Why it might be time to revisit a key FDIC ratio
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What is the FDIC’s 2% Designated Reserve Ratio and why does it matter?
And the 2% is set off of using provisions as the loss estimate for those two failure periods. So the provisions, the higher actual losses experienced, so it's pushing or elevating that 2% to a more significant level than what the FDIC might find if they did a reassessment of actual funds necessary to cover the industry in a safe manner through another crisis. So our expectation would be that if the FDIC made these small changes to their modeling and took a deeper dive, you may be able to make the argument for a ratio that's below 2% but still above the 1.35%.
From the American Bankers Association, this is the ABA Banking Journal podcast. Welcome back. I'm Evan Sparks. Today's episode is presented by Q2 Software. And I am here with a few of my colleagues from the policy division at the American Bankers Association to talk about an issue that will sound very technical when I tee it up here. But it's actually really important. And we published two pieces about it on the ABA Banking Journal website that you can read about. But first, let me introduce my colleagues who will be joining me today. We have Pat Mitchell. Pat is a former official at the FDIC, head of economic policy research here at ABA. We have my colleague, Brittany Kleinpaste, who is vice president for economic research in our office of the chief economist.
So welcome to the podcast.
Thanks, Evan. Thank you.
So I wanna talk about this technical issue that y'all have written about for the ABA Banking Journal. And it has to do with deposit insurance and how deposit insurance is calculated. And the way I've been thinking about this issue is that it's a little meta because y'all have written about
How do the Minimum Reserve Ratio and Designated Reserve Ratio differ legally and practically?
a recommendation to change a simulation that is used to calibrate a calculation. And I'm like, that's a lot of layers. That's just simulations and calibrations all the way down. But it actually is really important. And so let's just dive in. We're talking about this 2% designated reserve ratio in deposit insurance. This is something that applies to every single bank because every single bank pays into the deposit insurance fund. So even though it may sound technical, it's not some extraneous issue. This is really important for banks. Pat and Brittany, can you give our listeners a quick overview of what of the measurements we're talking about here? Does designated reserve ratio, minimum reserve ratio, and how these numbers go into the calculations of federal deposit insurance?
Sure. I'll take a first stab at that. And on the minimum reserve ratio, it's very clear. So that one is set out by statute. So Congress has mandated that the FDIC must maintain a fund of 1.35% of insured deposits. And so that is something that they have to maintain. And if they do not, for whatever reason, for example, large amounts of bank failures, then they have to increase assessments and they have to come back to within 1.35 within eight years. So that's a statutory requirement. The designated reserve ratio is a little bit different.
Why did the FDIC base the 2% target on loss provisions from past crises?
It's also a statutory requirement that the FDIC designate one. However, Congress did not mandate that it was set at any minimum level other than it had to be at or above 1.35%. So what the FDIC has done is they've set that out to as a long range goal for the fund to And that actually helps, to your point, Evan, that you made, this actually helps drive the level of assessments that banks are charged as they are trying to get to 2%, which is what it's been set since 2010. So for 16 years, which was set in the midst of the crisis. So that level has been set. And then since that time, they've been charging rates to get them to 2%.
What went into that original decision, into that original calculation says we're going to 2%.
That was actually created, which is very reasonable. What the FDIC did is they looked at, they've really had two stress time periods since their inception, really, where there have been material amounts of bank failures. And they looked at those two time periods and they said, let me look back at the savings and loan crisis back in the 80s and 90s.
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Chapters
8 chapters
1
What is the FDIC’s 2% Designated Reserve Ratio and why does it matter?
0:06–1:53
2
How do the Minimum Reserve Ratio and Designated Reserve Ratio differ legally and practically?
1:53–3:18
3
Why did the FDIC base the 2% target on loss provisions from past crises?
3:18–5:34
4
What historical simulations were used in 2010 to set the 2% ratio?
5:34–7:20
5
Is relying on the 1980s‑90s savings‑and‑loan crisis still appropriate for today’s banking system?
7:20–9:24
6
How might an updated simulation change the recommended reserve ratio?
9:24–10:43
7
What are the real‑world cost implications for banks and consumers if the ratio stays at 2%?
10:43–11:22
8
What next steps do the experts recommend for reassessing the FDIC’s reserve ratio?
11:22–11:33