WASHINGTON — After being wiped out during the financial crisis, the government's fund to protect insured deposits has steadily improved over the last five years- but the Federal Deposit Insurance Corp. will soon arrive at a critical juncture about how to manage it.

Under the Dodd-Frank Act, the agency must issue a proposal that would require large banks to bear the brunt of raising the fund's reserve ratio even higher once it reaches a statutorily imposed minimum. With the fund rapidly increasing, the agency is likely to put out a plan by the end of 2015 — sparking a debate over what the FDIC might do.

"The community banks are certainly looking forward to see how the FDIC will indemnify" them and raise the Deposit Insurance Fund's ratio of reserved to insured deposits, said Chris Cole, executive vice president and senior regulatory counsel at the Independent Community Bankers of America.

Under the Dodd-Frank Act, the FDIC is required to raise the DIF's reserve ratio to 1.35% by 2020. But when the fund reaches 1.15%, the law says banks with more than $10 billion of assets must shoulder the burden of raising the remaining 20 basis points.

As of the end of the second quarter, the reserve ratio stood at 1.06%. FDIC Chairman Martin Gruenberg said earlier this month that it could hit the 1.15% threshold in the near future.

"The threshold issue that will be presented for us is when the reserve ratio of the fund reaches 1.15%," Gruenberg said during a briefing on second quarter industry results. "We are anticipating reaching that 1.15% level perhaps sometime next year."

Under the FDIC's current assessment plan, large banks already generally pay more because an institution's total premiums are calculated based on its size and risk of harming the fund. Shifting the balance even more towards larger institutions could spark resistance, some said.

"The fund is going to get the point where the assessment burden will shift disproportionately to the larger banks and they see this coming, but it hasn't started to bite yet in terms of actual cost," said Bert Ely, a banking consultant in Alexandria, Va. "It will be interesting to see if pressure builds to maybe have some reassessment of the manner in which premiums are being assessed."

The fund has been steadily growing as failures have decreased and the FDIC has received assessment income. The fund also recaptured more than $20 billion in loss provisions since 2009, helping to boost the ratio.

Some argue that given the trajectory of the fund, the FDIC can lower assessments for all banks even while it shifts the burden of rebuilding it to larger institutions.

"The projections show that the FDIC could fulfill the [requirement that large banks bare the cost of getting the fund from 1.15 to 1.35] with lower overall average assessments for everyone," said Robert Strand, a senior economist at the American Bankers Association. "It is possible the overall assessment could go down for large banks and go down more for small banks," if estimated losses to the fund continue to decrease as they have in recent years.

Several analysts agreed the agency has a range of options. The FDIC could simply charge higher premiums for bigger banks, or consider changes to the risk factors that determine a bank's premium rate to more significantly affect large institutions, among other possible solutions.

"At the simple end of the spectrum, the FDIC could simply adjust based on size," said Bimal Patel, a financial services lawyer at O'Melveny & Myers and a former FDIC official. "Or it could look at the risk profiles of the banks more specifically and calibrate the true-up based on additional considerations that it believes influence potential loss to the DIF."

Another issue is the FDIC's longer term strategy. The FDIC has the option to increase the reserve ratio above 1.35%, and has set a non-binding target of 2% to account for any risk of the fund being hit hard from future crises. However, were the fund to hit 2%, assessments would then fall. They would fall again were the fund to subsequently hit 2.5%.

But some say a 2% reserve ratio may not be necessary.

"I think the question is, What is a reasonable fund level that provides the protection that would be needed in another downturn?" said James Chessen, chief economist at the ABA. "Each dollar that is being paid in premiums is another dollar that cannot be used in a bank's community."

Cole agreed, arguing that a 2% reserve ratio is "a little bit too much."

But the FDIC is unlikely to change course when it comes to building up the reserve ratio since the agency wants to avoid the situation that befell it during the financial crisis, when the reserve ratio went into negative territory.

"My sense is that the FDIC is going to going to continue the course as is because it wants the fund to be substantially larger," said John Douglas, a partner at Davis Polk and former general counsel at the FDIC. "I don't know that there is any reason to expect a dramatic shift in what the FDIC is doing."

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