Bank Insurance Fund - Explained
What is a Bank Insurance Fund?
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What is a Bank Insurance Fund?
Bank Insurance Fund (BIF) is a unit of Federal Deposit Insurance Corporation (FDIC) that deals with the provision of insurance protection for banks that are not grouped as a saving and loan association. Given all FDIC covers, BIF provides coverage with a limit of $250,000 for every customer in insolvent banks. Creation of BIF was due to loan and savings crisis in the late eighties.
How Does a Bank Insurance Fund Work?
As a result of BIF creation, two different branches of FDIC coverage were formed. The branches are BIF and Savings Association Insurance Fund (SAIF). Later in 2006, Congress brought together the two branches to form Deposit Insurance Fund. During the first quarter of 2017, there was a significant increase in the balance of Deposit Insurance Fund as reported by FDIC. The purpose of the fund is to pay depositors of liquidated banks. FDIC goes further outlining that each bank is required to set up a minimum Designated Reserve Ratio (DRR) of 1.35 percent of estimated insured deposits or the equal percentage of the new assessment base, average consolidated total assets minus average tangible liabilities. When the reserve ratio falls lower than either Designated Reserve Ratio of 1.35 or FDIC projects that the reserve ratio will be within six months, then the FDIC has to adopt a restoration plan that provides the Deposit Insurance Fund (DIF) with the return to 1.35 percent within the subsequent eight years. During these eight years, FDIC must undertake the necessary steps for taking back reserve ratio to 1.35 percent of approximated insured deposits by September 30, 2020. FDIC has a mandatory obligation of offsetting the impacts of small institutions, holding assets valued at less than $10 billion of the provision that the reserve ratio reaches DRR of 1.35 percent by September 30, 2020, not 1015 by the end of 2016. Whenever the reserve ratio surpasses 105 percent, FDIC must split the DIF members amounts on top of the 1.5 required to be maintained in DIF although FDIC board of Directs might on its complete discretion suspends or limit dividend declaration. After the financial crisis of 2008-09, the poor bank performance spiked reaching its maximum in 2011 after which it has slowly declined. There was a fall of the number of corporations maintained in FDIC problem register from 123 in December 2016 down from 183 at the end of 2015. The number of banks problems that once reached 888in March 2011 has quarterly declined too and is currently at its lowest ever since the second quarter of 2008. The number of banks failure also continue to fall as five failed in 2016 in comparison to eight in 2015, FDIC outlines.