The U.S. Federal Deposit Insurance Corporation will maintain its current schedule of assessments for banks, even though an historic influx in deposits made its reserve ratio fall below a legally mandated level.
FDIC’s board on Tuesday voted unanimously in favor of a plan to restore its required reserve ratio of 1.35% by 2028, after the reserve level fell to 1.30% at the end of the second quarter. By law, the FDIC is required to quickly enact a plan that would restore the 1.35% reserve ratio within eight years, barring “extraordinary circumstances.”
The drop in the reserve ratio, which hit its peak of 1.41% in December, is attributed to an “unprecedented” growth in insured deposits during the first half of 2020 due to actions undertaken by depositors and the federal government in response to COVID-19. An increase in total insured deposits affects the denominator, thereby lowering the overall reserve ratio.
“In establishing a restoration plan, we explored a range of reasonable estimates of future insured deposit growth and future potential [Deposit Insurance Fund] losses,” FDIC Chair Jelena McWilliams said. “Based on these estimates, we project the reserve ratio would return to a level above 1.35% without any increase in the deposit insurance assessment rate schedule.”
The anxieties stemming from the pandemic led to a 4.5% bump in insured deposits in the first quarter and an 8.2% increase in the second quarter, two of the highest growth rates since 1991, FDIC said. In sum, the insured deposit growth in those two quarters matches roughly three years of growth in pre-pandemic years.
As of June 30, the Deposit Insurance Fund topped a record $114.7 billion, up $4.3 billion from the end of 2019. At the same time, insured deposits grew $1 trillion in the first half of 2020, resulting in the 11 basis point drop in the reserve ratio.
Coupled with a sudden pause in daily activities, the direct government aid to individuals in the form of $1,200 checks resulted in a record high personal savings rate of 33.7% in April, up from 7.2% in December. Since then, the personal savings rate has steadily declined to 17.8% in July, FDIC said, while monthly savings more than doubled to $280 billion in June.
In response to federal injection of funds, FDIC in June made adjustments to the risk-based premium formula and an insured institution’s total assessment amount due to help mitigate a spike in assessment fees for banks. Still, FDIC made $1.4 billion and $1.8 billion in net assessment revenue in the first and second quarters, respectively, versus $1.3 billion in the fourth quarter of 2019.
In addition to keeping the assessment rates level, the FDIC plans to monitor factors affecting reserve levels like deposit balance trends and potential losses, and update its projections for the insured deposit fund at least semiannually. The board may make changes to its restoration plan given high economic uncertainty, the agency said.
The restoration plan “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,” said Martin Gruenberg, member of the FDIC’s board of directors.
The plan comes as FDIC’s deadline to achieve a 1.35% reserve ratio nears. In 2010, Congress increased the required reserve ratio in response to the 2008 financial crisis and gave the agency until September 2020 to reach it. FDIC first topped the minimum reserve level in 2018 and has aimed for 2% every year since 2010.