the DIF between 1.15 percent and 1.50 percent and sets assessment rates to meet that target within a time frame that the Board deems appropriate.

Recent bank failures significantly increased the DIF’s losses, resulting in a decline in the reserve ratio. As of September 30, 2008, the reserve ratio stood at 0.76 percent, down from 1.01 percent at June 30 and 1.19 percent at March 31. The law requires that the Board adopt a restoration plan when the DIF reserve ratio falls below 1.15 percent or is expected to do so within 6 months. Absent extraordinary circumstances, the restoration plan must provide that the reserve ratio increase to at least 1.15 percent no later than five years after the plan’s establishment. The Board adopted a restoration plan on October 7 that was based on higher assessment rates. Consistent with that plan, the Board also authorized publication of a notice of proposed rule making (NPR) that would raise assessment rates and make other changes to the assessment system in 2009. The other changes are primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments.

External Factors:
As discussed above, loss of independence could pose a risk to the agency and to the fund. In addition, industry consolidation presents benefits and risks to the DIF. While the risk to the fund is diminished because of the diversification benefits of consolidation (along geographic and product lines), the concentration of deposits in fewer insured depository institutions increases the risks to the fund in the event a large insured depository institution fails.

1.4 The FDIC resolves the failure of insured depository institutions in the manner least-costly to the Deposit Insurance Fund.

Means & Strategies:
When an institution fails, the FDIC facilitates an orderly least-cost resolution.¹ Using an estimated value of the failing institution’s assets and liabilities, the FDIC markets the institution to potential bidders. After analyzing the bids received, the FDIC conducts a least-cost test determination and selects the least-cost strategy to pursue.

External Factors:
In accordance with law, if a failure threatens serious adverse systemic effects on economic conditions or financial stability, resolution strategies other than the least-cost resolution may be employed.

1.5 The public and FDIC-insured depository institutions have access to accurate and easily understood information about federal deposit insurance coverage.

Means & Strategies:
To inform consumers and FDIC-insured institutions about federal deposit insurance coverage, the FDIC provides financial institutions with a variety of educational tools and materials that are designed to help customers understand their deposit insurance coverage. In addition, the FDIC employs a variety of other approaches to disseminate information on deposit insurance coverage:

• Operation of a toll-free call center² staffed by specialists who respond to questions from depositors and bankers.
• Training and other educational opportunities to help bank employees better understand the FDIC’s deposit insurance rules.
• An array of web-based educational resources for consumers and bankers.
• A wide range of publications and videos explaining how FDIC deposit insurance works.

In 2008, in conjunction with the celebration of its 75th anniversary, the FDIC initiated a comprehensive nationwide campaign to raise public awareness about the successful history of the deposit insurance program through regional educational events, print advertisements, and the release of new, easy-to-read brochures on deposit insurance coverage.

External Factors:
A significant rise in the volume of bank failures or publicity that raises public concerns about the possibility of significant bank failures could result in bank runs by misinformed depositors or public avoidance of an insured depository institution.

Timely, accurate and understandable information is essential to alleviating these risks. An increased volume of bank failures and public concern about the possibility of additional failures could also result in substantial increases in demand for information about FDIC insurance coverage that could temporarily exceed the FDIC’s capacity to provide such information. In such cases, the FDIC would augment staff resources for this function as quickly as possible.

¹ In resolving a failing institution, the FDIC calculates the estimated cost of various resolution options and selects the option resulting in the lowest total estimated cost to the DIF.
² 877-ASK-FDIC (877-275-3342); 800-925-4618 (TDD-for hearing impaired)