Bank Insurance Fund

Aug 29, 2022 By Triston Martin

BIF was a division that was part of the Federal Deposit Insurance Corporation, providing insurance to banks that weren't considered savings or loan associations. The BIF was established in response to the crisis in savings and loans in the 1980s.

Understanding the Bank Insurance Fund

The BIF was an insurance pool that was created in 1989 by the FDIC to protect deposits of banks that were part of the Federal Reserve System. The BIF was established to segregate bank insurance funds from the money for thrift insurance. A thrift bank is a financial institution that specializes in providing savings accounts and offering home mortgages. The funds for thrift insurance were derived via the Savings Association Insurance Fund.

Banks were enticed to change their classifications to either a thrift to a bank to a thrift or the latter to an institution, based on which fund was able to charge lower fees at that moment in time. This resulted in an act known as the Federal Deposit Insurance Act of 2005, which dismantled BIF, the Savings Association Insurance Fund, and the BIF and established one Deposit Insurance Fund.

How Does a Bank Insurance Fund Work?

In the wake of BIF formation, two distinct branches under FDIC coverage were established. The branches include BIF in addition to SAIF. In 2006, Congress combined the two banks to make the Deposit Insurance Fund. In the initial quarter of 2017, there was a substantial increase in the amount of DIF, as reported by the FDIC. The objective this fund serves is to provide depositors with liquidated banks. FDIC also states that each bank has to establish an initial DRR of 1.35 percent of the estimated insured deposit or an equivalent proportion of the latest assessment base, the average aggregated total assets less total tangible liability.

If the reserve ratio is below either Designated Reserve Ratio or 1.35 or FDIC estimates for the ratio to fall in six months or less, the FDIC is required to establish a restoration program that provides DIF with the possibility of returning to 1.35 percent in the next eight years. Over the course of eight years, FDIC has to undertake required steps to return its reserve ratio to 1.35 percent of the approximated insured deposits until September 30, 2020. FDIC is required to meet the obligation to offset the impact of small institutions that hold assets worth under $10 billion. The condition for the time is that the reserves ratio will reach the DRR level of 1.35 percent at the end of September 2020, not 1015 by the close of 2016.

If the reserve ratio is greater than 100 percent, FDIC has to split DIF members' funds on over 1.5 required to remain in DIF; however, the FDIC Board of Directs could, at its sole discretion, limit or suspend declaration of dividends. Following the 2008-09 financial crisis, the poor performance of banks reached its peak in 2011, and since then, it has slowly slowed down.

There was a decline in the number of companies included in the FDIC problem registers from 123 listed in December 2016 to 123 to 183 by the close of 2015. The number of bank problems once 888 in March of 2011 has decreased quarterly and is at its lowest since 2008's second quarter. Banks failing continues to decline, as five failed in 2016 compared to eight failures in 2015.

The Deposit Insurance Fund

The main purposes for the DIF are the following:

  • Insure deposits and safeguard the bank depositors who the banks insure.
  • To resolve bank failures

The DIF is funded mostly by quarterly assessments of insured banks. However, it also earns interest from its securities. The DIF is decreased by the loss provisions for banks that fail and through FDIC operational expenses.

Special Considerations

As a response to these changes to the law and the statutory revisions, the FDIC came up with a comprehensive long-term management strategy for the DIF created to decrease pro-cyclicality, achieve moderate, stable assessment rates across the credit and economic cycles, and also maintain an adequate balance in the fund even in the event of a financial crisis. The FDIC Board ratified the existing assessment rate schedules and the DRR, which was set at 2% pursuant to the plan.

The balance of the DIF was $110.3 billion during the quarter that ended in April of this year, up $1.4 billion from the close of the prior quarter. The increase in the fourth quarter was driven by assessment income and the interest paid on investment securities owned through the DIF. The reserve ratio was the same as the previous quarter, which was 1.41 percent.

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