Federal Deposit Insurance Corporation Restoration Plan, 59306-59309 [2020-20690]
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Federal Register / Vol. 85, No. 183 / Monday, September 21, 2020 / Notices
Commission has no direct involvement.
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impacts under the Privacy Act.
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In general there is no need for
confidentiality with this collection of
information.
Needs and Uses: On June 2, 2014, the
Commission released a Report and
Order, FCC 14–50, GN Docket No. 12–
268, ‘‘Expanding the Economic and
Innovation Opportunities of Spectrum
Through Incentive Auctions.’’ This
order adopted a revision to a
Commission rule, 47 CFR 74.802(b), to
permit low power auxiliary stations
(LPAS), including wireless
microphones, to operate in the bands
allocated for TV broadcasting at revised
distances from a co-channel television’s
contour, and provided LPAS operators
to operate even closer to television
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are coordinated with TV broadcast
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approval for an extension of the
currently approved information
collection for the coordination process
adopted in the Commission’s Report
and Order, FCC 14–50 for such cochannel operations, in 47 CFR
74.802d(b)(2).
Federal Communications Commission.
Marlene Dortch,
Secretary.
[FR Doc. 2020–20723 Filed 9–18–20; 8:45 am]
BILLING CODE 6712–01–P
FEDERAL DEPOSIT INSURANCE
CORPORATION
Federal Deposit Insurance Corporation
Restoration Plan
Federal Deposit Insurance
Corporation (FDIC).
ACTION: Notice of establishment of
restoration plan.
AGENCY:
Extraordinary growth in insured
deposits during the first and second
quarters of 2020 caused the Deposit
Insurance Fund (the DIF or the fund)
reserve ratio to decline below the
statutory minimum of 1.35 percent.1 As
of June 30, 2020, the reserve ratio had
fallen below the statutory minimum and
stood at 1.30 percent, 9 basis points
below the reserve ratio as of March 31,
2020, and 11 basis points below its
recent peak of 1.41 percent as of
December 31, 2019. Prior to 2020, the
DIF reserve ratio had not decreased
since the fourth quarter of 2009.
The Federal Deposit Insurance Act
(the FDI Act) requires that the FDIC’s
Board of Directors (Board) adopt a
restoration plan when the DIF reserve
ratio falls below 1.35 percent or is
expected to within 6 months.2 Under
the FDI Act, the restoration plan must
restore the reserve ratio to at least 1.35
percent within 8 years of establishing
the Plan, absent extraordinary
circumstances.3
Therefore, pursuant to section
7(b)(3)(E) (12 U.S.C. 1817(b)(3)(E)), the
FDIC established the following
Restoration Plan (or the Plan) on
September 15, 2020.
1. The FDIC will monitor deposit
balance trends, potential losses, and
other factors that affect the reserve ratio.
2. The FDIC will maintain the current
schedule of assessment rates for all
insured depository institutions (IDIs).
3. At least semiannually, the FDIC
will update its analysis and projections
for the fund and, if necessary,
recommend any modifications to the
Plan, such as increasing assessment
rates.
While subject to considerable
uncertainty, based on a range of
reasonable (though highly uncertain)
estimates of future losses and assuming
a return to normal insured deposit
growth, the reserve ratio would return to
1.35 percent without further action by
the FDIC before the end of the 8-year
period beginning upon the
implementation of the Plan, as required
by law.
Detailed Analysis and Basis for Actions
Taken by the Restoration Plan
The FDI Act requires that the FDIC
publish in the Federal Register a
detailed analysis of the factors
considered and the basis for the actions
taken with regard to the Restoration
Plan.4 The following summarizes the
analysis the FDIC conducted that
formed the basis of the Restoration Plan.
Source of Decline in Reserve Ratio
The decline in the reserve ratio during
the first half of 2020 was solely a result
of extraordinary insured deposit growth.
Table 1 shows the components of the
reserve ratio for the last quarter of 2019
and the first two quarters of 2020. Over
this period, the DIF balance grew and
did not experience material losses. As of
June 30, 2020, the DIF balance totaled
a record $114.7 billion, up $4.3 billion
from the end of 2019. Meanwhile,
insured deposits grew by an estimated
$1 trillion, resulting in an 11 basis point
decline in the reserve ratio from the end
of 2019.
TABLE 1—FUND BALANCE, ESTIMATED INSURED DEPOSITS, AND RESERVE RATIO
[$ In billions]
4th Qtr 2019
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Beginning Fund Balance .............................................................................................................
Plus: Net Assessment Revenue ...........................................................................................
Plus: Investment Income a ....................................................................................................
Less: Loss Provisions ...........................................................................................................
Less: Operating Expenses ...................................................................................................
Ending Fund Balance b ................................................................................................................
Estimated Insured Deposits .........................................................................................................
Ending Reserve Ratio ..................................................................................................................
108.9
1.3
0.5
¥0.1
0.5
110.3
7,815.2
1.41%
1st Qtr 2020
110.3
1.4
2.0
*
0.5
113.2
8,164.2
1.39%
* = Less than $50 million.
a Includes unrealized gains/losses on available-for-sale securities.
b Components of fund balance changes may not sum to totals due to rounding.
1 The reserve ratio is calculated as the ratio of the
net worth of the Deposit Insurance Fund (fund
balance) to the value of the aggregate estimated
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insured deposits at the end of a given quarter. See
12 U.S.C. 1813(y)(3).
2 12 U.S.C. 1817(b)(3)(E)(i).
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3 12
4 12
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U.S.C. 1817(b)(3)(E)(ii).
U.S.C. 1817(b)(3)(E)(v).
21SEN1
2nd Qtr 2020
113.2
1.8
0.1
*
0.5
114.7
8,837.3
1.30%
The extraordinary growth in insured
deposits during the first half of 2020
was also unprecedented. As described
in more detail below, this increase
largely stemmed from actions
undertaken by depositors, both
businesses and individuals, as well as
government policy actions in response
to the Coronavirus 2019 (COVID–19)
pandemic. During the first half of 2020,
estimated insured deposits grew by 4.5
percent (17.9 percent, annualized) in the
first quarter and by 8.2 percent (33.0
percent, annualized) in the second
quarter—two of the highest growth rates
since quarterly reporting began in
1991.5 Together, estimated insured
deposits grew by an amount equal to
approximately three years of insured
deposit growth in the first two quarters
of 2020 (Chart 1).
As of June 30, 2020, the
unprecedented rate of insured deposit
growth stemming from the pandemic
had reduced the reserve ratio to below
the statutory minimum of 1.35 percent.
The extraordinary growth in insured
deposits during the first and second
quarters of 2020 is largely a result of
actions taken by monetary and fiscal
authorities, and by individuals,
businesses, and financial market
participants in response to the COVID–
19 pandemic. Deposit growth initially
intensified in March upon the outbreak
of the COVID–19 pandemic. As COVID–
19 infections spread throughout the
United States, individual states or major
metropolitan areas ordered millions of
Americans to stay home, severely
reducing their ability to engage in usual
commerce and forcing many businesses
to close temporarily or furlough
employees. Faced with economic
disruption and uncertainty, businesses
drew on their lines of credit and
conserved cash, increasing deposits.
Market volatility pushed investors to
safer assets, including cash and insured
deposits. Beginning in March, the Board
of Governors of the Federal Reserve
System (Federal Reserve) announced a
series of emergency actions, including
large-scale asset purchases and
emergency lending facilities, which
rapidly expanded its balance sheet by
more than $1 trillion and, with it, grew
IDI reserve balances and deposits.
As deposit growth associated with a
flight to safety began to stabilize, fiscal
stimulus and reduced spending applied
additional upward pressure on deposit
growth. As part of the Coronavirus Aid,
Relief, and Economic Security Act
(CARES Act), the U.S. government
provided over $1 trillion in direct
support to consumers and businesses
through business loans, expanded
unemployment insurance, and one-time
checks to individuals.7 Lending to small
businesses resulted in an increase in
deposits. For individuals, the resulting
surge in personal incomes from direct
government assistance, combined with
the dramatic reduction in discretionary
spending, fueled deposit growth and
lifted the personal savings rate to a
record high of 33.7 percent in April. The
personal savings rate remained elevated
through July at 17.8 percent, and
monthly savings more than doubled to
$280 billion in June from $116 billion
5 The growth in estimated insured deposits
experienced during the first and second quarters of
2020 was surpassed only by quarters in which the
growth rate was substantially impacted by a
temporary increase in coverage for noninterestbearing transaction accounts or a permanent
increase in the standard maximum deposit
insurance amount from $100,000 to $250,000,
including specifically only the fourth quarter of
2010, the third quarter of 2009, and the fourth
quarter of 2008.
6 The reserve ratio is based on total estimated
insured deposits at the end of a given quarter. The
FDIC will rely on the reserve ratio as of September
30, 2028, the first quarter-end date for which the
reserve ratio will be known after September 15,
2028, the end date of the 8-year period.
7 The CARES Act established the Paycheck
Protection Program, which facilitated credit to
small businesses through loans backed by the full
faith and credit of the U.S. Government. The
CARES Act also provided Economic Impact
Payments of up to $1,200 per adult and $500 per
child, based on income, and expanded the amount
of and eligibility for unemployment benefits. See
Pub. L. 116–136 (Mar. 27, 2020).
Factors That Affect the Ability of the
Reserve Ratio to Return to 1.35 Percent
Deposit balance trends, potential
losses, and other factors will affect the
ability of the reserve ratio to return to
1.35 percent within 8 years of
implementing the Restoration Plan. To
determine whether the reserve ratio has
reached the statutory minimum, the
FDIC will rely on the reserve ratio as of
September 30, 2028.6 Under the Plan,
the FDIC will closely monitor the factors
affecting the reserve ratio and, as they
become clearer, will update the Plan, as
necessary, to reflect any updated
assumptions.
Deposit Balance Trends
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in February, or $3.4 trillion compared to
$1.4 trillion on an annualized basis.
Insured deposit growth rates are
expected to decline compared to rates
experienced during the first two
quarters of 2020. During the third
quarter of 2020 to the week ending
August 19, 2020, estimated domestic
deposits (including both insured and
uninsured deposits) for all domestically
chartered commercial banks declined by
0.7 percent.8 In the near term, low
interest rates and reduced fiscal support
in the face of weak economic
conditions, including weak labor
markets, incomes, and reduced
consumer spending may place
downward pressure on deposit growth
as depositors draw down savings. Even
as economic conditions improve,
deposits may decline as the
precautionary behavior exhibited by
depositors subsides and individuals and
businesses redirect deposits toward
consumption and higher-yielding
investments.
While insured deposit growth rates
are expected to decline, deposit
balances, including insured deposits,
could remain elevated until the factors
that supported their recent growth
decline from their current levels,
particularly monetary and fiscal policy
and economic uncertainty. The Federal
Reserve has indicated that it will
continue to provide monetary policy
support in the near-term with a
continuation of asset purchases. In the
medium- to long-term, if the Federal
Reserve implements a gradual approach
to unwinding monetary policy, as it did
in the post-2008 period, reserves may
remain elevated for years, even after
economic conditions improve. The
impact on deposits of a prolonged
period of economic weakness is difficult
to predict, but it is possible deposits
may remain elevated if businesses and
consumers continue to hold back
spending under such a scenario. Under
the Restoration Plan, the FDIC will
monitor these deposit balance trends
and their impact on the ability of the
reserve ratio to return to 1.35 percent
within 8 years of establishing the Plan.
Potential Losses
Losses from past and future bank
failures affect the reserve ratio by
lowering the fund balance. In recent
years, the DIF has experienced low
losses from IDI failures. On average, five
IDIs per year failed between 2015 and
2019, at an annual cost to the fund of
about $400 million. Two IDIs have
failed thus far in 2020, marking the
sixth year in a row with few or no
failures.
Future losses to the DIF remain
uncertain as the length of the pandemic
and the resulting potential economic
and banking effects are unclear. The
uncertainties include, among others, the
length of time necessary for a full
economic recovery, how quickly
businesses are able to reopen and return
to pre-pandemic operations, and
consumer behavior during and after the
pandemic, which could have longerterm effects on the condition and
performance of the banking industry.
Thus far, the industry has remained a
source of strength for the economy, in
part, because banks’ stronger capital
position has better positioned them to
withstand losses compared to 2008. As
of June 30, 2020, capital remained above
regulatory minimums and the industry
ratios for tier 1 risk-based capital and
total risk-based capital exceeded the
ratios reported at year-end 2007 by
several percentage points.
To anticipate declines in capital that
could trigger losses from IDI failures, the
FDIC also monitors other measures,
such as earnings, asset quality, and
supervisory ratings. Thus far, while
economic stress related to COVID–19
has impacted IDI earnings and lowered
net interest margins, asset quality and
supervisory ratings generally remain
strong. As of June 30, 2020, 1.08 percent
of loan and lease balances were
noncurrent, up from a year ago, but
below the peak of 5.46 percent in the
first quarter of 2010. The total number
of institutions on the FDIC’s Problem
Bank List fell to 52 in the second quarter
of 2020, continuing the decline in the
number of problem banks that has
occurred in every quarter since its peak
of 888 institutions in March 2011.9
Under the Restoration Plan, the FDIC
will monitor these and other measures
8 Percent change for estimated weekly aggregate
domestic deposits, which includes insured and
uninsured deposits, at domestically chartered
commercial banks only. This statistic is based on
data that are reported weekly by a sample of banks
and does not include deposits at other IDIs,
including savings institutions. Federal Reserve, H.8
Data Release, Assets and Liabilities of Commercial
Banks in the United States, data as of August 19,
2020, available at https://www.federalreserve.gov/
releases/h8/current/default.htm.
9 ‘‘Problem’’ institutions are institutions with a
CAMELS composite rating of ‘‘4’’ or ‘‘5’’ due to
financial, operational, or managerial weaknesses
that threaten their continued financial viability.
10 See 12 CFR 327.10(b); see also 76 FR 10672,
10718 (Feb. 25, 2011) and 81 FR 32180, 32202 (May
20, 2016).
11 The quarterly weighted average assessment rate
was calculated based on FDIC data as of August 24,
2020, and is subject to change due to amendments
made through September 28, 2020, to IDIs’ quarterly
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to project potential losses from past and
future IDI failures and their impact on
the ability of the reserve ratio to return
to 1.35 percent within 8 years of
establishing the Plan.
Other Factors
Other factors that affect the reserve
ratio include changes in IDI risk
profiles, which influence assessment
rates; growth in the assessment base;
DIF investment income and unrealized
gains and losses on investments; and
operating expenses. For example, under
the current rate schedule adopted
pursuant to the FDIC’s long-term fund
management plan,10 the weighted
average assessment rate for all IDIs is
approximately 4.0 basis points for the
assessment period ending June 30,
2020.11 In future quarters, this rate may
increase or decrease based on the risk
profiles of institutions, affecting the DIF
balance and, thus, the reserve ratio
through assessment income. Under the
Restoration Plan, the FDIC will monitor
these factors and their impact on the
ability of the reserve ratio to return to
1.35 percent within 8 years of
establishing the Plan.
Current Schedule of Assessment Rates
and Fund Projections
In developing this Restoration Plan,
the FDIC projected the DIF balance and
associated reserve ratio at the end of 8
years, using the current rate schedule
and assuming different rates of insured
deposit growth.12 While subject to
considerable uncertainty, it is the
FDIC’s view that raising assessments
based on two quarters of extraordinary
insured deposit growth would be
premature.
Table 2 depicts the amount of losses
that the DIF could absorb and still reach
1.35 percent within 8 years. For
example, if insured deposits grow at an
annual rate of 2.5 percent over the next
8 years, the DIF could absorb losses of
up to $23.7 billion and still reach the
minimum reserve ratio requirement
within 8 years. Alternatively, if insured
deposits grow at an annual rate of 4.5
percent over the next 8 years, the DIF
would need an additional $1.5 billion
for the reserve ratio to reach the 1.35
percent minimum.
Consolidated Reports of Condition and Income or
quarterly Reports of Assets and Liabilities of U.S.
Branches and Agencies of Foreign Banks (as
applicable).
12 For simplicity, the analysis shown in Table 2
assumes that: (1) The assessment base grows 4.5
percent, annually; (2) the average assessment rate
remains at 4.0 basis points; (3) interest income on
the deposit insurance fund balance is zero; and (4)
operating expenses grow at 1 percent per year.
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Federal Register / Vol. 85, No. 183 / Monday, September 21, 2020 / Notices
TABLE 2—PROJECTED RESERVE RATIO AT THE END OF 8 YEARS ASSUMING DIFFERENT RATES OF INSURED DEPOSIT
GROWTH
Annual insured
deposit growth rate
[percent]
2.5
3.0
3.5
4.0
4.5
Industry insured
deposits
[billions of dollars]
....................................................
....................................................
....................................................
....................................................
....................................................
10,835
11,279
11,739
12,215
12,708
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It is reasonable that annual insured
deposit growth could average less than
4.5 percent over the next 8 years for two
main reasons. First, annualized growth
has been less than 4.5 percent or
negative during most (57 percent)
quarters since quarterly reporting was
adopted in 1991. Most importantly, as
previously discussed, deposit growth
could face downward pressure in the
near-term based on economic
conditions, as the consumption and
investment patterns of individuals and
households exhibit less precautionary
behavior and as surge deposits are
disbursed or leave the banking system,
with growth rates normalizing over the
next 8 years.
For example, if insured deposits grow
at an annual rate of approximately 3.3
percent over the next 8 years, reflecting
the flow of surge deposits out of the
banking system and a return to normal
consumer behavior, then the long-term
growth rate (including extraordinary
growth during the first two quarters of
2020) would equal the long-term
average rate of 4.5 percent that the fund
has experienced since the 1990s. Under
this scenario, the table above shows that
losses would have to exceed $11.5
billion to prevent the reserve ratio from
reaching 1.35 percent in 8 years.
Due to the uncertainties discussed
elsewhere, losses from bank failures
remain difficult to project. However, the
banking industry is well capitalized, the
problem bank list remains low, and the
banking industry has appeared resilient
to the early stages of the economic
effects of the pandemic. As the effect of
the pandemic on the banking industry
becomes more apparent, the FDIC will
reassess its analysis of insured deposit
growth, potential losses, and other
factors that affect the reserve ratio.
Semiannual Updates of Income and
Loss Projections
It is the FDIC’s view that frequent
updates are necessary because loss and
reserve ratio projections made so far
into the future are subject to
considerable uncertainty. Losses could
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DIF Reserve ratio
[percent]
DIF Balance needed
to reach 1.35 percent
reserve ratio
[billions of dollars]
1.56
1.50
1.44
1.39
1.33
differ from projected amounts if
economic conditions worsen or
financial stresses facing IDIs prove more
or less severe. For example, DIF loss
projections may increase if the quality
of IDI assets quickly deteriorates or
capital markets become severely
constrained, and income could be
affected by the factors described
previously. Insured deposit growth
could be higher or lower based on future
economic conditions and the response
of fiscal and monetary authorities and
depositors.
Future updates to the Board may
result in changes in assumptions that
result in different assessment revenue
needs. Consequently, in order to fulfill
the statutory requirement to return the
fund reserve ratio to 1.35 percent, the
FDIC may need to adopt higher
assessment rates than those included in
the current assessment rate schedule.
Under assessment regulations, the Board
has the authority to adjust assessment
rates for all IDIs by up to two basis
points, without notice and comment, if
conditions warrant such an increase.13
Any increase greater than two basis
points would require notice and
comment. Given the considerable
uncertainty of long-range projections
and because the statutory deadline is 8
years away, the Restoration Plan
maintains the current assessment rate
schedule for all IDIs.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on September
15, 2020.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2020–20690 Filed 9–18–20; 8:45 am]
BILLING CODE 6714–01–P
13 The Board may increase or decrease the total
base assessment rate schedule up to a maximum
increase of 2 basis points or a fraction thereof or a
maximum decrease of 2 basis points or a fraction
thereof (after aggregating increases and decreases),
as the Board deems necessary. See 12 CFR 327.10(f).
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Amount available
to absorb losses and
reach 1.35 percent
reserve ratio
[billions of dollars]
145.7
151.7
157.9
164.3
170.9
23.7
17.7
11.5
5.1
(1.5)
FEDERAL RESERVE SYSTEM
Notice of Proposals To Engage in or
To Acquire Companies Engaged in
Permissible Nonbanking Activities
The companies listed in this notice
have given notice under section 4 of the
Bank Holding Company Act (12 U.S.C.
1843) (BHC Act) and Regulation Y, (12
CFR part 225) to engage de novo, or to
acquire or control voting securities or
assets of a company, including the
companies listed below, that engages
either directly or through a subsidiary or
other company, in a nonbanking activity
that is listed in § 225.28 of Regulation Y
(12 CFR 225.28) or that the Board has
determined by Order to be closely
related to banking and permissible for
bank holding companies. Unless
otherwise noted, these activities will be
conducted throughout the United States.
The public portions of the
applications listed below, as well as
other related filings required by the
Board, if any, are available for
immediate inspection at the Federal
Reserve Bank(s) indicated below and at
the offices of the Board of Governors.
This information may also be obtained
on an expedited basis, upon request, by
contacting the appropriate Federal
Reserve Bank and from the Board’s
Freedom of Information Office at
https://www.federalreserve.gov/foia/
request.htm. Interested persons may
express their views in writing on the
question whether the proposal complies
with the standards of section 4 of the
BHC Act.
Unless otherwise noted, comments
regarding the applications must be
received at the Reserve Bank indicated
or the offices of the Board of Governors,
Ann E. Misback, Secretary of the Board,
20th Street and Constitution Avenue
NW, Washington, DC 20551–0001, not
later than October 6, 2020.
A. Federal Reserve Bank of Richmond
(Adam M. Drimer, Assistant Vice
President) 701 East Byrd Street,
Richmond, Virginia 23219. Comments
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]]>Agencies
[Federal Register Volume 85, Number 183 (Monday, September 21, 2020)]
[Notices]
[Pages 59306-59309]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-20690]
=======================================================================
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FEDERAL DEPOSIT INSURANCE CORPORATION
Federal Deposit Insurance Corporation Restoration Plan
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Notice of establishment of restoration plan.
-----------------------------------------------------------------------
Extraordinary growth in insured deposits during the first and
second quarters of 2020 caused the Deposit Insurance Fund (the DIF or
the fund) reserve ratio to decline below the statutory minimum of 1.35
percent.\1\ As of June 30, 2020, the reserve ratio had fallen below the
statutory minimum and stood at 1.30 percent, 9 basis points below the
reserve ratio as of March 31, 2020, and 11 basis points below its
recent peak of 1.41 percent as of December 31, 2019. Prior to 2020, the
DIF reserve ratio had not decreased since the fourth quarter of 2009.
---------------------------------------------------------------------------
\1\ The reserve ratio is calculated as the ratio of the net
worth of the Deposit Insurance Fund (fund balance) to the value of
the aggregate estimated insured deposits at the end of a given
quarter. See 12 U.S.C. 1813(y)(3).
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The Federal Deposit Insurance Act (the FDI Act) requires that the
FDIC's Board of Directors (Board) adopt a restoration plan when the DIF
reserve ratio falls below 1.35 percent or is expected to within 6
months.\2\ Under the FDI Act, the restoration plan must restore the
reserve ratio to at least 1.35 percent within 8 years of establishing
the Plan, absent extraordinary circumstances.\3\
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\2\ 12 U.S.C. 1817(b)(3)(E)(i).
\3\ 12 U.S.C. 1817(b)(3)(E)(ii).
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Therefore, pursuant to section 7(b)(3)(E) (12 U.S.C.
1817(b)(3)(E)), the FDIC established the following Restoration Plan (or
the Plan) on September 15, 2020.
1. The FDIC will monitor deposit balance trends, potential losses,
and other factors that affect the reserve ratio.
2. The FDIC will maintain the current schedule of assessment rates
for all insured depository institutions (IDIs).
3. At least semiannually, the FDIC will update its analysis and
projections for the fund and, if necessary, recommend any modifications
to the Plan, such as increasing assessment rates.
While subject to considerable uncertainty, based on a range of
reasonable (though highly uncertain) estimates of future losses and
assuming a return to normal insured deposit growth, the reserve ratio
would return to 1.35 percent without further action by the FDIC before
the end of the 8-year period beginning upon the implementation of the
Plan, as required by law.
Detailed Analysis and Basis for Actions Taken by the Restoration Plan
The FDI Act requires that the FDIC publish in the Federal Register
a detailed analysis of the factors considered and the basis for the
actions taken with regard to the Restoration Plan.\4\ The following
summarizes the analysis the FDIC conducted that formed the basis of the
Restoration Plan.
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\4\ 12 U.S.C. 1817(b)(3)(E)(v).
---------------------------------------------------------------------------
Source of Decline in Reserve Ratio
The decline in the reserve ratio during the first half of 2020 was
solely a result of extraordinary insured deposit growth. Table 1 shows
the components of the reserve ratio for the last quarter of 2019 and
the first two quarters of 2020. Over this period, the DIF balance grew
and did not experience material losses. As of June 30, 2020, the DIF
balance totaled a record $114.7 billion, up $4.3 billion from the end
of 2019. Meanwhile, insured deposits grew by an estimated $1 trillion,
resulting in an 11 basis point decline in the reserve ratio from the
end of 2019.
Table 1--Fund Balance, Estimated Insured Deposits, and Reserve Ratio
[$ In billions]
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4th Qtr 2019 1st Qtr 2020 2nd Qtr 2020
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Beginning Fund Balance.......................................... 108.9 110.3 113.2
Plus: Net Assessment Revenue................................ 1.3 1.4 1.8
Plus: Investment Income a................................... 0.5 2.0 0.1
Less: Loss Provisions....................................... -0.1 * *
Less: Operating Expenses.................................... 0.5 0.5 0.5
Ending Fund Balance b........................................... 110.3 113.2 114.7
Estimated Insured Deposits...................................... 7,815.2 8,164.2 8,837.3
Ending Reserve Ratio............................................ 1.41% 1.39% 1.30%
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* = Less than $50 million.
a Includes unrealized gains/losses on available-for-sale securities.
b Components of fund balance changes may not sum to totals due to rounding.
[[Page 59307]]
The extraordinary growth in insured deposits during the first half
of 2020 was also unprecedented. As described in more detail below, this
increase largely stemmed from actions undertaken by depositors, both
businesses and individuals, as well as government policy actions in
response to the Coronavirus 2019 (COVID-19) pandemic. During the first
half of 2020, estimated insured deposits grew by 4.5 percent (17.9
percent, annualized) in the first quarter and by 8.2 percent (33.0
percent, annualized) in the second quarter--two of the highest growth
rates since quarterly reporting began in 1991.\5\ Together, estimated
insured deposits grew by an amount equal to approximately three years
of insured deposit growth in the first two quarters of 2020 (Chart 1).
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\5\ The growth in estimated insured deposits experienced during
the first and second quarters of 2020 was surpassed only by quarters
in which the growth rate was substantially impacted by a temporary
increase in coverage for noninterest-bearing transaction accounts or
a permanent increase in the standard maximum deposit insurance
amount from $100,000 to $250,000, including specifically only the
fourth quarter of 2010, the third quarter of 2009, and the fourth
quarter of 2008.
[GRAPHIC] [TIFF OMITTED] TN21SE20.000
As of June 30, 2020, the unprecedented rate of insured deposit
growth stemming from the pandemic had reduced the reserve ratio to
below the statutory minimum of 1.35 percent.
Factors That Affect the Ability of the Reserve Ratio to Return to 1.35
Percent
Deposit balance trends, potential losses, and other factors will
affect the ability of the reserve ratio to return to 1.35 percent
within 8 years of implementing the Restoration Plan. To determine
whether the reserve ratio has reached the statutory minimum, the FDIC
will rely on the reserve ratio as of September 30, 2028.\6\ Under the
Plan, the FDIC will closely monitor the factors affecting the reserve
ratio and, as they become clearer, will update the Plan, as necessary,
to reflect any updated assumptions.
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\6\ The reserve ratio is based on total estimated insured
deposits at the end of a given quarter. The FDIC will rely on the
reserve ratio as of September 30, 2028, the first quarter-end date
for which the reserve ratio will be known after September 15, 2028,
the end date of the 8-year period.
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Deposit Balance Trends
The extraordinary growth in insured deposits during the first and
second quarters of 2020 is largely a result of actions taken by
monetary and fiscal authorities, and by individuals, businesses, and
financial market participants in response to the COVID-19 pandemic.
Deposit growth initially intensified in March upon the outbreak of the
COVID-19 pandemic. As COVID-19 infections spread throughout the United
States, individual states or major metropolitan areas ordered millions
of Americans to stay home, severely reducing their ability to engage in
usual commerce and forcing many businesses to close temporarily or
furlough employees. Faced with economic disruption and uncertainty,
businesses drew on their lines of credit and conserved cash, increasing
deposits. Market volatility pushed investors to safer assets, including
cash and insured deposits. Beginning in March, the Board of Governors
of the Federal Reserve System (Federal Reserve) announced a series of
emergency actions, including large-scale asset purchases and emergency
lending facilities, which rapidly expanded its balance sheet by more
than $1 trillion and, with it, grew IDI reserve balances and deposits.
As deposit growth associated with a flight to safety began to
stabilize, fiscal stimulus and reduced spending applied additional
upward pressure on deposit growth. As part of the Coronavirus Aid,
Relief, and Economic Security Act (CARES Act), the U.S. government
provided over $1 trillion in direct support to consumers and businesses
through business loans, expanded unemployment insurance, and one-time
checks to individuals.\7\ Lending to small businesses resulted in an
increase in deposits. For individuals, the resulting surge in personal
incomes from direct government assistance, combined with the dramatic
reduction in discretionary spending, fueled deposit growth and lifted
the personal savings rate to a record high of 33.7 percent in April.
The personal savings rate remained elevated through July at 17.8
percent, and monthly savings more than doubled to $280 billion in June
from $116 billion
[[Page 59308]]
in February, or $3.4 trillion compared to $1.4 trillion on an
annualized basis.
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\7\ The CARES Act established the Paycheck Protection Program,
which facilitated credit to small businesses through loans backed by
the full faith and credit of the U.S. Government. The CARES Act also
provided Economic Impact Payments of up to $1,200 per adult and $500
per child, based on income, and expanded the amount of and
eligibility for unemployment benefits. See Pub. L. 116-136 (Mar. 27,
2020).
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Insured deposit growth rates are expected to decline compared to
rates experienced during the first two quarters of 2020. During the
third quarter of 2020 to the week ending August 19, 2020, estimated
domestic deposits (including both insured and uninsured deposits) for
all domestically chartered commercial banks declined by 0.7 percent.\8\
In the near term, low interest rates and reduced fiscal support in the
face of weak economic conditions, including weak labor markets,
incomes, and reduced consumer spending may place downward pressure on
deposit growth as depositors draw down savings. Even as economic
conditions improve, deposits may decline as the precautionary behavior
exhibited by depositors subsides and individuals and businesses
redirect deposits toward consumption and higher-yielding investments.
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\8\ Percent change for estimated weekly aggregate domestic
deposits, which includes insured and uninsured deposits, at
domestically chartered commercial banks only. This statistic is
based on data that are reported weekly by a sample of banks and does
not include deposits at other IDIs, including savings institutions.
Federal Reserve, H.8 Data Release, Assets and Liabilities of
Commercial Banks in the United States, data as of August 19, 2020,
available at https://www.federalreserve.gov/releases/h8/current/default.htm.
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While insured deposit growth rates are expected to decline, deposit
balances, including insured deposits, could remain elevated until the
factors that supported their recent growth decline from their current
levels, particularly monetary and fiscal policy and economic
uncertainty. The Federal Reserve has indicated that it will continue to
provide monetary policy support in the near-term with a continuation of
asset purchases. In the medium- to long-term, if the Federal Reserve
implements a gradual approach to unwinding monetary policy, as it did
in the post-2008 period, reserves may remain elevated for years, even
after economic conditions improve. The impact on deposits of a
prolonged period of economic weakness is difficult to predict, but it
is possible deposits may remain elevated if businesses and consumers
continue to hold back spending under such a scenario. Under the
Restoration Plan, the FDIC will monitor these deposit balance trends
and their impact on the ability of the reserve ratio to return to 1.35
percent within 8 years of establishing the Plan.
Potential Losses
Losses from past and future bank failures affect the reserve ratio
by lowering the fund balance. In recent years, the DIF has experienced
low losses from IDI failures. On average, five IDIs per year failed
between 2015 and 2019, at an annual cost to the fund of about $400
million. Two IDIs have failed thus far in 2020, marking the sixth year
in a row with few or no failures.
Future losses to the DIF remain uncertain as the length of the
pandemic and the resulting potential economic and banking effects are
unclear. The uncertainties include, among others, the length of time
necessary for a full economic recovery, how quickly businesses are able
to reopen and return to pre-pandemic operations, and consumer behavior
during and after the pandemic, which could have longer-term effects on
the condition and performance of the banking industry. Thus far, the
industry has remained a source of strength for the economy, in part,
because banks' stronger capital position has better positioned them to
withstand losses compared to 2008. As of June 30, 2020, capital
remained above regulatory minimums and the industry ratios for tier 1
risk-based capital and total risk-based capital exceeded the ratios
reported at year-end 2007 by several percentage points.
To anticipate declines in capital that could trigger losses from
IDI failures, the FDIC also monitors other measures, such as earnings,
asset quality, and supervisory ratings. Thus far, while economic stress
related to COVID-19 has impacted IDI earnings and lowered net interest
margins, asset quality and supervisory ratings generally remain strong.
As of June 30, 2020, 1.08 percent of loan and lease balances were
noncurrent, up from a year ago, but below the peak of 5.46 percent in
the first quarter of 2010. The total number of institutions on the
FDIC's Problem Bank List fell to 52 in the second quarter of 2020,
continuing the decline in the number of problem banks that has occurred
in every quarter since its peak of 888 institutions in March 2011.\9\
Under the Restoration Plan, the FDIC will monitor these and other
measures to project potential losses from past and future IDI failures
and their impact on the ability of the reserve ratio to return to 1.35
percent within 8 years of establishing the Plan.
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\9\ ``Problem'' institutions are institutions with a CAMELS
composite rating of ``4'' or ``5'' due to financial, operational, or
managerial weaknesses that threaten their continued financial
viability.
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Other Factors
Other factors that affect the reserve ratio include changes in IDI
risk profiles, which influence assessment rates; growth in the
assessment base; DIF investment income and unrealized gains and losses
on investments; and operating expenses. For example, under the current
rate schedule adopted pursuant to the FDIC's long-term fund management
plan,\10\ the weighted average assessment rate for all IDIs is
approximately 4.0 basis points for the assessment period ending June
30, 2020.\11\ In future quarters, this rate may increase or decrease
based on the risk profiles of institutions, affecting the DIF balance
and, thus, the reserve ratio through assessment income. Under the
Restoration Plan, the FDIC will monitor these factors and their impact
on the ability of the reserve ratio to return to 1.35 percent within 8
years of establishing the Plan.
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\10\ See 12 CFR 327.10(b); see also 76 FR 10672, 10718 (Feb. 25,
2011) and 81 FR 32180, 32202 (May 20, 2016).
\11\ The quarterly weighted average assessment rate was
calculated based on FDIC data as of August 24, 2020, and is subject
to change due to amendments made through September 28, 2020, to
IDIs' quarterly Consolidated Reports of Condition and Income or
quarterly Reports of Assets and Liabilities of U.S. Branches and
Agencies of Foreign Banks (as applicable).
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Current Schedule of Assessment Rates and Fund Projections
In developing this Restoration Plan, the FDIC projected the DIF
balance and associated reserve ratio at the end of 8 years, using the
current rate schedule and assuming different rates of insured deposit
growth.\12\ While subject to considerable uncertainty, it is the FDIC's
view that raising assessments based on two quarters of extraordinary
insured deposit growth would be premature.
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\12\ For simplicity, the analysis shown in Table 2 assumes that:
(1) The assessment base grows 4.5 percent, annually; (2) the average
assessment rate remains at 4.0 basis points; (3) interest income on
the deposit insurance fund balance is zero; and (4) operating
expenses grow at 1 percent per year.
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Table 2 depicts the amount of losses that the DIF could absorb and
still reach 1.35 percent within 8 years. For example, if insured
deposits grow at an annual rate of 2.5 percent over the next 8 years,
the DIF could absorb losses of up to $23.7 billion and still reach the
minimum reserve ratio requirement within 8 years. Alternatively, if
insured deposits grow at an annual rate of 4.5 percent over the next 8
years, the DIF would need an additional $1.5 billion for the reserve
ratio to reach the 1.35 percent minimum.
[[Page 59309]]
Table 2--Projected Reserve Ratio at the End of 8 Years Assuming Different Rates of Insured Deposit Growth
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Amount available to
Industry insured DIF Balance needed to absorb losses and
Annual insured deposit growth rate [percent] deposits [billions of DIF Reserve ratio reach 1.35 percent reach 1.35 percent
dollars] [percent] reserve ratio [billions reserve ratio [billions
of dollars] of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
2.5................................................. 10,835 1.56 145.7 23.7
3.0................................................. 11,279 1.50 151.7 17.7
3.5................................................. 11,739 1.44 157.9 11.5
4.0................................................. 12,215 1.39 164.3 5.1
4.5................................................. 12,708 1.33 170.9 (1.5)
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It is reasonable that annual insured deposit growth could average
less than 4.5 percent over the next 8 years for two main reasons.
First, annualized growth has been less than 4.5 percent or negative
during most (57 percent) quarters since quarterly reporting was adopted
in 1991. Most importantly, as previously discussed, deposit growth
could face downward pressure in the near-term based on economic
conditions, as the consumption and investment patterns of individuals
and households exhibit less precautionary behavior and as surge
deposits are disbursed or leave the banking system, with growth rates
normalizing over the next 8 years.
For example, if insured deposits grow at an annual rate of
approximately 3.3 percent over the next 8 years, reflecting the flow of
surge deposits out of the banking system and a return to normal
consumer behavior, then the long-term growth rate (including
extraordinary growth during the first two quarters of 2020) would equal
the long-term average rate of 4.5 percent that the fund has experienced
since the 1990s. Under this scenario, the table above shows that losses
would have to exceed $11.5 billion to prevent the reserve ratio from
reaching 1.35 percent in 8 years.
Due to the uncertainties discussed elsewhere, losses from bank
failures remain difficult to project. However, the banking industry is
well capitalized, the problem bank list remains low, and the banking
industry has appeared resilient to the early stages of the economic
effects of the pandemic. As the effect of the pandemic on the banking
industry becomes more apparent, the FDIC will reassess its analysis of
insured deposit growth, potential losses, and other factors that affect
the reserve ratio.
Semiannual Updates of Income and Loss Projections
It is the FDIC's view that frequent updates are necessary because
loss and reserve ratio projections made so far into the future are
subject to considerable uncertainty. Losses could differ from projected
amounts if economic conditions worsen or financial stresses facing IDIs
prove more or less severe. For example, DIF loss projections may
increase if the quality of IDI assets quickly deteriorates or capital
markets become severely constrained, and income could be affected by
the factors described previously. Insured deposit growth could be
higher or lower based on future economic conditions and the response of
fiscal and monetary authorities and depositors.
Future updates to the Board may result in changes in assumptions
that result in different assessment revenue needs. Consequently, in
order to fulfill the statutory requirement to return the fund reserve
ratio to 1.35 percent, the FDIC may need to adopt higher assessment
rates than those included in the current assessment rate schedule.
Under assessment regulations, the Board has the authority to adjust
assessment rates for all IDIs by up to two basis points, without notice
and comment, if conditions warrant such an increase.\13\ Any increase
greater than two basis points would require notice and comment. Given
the considerable uncertainty of long-range projections and because the
statutory deadline is 8 years away, the Restoration Plan maintains the
current assessment rate schedule for all IDIs.
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\13\ The Board may increase or decrease the total base
assessment rate schedule up to a maximum increase of 2 basis points
or a fraction thereof or a maximum decrease of 2 basis points or a
fraction thereof (after aggregating increases and decreases), as the
Board deems necessary. See 12 CFR 327.10(f).
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Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on September 15, 2020.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2020-20690 Filed 9-18-20; 8:45 am]
BILLING CODE 6714-01-P
