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