FDIC Says Deposit Insurance Fund Should Recover by Late 2018

The Federal Deposit Insurance Corp. fund guaranteeing customer deposits in U.S. banks is rebuilding at a faster pace as bank failures slow from their 2010 peak, the agency said in a report today.

The federal backstop, funded by assessments on banks, was at $11.8 billion at the end of 2011, up from a deficit of $20.9 billion at the end of 2009 as the credit crisis caused banks to fail. The FDIC predicted it will spend $12 billion to cover bank shutdowns through 2016, according to a report updating the fund’s health. That five-year cost is $7 billion less than the FDIC’s last five-year projection in October.

The fund remains below its required reserve ratio of 1.15 percent of the deposits it insures and the agency expects it to reach that goal by the latter half of 2018. The FDIC says it anticipates this year’s assessments on banks to stay at about the same $13.5 billion level as in the previous two years. The reserve ratio was at 0.17 percent at the end of 2011, the agency said. The Dodd-Frank Act of 2010 required the FDIC to increase the target ratio to 1.35 percent -- a level it must reach by Sept. 30, 2020.

The fund returned to a positive balance last year. Last week, Fort Lee Federal Savings Bank of Fort Lee, New Jersey became the 17th FDIC-insured institution to fail this year, estimated to cost the fund $14 million.

‘Problem List’ Shrinks

The number of banks on the FDIC’s confidential “problem list” has been declining, going from 844 to 813 in the final quarter of 2011, according to the agency’s quarterly banking profile.

“The FDIC has been overly conservative in setting aside reserves for possible failures that did not occur,” said James Chessen, executive vice president and chief economist of the Washington-based American Bankers Association, in a statement that argued assessments are too high for what the fund needs. “Banks will provide more than $65 billion in revenue over the next five years, more than five times what the FDIC expects in failure costs.”

The FDIC reports new five-year projections for the fund’s health twice a year. Today’s meeting of the board was the first for new members Thomas Hoenig and Jeremiah O. Norton, who were sworn in last week after recent Senate confirmations, which also established FDIC board member Thomas J. Curry as chief of the Office of the Comptroller of the Currency.

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net.

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net.

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