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PROJECTED IMPACT OF INCREASED
INSURANCE PREMIUMS ON THE BANKING INDUSTRY
AND THE BANK INSURANCE FUND
 
 
MAY 1991
 
 

This memorandum was prepared by Tom Lutton under the supervision of Elliot Schwartz. Phil Bartholomew, Michael Crider, Bob Hartman, Kim Kowalewski, and Bob Sunshine contributed substantially to this memorandum. This analysis was conducted at the request of the Committee on Banking, Housing, and Urban Affairs of the United States Senate. It examines the effects of increased premiums on the banking industry and the Bank Insurance Fund (BIF). In accordance with the Congressional Budget Office's mandate to provide objective and impartial analysis, the memorandum contains no recommendations.

NOTE: All years are fiscal years, unless otherwise stated.
 
 

SUMMARY

Increases in bank insurance premiums may be used to recapitalize the Bank Insurance Fund (BIF), but not without causing additional bank failures and increases in gross losses to the fund in the near term. This analysis illustrates the potential effects of various premium increases on the banking industry and the balance of the BIF for fiscal years 1991 through 1996. Fund balances are compared with a fiscal 1996 standard based on 1.25 percent of insured deposits as mandated by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).

The principal finding of these simulations is that it is likely to take a substantial increase in the premiums above the current 19.5 cent premium to recapitalize the BIF to the FIRREA standard by fiscal year 1996. To reach that target the premium required would have to approach 46 cents per $100 of insured deposits, under the Congressional Budget Office's (CBO's) baseline assumptions.
 

INTRODUCTION

The BIF may become illiquid before 1991 has ended. Almost 600 banks have failed in the last three years and over 1,000 banks in the last decade. As banks fail, the Federal Deposit Insurance Corporation (FDIC) draws down the BIF balance to cover costs of resolution. BIF outlays have exceeded income for the last three years, and the last decade of bank closures has taken its toll on the fund. Current and announced premiums appear inadequate to recapitalize the fund.

This memorandum provides simulations that illustrate how increases in premiums may affect the banking industry as a whole and the balance of the BIF over fiscal years 1991 through 1996. As part of this analysis, CBO estimates premiums required to recapitalize the fund at 1.25 percent of insured deposits by 1996. The simulations take into consideration the weakened state of the industry and the current recession. The memorandum examines the effects of increased premiums on bank failures, gross losses to the fund, and the fund balance.

Some initial caveats are in order. While the simulations made in this report include estimates of effects of the current recession and secular trends in the banking industry, the depth and duration of the current downturn remain uncertain. Moreover, the effect of increased premiums depends critically on the ability of banks to pass the cost through to their customers and on the extent to which the rate of growth of deposits is affected by premium increases. Because past history offers little guidance on how to estimate these behavioral responses, somewhat arbitrary assumptions must be made about them.

This document is available in its entirety in PDF.