Banking and Finance Law Daily Wrap Up, DODD-FRANK ACT—Deposit Insurance Fund reserve ratio on track to meet 2020 goal, (Apr 9, 2014)

By Lisa M. Goolik, J.D.

According to an update by staff of the Federal Deposit Insurance Corporation, under the current assessment rate schedule, the Deposit Insurance Fund (DIF) reserve ratio will reach 1.15 percent in 2019 and remains on track to reach 1.35 percent in 2020. FDIC staff reports that the DIF balance has risen four years in a row and stood at $47.2 billion on Dec. 31, 2013, resulting in a reserve ratio of 0.79 percent.

The Dodd-Frank Act requires that the DIF reserve ratio reach 1.35 percent by Sept. 30, 2020. The FDIC’s Restoration Plan requires the FDIC to update DIF loss and income projections at least semiannually, which allows the FDIC to evaluate whether growth in the DIF is likely to be sufficient to meet the statutory requirements.

Current outlook. The outlook for the reserve ratio depends on forecasts and assumptions for several financial measures, including bank failures, changes in bank risk profiles, growth in the assessment base, fund investment income, operating expenses, and growth in estimated insured deposits. According to the report, positive trends that are affecting the DIF include:

• The banking industry continues to recover at a gradual pace. Industry earnings have posted a year-over-year increase in 17 of the last 18 quarters, including the fourth quarter 2013. The average return on assets for the fourth quarter 2013 increased to 1.10 percent from 0.96 percent for the same quarter one year ago. More than half of all banks reported improvement in quarterly net income from one year ago, and only 12 percent were unprofitable, down from 15 percent in the same quarter in 2012.

• The total number of institutions on the FDIC's Problem Institution List continues to drop. The number of problem banks, which peaked at 888 in March 2011, has declined in every quarter since then, and is now at 467—its lowest level since June 2009. The improvement in the number of problem institutions reflects a continued decline in the rate of supervisory rating downgrades, as well as an increase in the rate of supervisory rating upgrades.

• Bank failures continued to decline in 2013. There were 24 bank failures in 2013, down from 51 in 2012, and down substantially from the recent crisis peak of 157 in 2010. The assets of banks that failed in 2013 totaled $6.0 billion, down by almost half from the $11.6 billion in total assets of banks that failed in 2012.

However, FDIC staff cautions that challenges still remain for the industry. Revenue growth remains weak, reflecting modest loan growth and narrow margins. The prolonged low interest rate environment has created incentives for institutions to reach for yield by increasing the share of longer-term assets on their balance sheets.

Updated projections. FDIC staff also updated DIF balance and reserve ratio projections. The projections are based on recently available information about banks expected to fail in the near term, on analyses of longer-term prospects for troubled banks, and on trends in ratings, failure rates, and loss rates. The current projected total cost of failures for 2013-2017 remains at approximately $4 billion. For the new five-year projection period beginning in 2014 and ending in 2018, staff projects failures also will cost the DIF $4 billion.

For 2014, staff currently projects DIF earned assessment income of approximately $9 billion, down from the $9.7 billion earned in 2013. The decrease in projected revenue results from improvement in banking industry performance and conditions reflected in measures that determine risk-based premium rates.

Based on staff projections of the DIF's future cash balance, current liquid assets of $42.5 billion, together with future assessment cash collections and dividends from receiverships, should be sufficient to meet all FDIC obligations during the next five years.

RegulatoryActivity: BankingOperations DepositInsurance DoddFrankAct