[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]


=======================================================================
-----------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \2\ 12 U.S.C. 1817(b)(3)(E)(i).
    \3\ 12 U.S.C. 1817(b)(3)(E)(ii).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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]
----------------------------------------------------------------------------------------------------------------
                                                                   4th Qtr 2019    1st Qtr 2020    2nd Qtr 2020
----------------------------------------------------------------------------------------------------------------
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%
----------------------------------------------------------------------------------------------------------------
* = 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).
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                   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)
--------------------------------------------------------------------------------------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).

---------------------------------------------------------------------------
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