Bank Failures and the Federal Deposit Insurance Corporation

Darryl E. Getter
Specialist in Financial Economics

The Federal Deposit Insurance Corporation (FDIC) was established as an independent government corporation under the authority of the Banking Act of 1933, also known as the Glass- Steagall Act (P.L. 73-66, 48 Stat. 162, 12 U.S.C.), to insure bank deposits. The FDIC is funded through insurance assessments collected from its member depository institutions and held in a Deposit Insurance Fund (DIF). The proceeds in the DIF are used to pay depositors if member institutions fail. 

The DIF is currently far below its statutory minimum requirement. Prior to 2006, the FDIC was unable to collect assessments from its member banks when the DIF reached its statutory limit, which injected a procyclical bias into the pricing of deposit insurance. The number of bank failures increased substantially beginning in 2008. Given both the surge in bank failures and the procyclical bias in the pricing structure, the DIF is now almost depleted. This report discusses various alternatives for increasing the DIF as well as a proposal to improve the pricing of deposit insurance. 

This report begins with a general overview of the FDIC, followed by a discussion on the pricing of deposit insurance. In particular, the procyclical bias injected into the pricing of deposit insurance is explained. Next, recent efforts by the FDIC to replenish the DIF are presented as well as additional options that vary in the degree of burden administered to banks. Finally, this report focuses on the pricing of deposit insurance to minimize future risks to the DIF. H.R. 2897, the Bank Accountability and Risk Assessment Act of 2009 (Representative Luis Gutierrez et al.), has been introduced in the House to help mitigate risks that institutions, which may be determined systemically important, may have on the DIF. This report analyzes the possible impact of H.R. 2897. An appendix to this report provides information regarding the FDIC's Temporary Liquidity Guarantee Program.


Date of Report: March 5, 2010
Number of Pages: 12
Order Number: R40843
Price: $29.95

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