Deposit Insurance: The Bank Insurance Fund

Publication Date: July 2002

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

The prosperity of the banking and thrift industries in recent years has spurred the Federal Deposit Insurance Corporation (FDIC) to propose reforming the system of deposit protection. Deterioration in the economy during the 2001 recession added to the impetus for reform. Two bills in the 107th Congress -- H.R. 3717 and S. 1945 -- have emerged as the primary vehicles to execute those and other proposed reforms. Both bills include controversial provisions to change the way in which the Bank Insurance Fund (BIF) operates and is funded.

In analyzing the proposals for changes to BIF, the report considers relevant history. Federal deposit insurance for commercial and savings banks in the United States was initiated in 1934 by the Federal Deposit Insurance Corporation (FDIC). The FDIC fund, as it was initially called, grew steadily for 50 years -- through the nation's recovery from the Great Depression, the economy's conversion to a war footing during World War II and its readjustment to "Cold-War" conditions in the 1950s and 1960s. Benefitting from this period of recovery, followed by a time of relative bank stability, the fund had grown to over $18 billion by the mid 1980s.

The economy began to develop maladjustments during the 1970s, however. They, together with supervisory inadequacies, led to a very large number of costly bank failures in the mid- and late-1980s and early-1990s that adversely affected the FDIC fund. The then statutory requirement to charge banks a flat rate premium for each dollar of their domestic deposits -- moderated by rebates when the fund was considered to be well-capitalized -- meant that the fund balance would change with the condition of the banking industry. Consequently, when the condition of the banking industry deteriorated, the fund's $18 billion in reserves was quickly dissipated. The fund became illiquid by the end of the 1980s and was insolvent by 1991.

That experience led to a large number of legislative changes. Many of the changes made during the early 1990s -- prompt corrective action, least cost resolution, risk-adjusted premiums, limiting the adoption of "too big to fail" policies, depositor preference -- were intended to protect the Bank Insurance Fund (BIF), as it was renamed in 1989, from severe losses in the future. Other changes -- increased insurance premiums and a switch from fixed premiums to a fixed target for the fund -- were meant to protect the taxpayer from having to come to BIF's rescue.

Certain of these changes now present problems for funding and operating BIF and have led to the current proposals for changing the current arrangements. This report concludes by describing BIF's current condition as good, but seeing its outlook for the near future as depending on the future, possibly uncertain, path for the economy.

This report may be updated to reflect new developments.