Explainer: What is the FDIC's deposit insurance fund used to backstop failed banks?

First Republic Bank

11/05/2023 18:22

(Recasts to reflect impact of failure of FRC, details on
special assessment fee)
    By Hannah Lang
       MAY 11 (Reuters) - 
    Created after the Great Depression, the Federal Deposit
Insurance Corp (FDIC) is the independent federal agency charged
with insuring depositors in the case of bank failures by
reimbursing certain customer accounts.
    The agency's deposit insurance fund stood at $128 billion as
of last year, but with the failures of Silicon Valley Bank (SVB)
and Signature Bank, and the FDIC-brokered sale of First Republic
Bank to JPMorgan, it has taken an estimated $35.5 billion hit.
On Thursday, the FDIC said it was assessing a special fee to
replenish the fund following the failures.  
    Here's what you need to know about how the fund works: 
    
    WHAT IS THE DEPOSIT INSURANCE FUND?
    The deposit insurance fund helps to fulfill the agency's
guarantee on FDIC-insured bank deposits up to $250,000. In the
event an insured bank fails, the FDIC uses the fund to pay back
customers who had accounts under the limit. 
    In the case of SVB and Signature Bank, the U.S. government
determined that a "systemic risk exception" applied and
reimbursed all customers-- including those whose deposits
exceeded the $250,000 limit-- in an attempt to prevent further
contagion to the banking system.
    Throughout the FDIC's history, the insured deposit cap has
been raised multiple times, most recently in the wake of the
2008 financial crisis when lawmakers passed legislation raising
the cap from $100,000 to $250,000. 
    The agency is legally required to resolve failed
FDIC-insured banks using the least costly option to the fund. 
    The FDIC can also use the fund as a backstop to sweeten a
potential rescue deal by sharing losses on certain assets with
the acquirer.
    The FDIC agreed with JPMorgan to share losses on First
Republic's single family, residential and commercial loans,
while First Citizens BancShares  FCNCA.O , which acquired SVB in
March, agreed to share losses on some of SVB's commercial loans.
    
     
  
    HOW IS IT FUNDED?
    The fund comprises quarterly fees the FDIC charges insured
banks, and interest it earns on investing the cash in U.S.
government obligations, like Treasury bills. The law requires
the fund maintains $1.35 for every $100 of insured deposits.
    The quarterly bank fee varies depending on a bank's
liabilities and its risk profile. 
        
  

     WHAT HAPPENS WHEN THERE ARE LOSSES TO THE FUND?
    Invoking the systemic risk exception, as was the case with 
Silicon Valley Bank and Signature Bank, requires the FDIC to
recoup losses through a special assessment fee, and the law
gives the FDIC significant flexibility in designing such a fee.
        On Thursday, the FDIC proposed applying a special
assessment fee of 0.125% to the uninsured deposits of banks in
excess of $5 billion, based on the amount of uninsured deposits
a bank held at the end of 2022. The fee as proposed would apply
to around 113 of the largest lenders in the U.S., the FDIC
estimated. 
    While the fee applies to all banks, in practice it would
affect banks with more than $50 billion in assets, which would
cover over 95% of the cost, the agency said. No bank with less
than $5 billion in assets would pay any fee, according to the
FDIC. The fee would be collected over eight quarters beginning
in June 2024, but could be adjusted as the estimated losses to
the insurance fund change.

 (Reporting by Hannah Lang in Washington; Editing by Megan
Davies, Aurora Ellis and Michelle Price)
 ((Hannah.Lang@thomsonreuters.com;))