FDIC holds line on bank fees despite sharp deposit growth

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WASHINGTON — The Federal Deposit Insurance Corp.'s board voted unanimously to maintain current assessment rates for banks despite a sudden hit to the agency's insurance fund.

In August, the FDIC announced that the Deposit Insurance Fund had fallen to 1.3% of estimated insured deposits in the second quarter, 9 basis points below the previous quarter and 5 basis points below the agency's statutory minimum. The agency cited an unprecedented surge in deposit growth in the early months of the coronavirus pandemic as the cause, rather than any major loss to the DIF from bank failures.

The agency is required by law to develop a restoration plan whenever the DIF's reserve ratio falls below 1.35%. But officials said at this point they will continue to monitor the situation with the expectation that deposit growth will stabilize, boosting that ratio without an insurance price increase.

“While subject to considerable uncertainty, it is the FDIC’s view that raising assessments based on two quarters of extraordinary insured deposit growth would be premature,” FDIC staff wrote in the restoration plan presented to the board.

In the memo, the agency said for the first half of the year, estimated insured deposits had grown by an amount equal to roughly three years of growth during a more normal period. The DIF balance totaled $114.7 billion at the end of the second quarter, when the fund had earned nearly $1.8 billion in assessment income. Under the FDIC's current assessment rate schedule, the average assessment rate last quarter was 4 basis points per total assets minus its average tangible equity.

FDIC officials repeatedly emphasized the short-term nature of the spring and summer’s explosive deposit growth, as well as a murky economic outlook, as reasons for not raising rates quite yet.

“Of course, we're living in highly uncertain times, and these estimates are not predictions,” FDIC Chair Jelena McWilliams said in prepared remarks. “As part of the restoration plan, we will closely monitor economic conditions, the health of the banking sector and deposit growth trends, and FDIC staff will provide updates to the Board of Directors not less than semi-annually.”

Agency staff stressed that assuming a return to normal deposit growth, the fund would likely recover without adjusting assessment rates within eight years — the length of time allowed by law to restore DIF reserves once the fund falls below its legal minimum.

“For example, if insured deposits grow at an annual rate of 2.5 percent over the next 8 years, the DIF could absorb losses of up to $23.7 billion and still reach the minimum reserve ratio requirement within 8 years” without needing to raise assessment rates, FDIC staff wrote in their restoration plan.

But the agency also signaled that it would consider raising assessments if the nation’s economic outlook worsens.

“DIF loss projections may increase if the quality of [insured depository institution] assets quickly deteriorates or capital markets become severely constrained,” FDIC staff wrote in the memo. “Consequently, in order to fulfill the statutory requirement to return the fund reserve ratio to 1.35 percent, the FDIC may need to adopt higher assessment rates than those included in the current assessment rate schedule.”

Martin Gruenberg, a longtime director on the FDIC board and a frequent dissenting voice during McWilliams’s tenure, voted in favor of the proposal along with the board’s other three members.

“I believe the restoration plan before the board today takes a balanced approach,” Gruenberg said in prepared remarks. “It underscores the uncertainty of the outlook, the need for the FDIC to monitor future developments closely, and the potential necessity for the board to take action going forward to ensure the adequacy of the Deposit Insurance Fund.”

Rob Nichols, president and CEO of the American Bankers Association, commended the FDIC for not raising assessment rates. “By maintaining the current assessment schedules, the FDIC recognizes that the recent unprecedented surge in deposits has been due to the extraordinary federal assistance in response to the global pandemic and customers seeking the safest place to keep their money,” Nichols said.

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