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Monday, June 7, 2010

Loss Exposure 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 what is now known as the Deposit Insurance Fund (DIF). The proceeds in the DIF are used to pay depositors if member institutions fail.

Beginning in 2008, the number of bank failures has increased substantially, and the DIF is currently below its statutory minimum requirement. As a result, the FDIC has raised assessments on member depository institutions during a banking downturn, which has drawn attention to a procyclical bias in assessments. The FDIC, therefore, has made efforts to revise deposit insurance assessments to better reflect the total loss exposure to the DIF.

This report begins with an overview of the FDIC, followed by an explanation of the loss exposure and total risk to the DIF. Next, the report discusses issues regarding the setting of deposit insurance premiums and presents changes to the assessment system proposed by the FDIC to address some of the issues. Finally, recent efforts proposed by Congress to support the DIF are discussed. H.R. 2897, the Bank Accountability and Risk Assessment Act of 2009 (Representative Luis Gutierrez et al.); H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009 (Representative Barney Frank et al.); and S. 3217, the Restoring American Financial Stability Act of 2010 (Senator Christopher Dodd) address modifications to the deposit insurance assessment system. Appendices to this report provide information regarding the FDIC's efforts to support the DIF during the recent period of financial distress, which includes information about the Temporary Liquidity Guarantee Program.

Date of Report: May 24, 2010
Number of Pages: 15
Order Number: R41226
Price: $29.95

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