Yesterday, at an open meeting, the FDIC Board of Directors, upon the recommendation of the FDIC staff as reflected in a proposed memorandum and Notice of Proposed Rulemaking on Assessment Rates, Dividends and the Designated Reserve Ratio, voted to approve a comprehensive, long-range restoration plan for the deposit insurance fund (DIF), exercising authority granted to the FDIC by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to change the reserve requirements under the DIF, which was the subject of a public forum late last month.

The restoration plan is intended to restore the DIF to a long-term positive fund balance, even during periods of large fund losses, and maintain steady, predictable assessment rates throughout economic and credit cycles. In connection with its adoption of the restoration plan, the FDIC also voted to forego a 3% assessment that would otherwise have applied to FDIC-insured institutions starting January 2011.

In approving the restoration plan, the FDIC staff reviewed for the Board the financial condition of the DIF as measured by the DIF reserve ratio, or the ratio of funds in the DIF to insured deposits. The staff indicated that, based on updated income loss and reserve ratio projections, they were now projecting that losses from 2010 through 2014 will be about $52 billion, an $8 billion decline from the $60 billion that the staff projected in June, and now estimated that DIF reserve ratio could reach 1.15% by the end of 2018 without the three basis point uniform increase in rates that was scheduled to go into effect in January 2011.

The restoration plan not only provides that the DIF reserve ratio would reach 1.35% by September 30, 2020, as required by Dodd-Frank, but sets the minimum target ratio at 2%. Under the restoration plan, once the reserve ratio reaches 2%, instead of paying dividends, the FDIC would lower assessment rates so that the average rate would decline about 25%. The decline would be 50% when the reserve ratio reaches 2.5%.

The restoration plan received support from FDIC Vice-Chairman Martin J. Gruenberg, who stated that the increase in the DIF reserve ratio “allows us to avoid the short term cyclical effects of the proposed assessment increases next year at the same time allowing [the FDIC] to put into place a long-term plan that will really provide for a stronger DIF.” Chairman Bair agreed, stating that the 1.25% reserve ratio was “woefully inadequate” in the face of the financial crisis, and that a 2% ratio was “better grounded.” She noted that “while it is difficult to make long-term projections, we are trying to give the industry greater certainty regarding what rates will be over the long run.”