(The Herald Post) – The Federal Deposit Insurance Corp (FDIC) and its deposit insurance fund have been instrumental in maintaining confidence in the U.S. banking system since the Great Depression. Recently, the FDIC backed a deal for regional lender First Citizens BancShares to acquire the failed Silicon Valley Bank, resulting in an estimated $20 billion hit to the deposit insurance fund. This article aims to provide a thorough understanding of the deposit insurance fund, its funding mechanisms, and its role in resolving failed banks.
What is the Deposit Insurance Fund?
The FDIC’s deposit insurance fund is crucial in upholding the agency’s guarantee of bank deposits up to $250,000. In cases where insured banks fail, the FDIC uses the fund to reimburse customers with accounts below the limit. Recently, the U.S. government invoked a “systemic risk exception” for the failures of Silicon Valley Bank and Signature Bank, fully reimbursing all customers, including those with deposits above the $250,000 cap, to prevent further contagion.
The insured deposit amount has been increased multiple times throughout the FDIC’s history, with the most recent change following the 2008 financial crisis when lawmakers raised the cap from $100,000 to $250,000.
The deposit insurance fund primarily receives funding through quarterly fees charged by the FDIC to insured banks and interest earned on investments in U.S. government obligations, such as Treasury bills. A bank’s fee depends on its liabilities and risk profile. By the end of last year, the deposit insurance fund balance stood at $128.2 billion.
In October, the FDIC finalized a rule to increase initial base deposit insurance assessment rate schedules by 2% starting in June. The FDIC is legally required to resolve failed banks using the least costly option to minimize losses to its deposit insurance fund.
What Happens When There Are Losses to the Fund?
In cases like Silicon Valley Bank and Signature Bank, losses to the deposit insurance fund are covered through a “special assessment” fee on banks. The FDIC estimates the failure of Silicon Valley Bank will cost the deposit insurance fund $20 billion, but the exact amount will be determined later.
What Else Will the FDIC Get Out of the First Citizens Deal?
In addition to the loss-sharing agreement, the FDIC will receive equity appreciation rights in First Citizens worth up to $500 million. Furthermore, the FDIC will receive 3.5% annual interest on a 5-year $35 billion note that First Citizens issued as financing to buy the assets from the FDIC.