Alert December 21, 2010

FDIC Board Sets Two Percent Designated Reserve Ratio under Insurance Fund Management Plan

The FDIC Board of Directors approved a final rule (the “Rule”) setting the designated reserve ratio (“DRR”) for the deposit insurance fund (“DIF”) at 2% of estimated insured deposits.  The Rule allows the FDIC to build reserves in excess of its current level.  The FDIC said the Rule allows the FDIC to prepare for the future and build DIF reserves during good economic times.  The FDIC further noted that its analysis of historic losses led it to conclude that a 2% DRR was needed as a long-term, minimum goal “in order to maintain a positive [DIF] balance [in a banking crisis] and steady, predictable assessment rates.”

The Dodd-Frank Act (“DFA”) gave the FDIC greater authority to manage the DIF, including where to set the DRR.  Among other things, the DFA raised the minimum DRR (which the FDIC must set annually) to 1.35% from 1.15%, eliminated the upper limit on the DRR, and requires that the DIF reserves reach 1.35% by September 30, 2020.  The FDIC said that the Rule is part of a comprehensive fund management plan that is meant to provide insured depository institutions with moderate, steady assessment rates throughout economic cycles.  The Rule will become effective on January 1, 2011.