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Tuesday, January 25, 2011

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 below its statutory minimum requirement. As a result, the FDIC raised assessments on member depository institutions during a banking downturn, which drew 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. By expanding the assessment base to cover both deposit and non-deposit liabilities as well as eliminating the procyclical bias in deposit insurance pricing, Congress has also provided the FDIC with greater ability to meet the needs of the DIF. Determining whether additional legislative action would be necessary to restore the DIF to the level required by statute may depend on the number and pace of bank failures.

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, changes resulting from passage of P.L. 111-203, the Dodd- Frank Wall Street Reform and Consumer Protection Act, to support the DIF, will be reflected in this report. Appendixes 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 (TLGP).

Date of Report: January 3, 2011
Number of Pages: 16
Order Number: R41226
Price: $29.95

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