A recession now in its 21st month has presented tremendous challenges to the deposit insurance system. Actual and expected bank failures have left the Deposit Insurance Fund below its mandated level. The Federal Deposit Insurance Corporation has responded by raising the premiums banks pay. Premiums will rise for banks in the Dallas-based Eleventh Federal Reserve District--but not by as much as they will for banks in the rest of the country. This additional cost is an important consideration because every dollar spent on insurance is a dollar that can't be lent or otherwise invested.Deposit insurance ; Federal Deposit Insurance Corporation ; Bank failures

Kory Killgo

English

Research Papers in Economics

16 SouthwestEconomy 			FEDERAL	RESERVE	BANK	OF	DALLAS	•	THIRD	QUARTER	2009
from the kind of runs that marked the early 
years of the Great Depression, allowing the 
institutions to function more efficiently as 
financial intermediaries. In turn, greater ef-
ficiency in the financial system promotes a 
more efficient and robust economy.
A recession now in its 21st month has 
presented tremendous challenges to the de-
posit insurance system. Actual and expected 
bank failures have left the DIF below its 
mandated level; the fund’s balance declined 
from $45.2 billion on June 30, 2008, to 
$10.4 billion on June 30, 2009. 
The FDIC has responded by raising the 
premiums banks pay. Premiums will rise for 
banks in the Dallas-based Eleventh Federal 
Reserve District—but not by as much as 
they will for banks in the rest of the coun-
try.1 This additional cost is an important 
consideration because every dollar spent 
on insurance is a dollar that can’t be lent or 
otherwise invested. 
Replenishing the DIF
Twenty-five FDIC-insured institutions 
failed nationwide in 2008, and another 45 
failures occurred in the first six months 
of 2009. This followed a decade with no 
more than 11 failures a year, including a 
31-month period from mid-2004 to early 
2007 with no failures. 
The DIF reserve ratio—its balance as a 
percentage of estimated insured deposits—
fell from 1.22 percent at the end of 2007 to 
0.36 percent on Dec. 31, 2008, then slipped 
further to 0.22 percent on June 30, 2009 
(Chart 1).2  
When the reserve ratio fell below 1.15 
percent in the second quarter of 2008, the 
law required the FDIC to return it to at least 
that level within five years. The current 
downturn’s severity led the FDIC to grant 
an extension to seven years. Even with the 
added time, forecasts indicated that col-
lecting premiums at rates then in effect 
wouldn’t rebuild the DIF quickly enough to 
meet expected demands on the fund.
To ensure the DIF’s stability and maintain 
public confidence, the FDIC implemented 
Deposit insurance has been a funda-
mental part of the U.S. banking system 
since the newly chartered Federal Deposit 
Insurance Corp. (FDIC) opened on Jan. 1, 
1934. Over the next 75 years, the FDIC has 
protected millions of depositors and helped 
thousands of institutions weather economic 
storms—without the loss of any insured 
deposits.
Banks pay premiums to insure their 
deposits. Institutions with more deposits or 
weaker conditions pay more—much like 
the cost of automobile insurance depends 
on the value of the car and the driving 
record of the person behind the wheel. In-
sured banks contribute each quarter to the 
Deposit Insurance Fund (DIF), which the 
FDIC uses to cover the expenses related to 
resolving failed banks.
For banks, the premiums are an on-
going expense, a recurring reduction in 
earnings and profitability. However, deposit 
insurance’s protection is a key factor in 
institutions’ ability to attract and retain de-
posits. A stable deposit base insulates banks 
Restoring Banking’s Safety Net:
Deposit Insurance’s Steeper Cost
By Kory Killgo
Chart 1
Pressure Builds on the Deposit Insurance Fund
0
.5
1
1.5
2009 2008 2007 2006
DIF balance as a percent
of insured deposits
Number of bank failures
each quarter
0
5
10
15
20
25
30
SOURCE: Federal Deposit Insurance Corp.
Premiums will rise for 
banks in the Dallas-based 
Eleventh Federal Reserve 
District—but not by as 
much as they will for banks 
in the rest of the country.	 FEDERAL	RESERVE	BANK	OF	DALLAS	•	THIRD	QUARTER	2009 SouthwestEconomy 17
three changes to the way insurance premiums 
are calculated. These adjustments are ex-
pressed in basis points, a banking industry 
measure equal to one 100th of a percentage 
point.
First, it imposed an annualized pre-
mium increase of 7 basis points in the first 
quarter of 2009—7 cents for every $100 of 
assessable deposits. 
Second, the FDIC adjusted the pre-
mium formulas to make the system more 
sensitive to insured institutions’ financial 
conditions and the impact their failures 
could have on the DIF. The new approach 
considers more factors in calculating assess-
ments and widens their range. Annualized 
premiums were 12 to 50 basis points in the 
first quarter of 2009. Starting in the second 
quarter, the premiums range from 7 to 77.5 
basis points.
Third, the FDIC proposed a one-time 
premium of 20 basis points on applicable 
deposits at all institutions, regardless of 
condition, as of June 30, 2009. After further 
analysis and public comment, the FDIC 
modified its proposal, opting to calculate 
the one-time assessment as 5 basis points 
on adjusted assets.3 
To bolster confidence in banks, 
Congress raised the insurance limit from 
$100,000 to $250,000 per depositor on in-
dividual accounts in October 2008. This 
year, Congress extended the extra coverage 
through the end of 2013. Higher assess-
ments would likely have been needed with 
or without the new limits.
The Cost to Banks
The FDIC believes these changes are 
critical to restoring the DIF to appropriate 
levels. But how will they impact banks, 
particularly smaller banks, which tend to 
fund more of their business with deposits? 
And how will the changes affect Eleventh 
District banks?
Addressing these questions begins with 
a baseline that looks at the premium assess-
ment method in place for 2008 (see box). 
Then we compare it to the adjusted method 
used in the first quarter of 2009 (step 1) and 
to the revised method used beginning in the 
second quarter (step 2). Finally, we look at 
the impact of the special assessment.
Data for comparing the different calcu-
lation methods are collected in the quarterly 
Report of Condition and Income filed by fi-
nancial institutions as of Dec. 31, 2008. Other 
inputs are institutions’ safety and soundness 
ratings and, where available, their long-term 
Calculating the Assessment: A Primer
  Risk categories determine the assessment rates banks pay for deposit insurance. The FDIC 
assigns all insured institutions to one of four risk categories based on two factors: regulatory capital and 
supervisory group.1  
  A bank’s capital level determines whether it’s well, adequately or undercapitalized.2 The supervisory 
group reflects a bank’s safety and soundness rating. The rating, assigned by bank examiners, ranges from 
1 to 5, with a 1-rated institution the most sound.
  In this table, supervisory group A includes most banks with safety and soundness ratings of 1 or 2. 
Most 3-rated banks are in group B, and most 4- or 5-rated banks are in group C.
Supervisory group
Capital level A B C
Well capitalized Category I Category II Category III
Adequately capitalized Category II Category II Category III
Undercapitalized Category III Category III Category IV
 
  Under the baseline method in place on Dec. 31, 2008, assessment rates for banks in category I, the 
safest, are set in a range based on additional analysis of their safety and soundness rating, plus their long-
term debt rating (for banks with more than $10 billion in assets that have such ratings) or condition ratios 
(for all other banks).3
  Annualized assessment rates for the four risk categories calculated for Dec. 31 were:
Baseline method Risk category
Category I Category II Category III Category IV
Assessment rates (basis points) 5 to 7 10 28 43
 
  With the March 31, 2009, assessment, the FDIC increased all categories by 7 basis points (step 1).
Step 1 Risk category
Category I Category II Category III Category IV
Assessment rates (basis points) 12 to 14 17 35 50
  The FDIC made extensive adjustments beginning with the June 30, 2009, assessment. The new 
model analyzes the condition ratios of all banks regardless of size. It adds special rate adjustments for 
levels of secured liabilities and brokered deposits, which can increase a bank’s assessment rate, and 
unsecured debt, which can lower the rate.  
  The resulting approach (step 2) is more sensitive to the factors that the FDIC’s research has shown 
to be important predictors of a bank’s financial condition. The overall range of possible assessment rates 
has also expanded significantly.
Step 2 Risk category
Category I Category II Category III Category IV
Assessment rates (basis points) 7 to 24 17 to 43 27 to 58 40 to 77.5
 
 
NOTES:
1 A thorough description of recent developments in the FDIC’s premium assessment process is available at www.fdic.gov/
deposit/insurance/assessments/index.html and in the Federal Register, vol. 74, no. 41, March 4, 2009, pp. 9,525–63.
2 A detailed definition is available in the Federal Reserve’s Commercial Bank Examination Manual, Section 4133.1, updated 
November 2006; the manual is available online at www.federalreserve.gov/boarddocs/supmanual/supervision_cbem.htm.
3 Ratios represent tier 1 leverage, loans past due 30–89 days, nonperforming assets, loans charged off, pretax net income 
and (under step 2) brokered deposits.SouthwestEconomy 			FEDERAL	RESERVE	BANK	OF	DALLAS	•	THIRD	QUARTER	2009 18
lowest average rates as a percent of capi-
tal under the baseline method and steps 1 
and 2. Banks in the $1 billion to $5 billion 
group have the highest assessments.  
Inside the Eleventh District, the low-
est assessment rates relative to capital are 
in the $5 billion to $10 billion group. Rates 
are slightly higher in the largest asset group 
and noticeably higher in asset groups less 
than $5 billion. 
The Special Assessment 
Steps 1 and 2 represent the FDIC’s 
response to deteriorating conditions in the 
industry. Projections indicated, however, 
that premiums collected from the new as-
sessments wouldn’t be enough to restore 
the DIF to mandated levels in the required 
time frame, leading the FDIC to propose a 
special assessment.  
The original 20-basis-point proposal 
would have averaged 1.65 percent of com-
mercial bank capital nationwide and 1.67 
percent in the Eleventh District, but it trig-
gered an outcry from smaller banks, con-
cerned that sound community banks with 
high relative levels of deposits would bear 
an unfair burden. 
For example, a well-capitalized bank 
paying the minimum premium under the 
current calculation method would pay 
almost three times as much in this single 
assessment as it would for a whole year’s 
premiums.
The FDIC subsequently modified the 
debt ratings.4 These inputs are used to       
determine an institution’s risk category, 
which in turn sets its premium level. This 
analysis omits some factors that affect the 
premiums banks actually pay, so the results 
only approximate the impact of the assess-
ment changes implemented by the FDIC.5
The FDIC’s actions directly address the 
need to restore the DIF. However, they put 
a noticeable dent in commercial banks’ cap-
ital, defined broadly as total assets less total 
liabilities. Capital serves as a critical cushion 
that banks maintain to absorb losses.  
For the commercial banking industry, 
the total assessment amounts to 0.17 per-
cent of capital per calendar quarter under 
the baseline, 0.31 percent under step 1 and 
0.33 percent under step 2. The assessments 
under all three methods, on average, con-
stitute a smaller percentage of capital for 
banks headquartered in the Eleventh Dis-
trict than for institutions based elsewhere 
(Chart 2). 
Grouping banks by size reveals ad-
ditional details of the assessment system’s 
impact. This approach divides banks into six 
groups based on assets: less than $100 mil-
lion, $100 million to $500 million, $500 mil-
lion to $1 billion, $1 billion to $5 billion, $5 
billion to $10 billion and over $10 billion.
In general, banks in the two largest 
asset-size groups pay the least in assess-
ments as a share of capital.  
Outside the Eleventh District, banks 
with assets greater than $10 billion have the 
Chart 2
FDIC Premiums Lower for Eleventh District Banks
Assessments as a percent of capital, in basis points
0
5
10
15
20
25
30
35
40
45
All
asset groups
Greater than
$10 billion
$5 billion to
$10 billion
$1billion to
$5 billion
$500 million
to $1 billion
$100 million to
$500 million
Less than
$100 million
11th District after steps 1 and 2
11th District baseline
Other after steps 1 and 2
Other baseline
SOURCES: Federal Deposit Insurance Corp.; Federal Reserve’s National Examination Database; SNL Financial; author’s calculations.
The FDIC’s actions 
put a noticeable dent 
in commercial banks’ 
capital, defined broadly 
as total assets less 
total liabilities.	 FEDERAL	RESERVE	BANK	OF	DALLAS	•	THIRD	QUARTER	2009 SouthwestEconomy 19
both in and out of the Eleventh District 
(Chart 3). 
Eleventh District banks have higher rel-
ative levels of deposits, so we would expect 
their assessments to be higher than banks 
elsewhere—but that isn’t the case. The rea-
son involves the condition of the banks. 
The FDIC places insured institutions in 
one of four risk categories. In the Eleventh 
District, a greater percentage of banks falls 
into the lowest risk category—a function 
of district banks’ generally higher safety 
and soundness ratings and levels of capital. 
Ninety-three percent of Eleventh District 
banks are in the FDIC’s lowest risk cat-
egory, compared with 86 percent of banks 
elsewhere. Because of these factors, they 
tend to have lower assessments.
Overall, applying the scenarios to 
year-end 2008 data suggests a generally 
lighter impact in the Eleventh District than 
elsewhere. Expressed as a percent of capi-
tal, deposit insurance premiums for district 
banks were less than assessments for banks 
elsewhere in all asset groups and under the 
baseline, step 1 and step 2. The special as-
sessment was similar or lighter for district 
banks. 
The condition of Eleventh District 
banks offsets their relatively higher concen-
tration of deposits, reducing assessments 
and freeing up capital.  
Killgo is a financial industry analyst in the 
Financial Industry Studies Department of the 
Federal Reserve Bank of Dallas.
Notes
1 The Federal Reserve Bank of Dallas is the main office of the 
Eleventh Federal Reserve District, which comprises Texas, 
southern New Mexico and northern Louisiana.
2 DIF data for 2009 are preliminary and unaudited.
3 Adjusted assets are total assets, less tier 1 capital; tier 1 
capital includes common stockholders’ equity, qualifying 
perpetual preferred stock, certain minority interests and trust 
preferred securities.
4 Safety and soundness ratings are from the Federal Reserve’s 
National Examination Database. Long-term debt ratings are 
from SNL Financial.
5 Among factors not considered in this analysis are the effects 
of a one-time credit available to some banks, potential case-
by-case adjustments made by the FDIC to the assessments of 
large banks, and an institution’s possible migration between 
risk categories during the quarter.
special assessment, calculating it as 5 basis 
points multiplied by adjusted assets instead 
of deposits. 
The FDIC capped the dollar amount 
at 10 basis points times the bank’s deposit 
assessment base. If the FDIC finds a need 
for further special assessments, it can levy 
similar 5-basis-point supplements at the end 
of September and December.
The special assessment as adopted 
equals approximately 0.46 percent of capi-
tal for all banks and 0.45 percent for district 
banks. 
The revision significantly reduces 
funds collected for the DIF, but it imposes a 
lighter burden on banks, provided the FDIC 
doesn’t implement the September and De-
cember assessments. 
Basing the special assessment on assets 
instead of deposits also treats banks of dif-
ferent sizes more uniformly. In the Eleventh 
District, the original 20-basis-point plan 
would have resulted in a maximum differ-
ence in average assessment rates across size 
categories of 76 basis points. Under the ad-
opted method, the range is 11 basis points.
Why the Differences?
The observation that banks in the two 
largest size groups tend to have lower as-
sessments than those in smaller groups is 
consistent with larger banks’ relatively low-
er levels of deposits—which translates into 
lesser premiums in an assessment system 
based on deposits. This applies to banks 
Chart 3
Eleventh District Banks 
Depend More on Deposits
Deposits as a percent of assets
All other
11th District
40
50
60
70
80
90
All
asset groups
Greater than
$5 billion
Less than
$5 billion
SOURCES: Federal Deposit Insurance Corp.; Federal Reserve’s 
National Examination Database; SNL Financial; author’s           
calculations.
The observation that banks 
in the two largest size groups 
tend to have lower 
assessments is consistent 
with larger banks’ relatively 
lower levels of deposits—
which translates into lesser 
premiums in an assessment 
system based on deposits.

Restoring banking's safety net: deposit insurance's steeper cost

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Restoring banking's safety net: deposit insurance's steeper cost

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