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The FDIC finally fills its insurance fund — 10 years after the crisis

Brian Cheung
A man enters an IndyMac Bank branch at the company’s corporate headquarters, after waiting in line for it to open under federal management, in Pasadena, California July 14, 2008. IndyMac was t he most costly failure to the FDIC’s insurance fund   REUTERS/Danny Moloshok 

Ten years after the financial crisis, the Federal Deposit Insurance Corporation has finally filled its reserve of cash set aside to address bank failures.

The Federal Deposit Insurance Corporation, which insures up to $250,000 for each depositor, said Tuesday that it now has enough cash on hand to cover 1.36% of all the FDIC-insured deposits in the U.S. banking system, above the 1.35% mandated by the post-crisis Dodd-Frank regulatory law.

The FDIC said its insured deposits reached $7.4 trillion as of the end of September, meaning that its Deposit Insurance Fund has about $100.2 billion. On a quarter-over-quarter basis, the fund increased by $2.6 billion.

Reaching its 1.35% mandate is a milestone for the insurance fund that dipped into the negative during the financial crisis. Between 2008 and 2013, almost 500 banks failed, forcing the FDIC to deploy about $73 billion in funds to save insured deposits and resolve the failing institutions.

The Federal Deposit Insurance Corporation’s insurance fund reached its congressional mandate of a 1.35% ratio to insured deposits in the third quarter of 2018.

The most costly failure to the FDIC’s insurance fund was the June 2008 failure of IndyMac, which cost the fund $12 billion. IndyMac was eventually sold to OneWest Bank, the Pasadena-based bank where current Treasury Secretary Steven Mnuchin and Comptroller of the Currency Joseph Otting once worked.

The fund does not come from taxpayer dollars; banks with insured deposits instead pay the FDIC an “assessment rate” that contributes to the insurance fund. On top of this, large banks — generally those with more than $10 billion in total assets — pay a quarterly surcharge toward the fund.

The large bank surcharge has been a huge contributor to the insurance fund’s growth; the FDIC says that 45% of the $2.6 billion quarter-over-quarter increase in the insurance fund came from large bank surcharges.

With the fund now reaching its federally-mandated goal, the FDIC will no longer levy the “large bank” surcharge and will credit small banks for a portion of their assessments once the ratio is above 1.38%.

Although now fully funded, debate over the fund is not over. Amid regulatory changes in the banking industry, some regulators are pointing to the deposit insurance fund to argue against rolling back red tape on the largest banks.

On Tuesday, the last remaining Obama-era appointee on the FDIC board, Martin Gruenberg, voted against a proposal to apply tailored liquidity requirements on banks with more than $100 billion, arguing that it would pose greater risk to the deposit insurance fund.

“Most of the institutions in the $100 billion to $700 billion asset class have tens of thousands of uninsured depositors,” Gruenberg, the former FDIC Chair, said Tuesday. “The risk of undermining public confidence and causing significant disruption to the financial system is substantial.”

He pointed to the September 2008 failure of Washington Mutual, which would have qualified for lighter liquidity restrictions under the proposal. Gruenberg said its failure would have cost the insurance fund $42 billion if forced to liquidate.

That did not happen; the FDIC facilitated its sale to JPMorgan Chase (JPM) at no cost to the fund.

Proponents of the proposal argue that liquidity requirements were ill-fitted for the likes of U.S. Bancorp (USB), PNC Financial (PNC), Capital One (COF), and Charles Schwab (SCHW), maintaining that requirements on the largest banks — like JPMorgan Chase, Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC) — are unchanged.

“Our largest, most systemically important banks would continue to be subject to the most rigorous standards, and their smaller, less systemically important peers would be subject to standards tailored to their risk profile,” FDIC Chair Jelena McWilliams said.

Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.

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