Deposit Insurance Reform

Last Updated: March 2006

STATUS

On February 15, 2006, President Bush signed the Deficit Reduction Act (H.R. 4636) into law. H.R. 4636 included the Federal Deposit Insurance Reform Conforming Amendments Act of 2005.

The recently enacted law contains many AFP supported provisions including:

• the merging of the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) into the new Deposit Insurance Fund (DIF)
• the elimination of the current 1.25 percent hard target Designated Reserve Ratio (DRR) and provide the FDIC with the discretion to set the DRR within a range of 1.15 to 1.50 percent for any given year
• a compromise on coverage limit increases
• a one-time credit for institutions that paid into the deposit insurance funds prior to December 31, 1996

The new law eliminates the prohibition that prevented the FDIC from charging premiums to well-managed and highly capitalized institutions. AFP supported maintaining the exemption for low risk institutions. However, the law does include the provision that the new risk based premium plan cannot bar a bank from the lowest risk category simply based on size.

Also included is an increase in the deposit insurance limit for certain retirement accounts. Responding to the new law, the FDIC recently approved final rules that will raise the deposit insurance coverage on those retirement accounts to $250,000 from $100,000. The increase will become effective on April 1, 2006.

AFP ACTION – Representing corporate depositors, who are the dominant funders of deposit insurance, the AFP supports deposit insurance reform. AFP advocated that any changes to the deposit insurance system should adhere to the following principals: (a) maintain coverage limits at 100,000, (b) allow a range for required reserves and eliminate the fixed 1.25 ratio "cliff," (c) assess special premiums on “free riders,” (d) grant premium credits rather than rebating premiums to financial institutions, and (e) assess only insured balances. AFP is the only corporate voice in the deposit insurance reform debate.

AFP met with FDIC, provided extensive written comments on the issue, submitted testimony at House hearings, submitted letters to House Financial Services Committee and Senate Banking Committee, and met with staff at the U.S. Department of Treasury.