FDIC’s Restoration Plan: A Path to Solvency or a Recipe for Disaster?

WASHINGTON — The Federal Deposit Insurance Corporation (FDIC) Board of Directors has released its second semiannual update of 2023 on the Restoration Plan for the agency’s Deposit Insurance Fund (DIF), sparking concerns about the fund’s future solvency.

The Federal Deposit Insurance Act (FDI Act) requires that the FDIC Board adopt a restoration plan when the DIF’s reserve ratio—the ratio of the fund balance relative to insured deposits—falls below 1.35 percent. As of June 30, 2023, the DIF balance stood at $117.0 billion, with the reserve ratio declining from 1.25 percent as of December 31, 2022, to 1.10 percent. Despite this decline, the FDIC projects that the reserve ratio is likely to reach the statutory minimum of 1.35 percent by the statutory deadline of September 30, 2028.

The FDIC established the Restoration Plan in September 2020, after extraordinary deposit growth during the first half of 2020 caused the DIF’s reserve ratio to decline below the statutory minimum. The Plan maintained the assessment rate schedules in place at the time. However, on June 21, 2022, the FDIC Board amended the Restoration Plan, increasing deposit insurance assessment rates by 2 basis points for all insured depository institutions, effective in the first quarterly assessment period of 2023.

The increase in assessment rate schedules resulted in additional assessment revenue that slightly offset the decline in the DIF in the first half of 2023. FDIC Chairman Martin J. Gruenberg noted, “Had this rate increase not already been in effect, the Board might have been faced with a different projected path for the reserve ratio, and potential need for further current action, given the period of stress and the bank failures earlier this year.”

While the FDIC’s projections suggest that the DIF will reach the required minimum by 2028, critics argue that the plan is overly optimistic and may not be sufficient to address the ongoing challenges facing the banking industry. The FDIC’s Restoration Plan has sparked concerns about the fund’s future solvency, raising questions about the potential risks to depositors and the broader financial system.

The FDIC’s semiannual update on the Restoration Plan highlights the ongoing challenges facing the banking industry and the need for continued vigilance and reform. As the FDIC continues to navigate the complex landscape of banking regulation, it is essential that policymakers and regulators work together to ensure the stability and solvency of the financial system.