The Federal Deposit Insurance Corporation (FDIC) is considering a significant change in its reserve ratio calculation methodology. Acting Chairman Travis Hill has suggested that the agency should use total liabilities, rather than insured deposits, as the denominator in determining the Deposit Insurance Fund’s (DIF) reserve ratio.

Rationale Behind the Proposed Change

Currently, the DIF reserve ratio is calculated by dividing the fund’s balance by the total amount of insured deposits. However, Hill points out that this approach creates a mismatch, as the FDIC moved away from charging assessments based solely on insured deposits years ago. By using total liabilities—which generally equate to total consolidated assets minus tangible equity—the calculation would align more closely with the current assessment base.

This adjustment aims to provide a more comprehensive view of the DIF’s health and its capacity to cover potential losses, considering the broader financial exposure of insured institutions.

Current Status of the DIF Reserve Ratio

As of December 31, 2024, the DIF reserve ratio stood at 1.28%, an increase from 1.22% in June 2024. Despite this improvement, it remains below the statutory minimum of 1.35%. The FDIC initiated a restoration plan in 2020 to address this shortfall, aiming to meet the required threshold by 2028. However, projections now indicate that the reserve ratio is likely to reach the statutory minimum ahead of schedule, potentially by the end of 2025.

Rescission of 2024 Bank Merger Policy

In a separate development, the FDIC board has unanimously voted to rescind the 2024 Statement of Policy on Bank Merger Transactions. The rescinded policy had expanded the factors considered during merger application reviews, including the impact on local communities and financial stability assessments for mergers resulting in institutions with over $100 billion in assets. Critics argued that the policy introduced uncertainty and complexity into the merger approval process. The FDIC has reinstated the previous policy, effective 30 days from its publication in the Federal Register, while it conducts a broader reevaluation of its bank merger review process.

Industry Response

The American Bankers Association (ABA) has expressed support for the FDIC’s decision to rescind the 2024 merger policy. ABA President and CEO Rob Nichols stated that the move would help ensure that future decisions on bank merger applications are made promptly and are subject to clear standards. He emphasized the importance of developing a revised merger framework that strengthens the financial system and enables banks of all sizes to flourish.

Conclusion

The FDIC’s proposed shift in the reserve ratio calculation to use total liabilities reflects an effort to align assessment methodologies with current financial realities. Coupled with the rescission of the 2024 bank merger policy, these actions indicate a move towards greater clarity and efficiency in regulatory practices. Stakeholders are encouraged to engage with the FDIC as it continues to refine its approaches to ensure the stability and robustness of the financial system.