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Bank Insurance Fund Definition

Bank Insurance Fund (BIF) Defined

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.

A Little More on What is a Bank Insurance Fund

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 member’s 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.

References for Bank Insurance Fund

Academic Research on Bank Insurance Fund

  • Implications of annual examinations for the bank insurance fund, Gilbert, R. A. (1993). Federal Reserve Bank of St. Louis Review, 75(1), 35. The author states that the annual examinations are meant to mitigate Federal Deposit Insurance fund loses. It proceeded by emphasizing on the frequent check that might reveal the depository company’s challenges that can be corrected before they get worse. Besides, a frequent examination may allow supervisors to shut down seriously troubled institutions. When this is done earlier, it prevents managers of such institutions from making decisions that increasingly expose federal deposit insurance fund into losses this paper examines the existence of a relationship between the extent of banks examination and loses to the bank insurance fund (BIF).
  • The implied reserves of the Bank Insurance Fund, Episcopos, A. (2004). Journal of Banking & Finance, 28(7), 1617-1635. The paper talks of the put premium option as an option model of deposit insurance pricing view assessment. The model weakness is that it assumes risks of fund guarantee default. The author tries to link risks based premiums with guaranty fund reserves in semi equilibrium state by using methodology founded on options possessing credit risks. The premium value is divided into two, the explicit part as a result of the existence of assets of the guaranty fund. On the other hand, implicit comes from federal support contingent on satisfaction of reserve at the end of the period cover.
  • The effects of legislating prompt corrective action on the bank insurance fund, Gilbert, R. A. (1992). Federal Reserve Bank of St. Louis Review, 74(4), 3. The Federal Deposit Insurance corporation improvement act of 1991 after that, FDIC authored more federal government funds for the Federal Deposit Insurance Corporation and made supervisorily, and regulation of deposit companies changes were made. One of the requirements of FDICIA was that the supervisors were to take prompt corrective action if a company’s capital ratio falls below the required level. Supervisors were also to put limits for the companies with relatively less capital ratio. Despite all these, Banks that were considered to be well capitalized were subjected to very fewer restrictions.
  • The federal deposit insurance fund that didn’t put a bite on US taxpayers, Kane, E. J., & Hendershott, R. (1996). Journal of Banking & Finance, 20(8), 1305-1327.  The paper states that The National Credit Union Share Insurance Fund (NCUSIF) went through the 1980s without falling out of funds unlike Federal Savings and Loan Insurance Corporation and Bank Investment Fund. The paper also carried variations in incentive structure constrain analysis on attractiveness of interest-rate speculation and other risk-taking opportunities to managers and regulators of credit unions. The author continues by saying that regardless of the incentives, comprehensive present-value calculations establish that NCUSIF fell into economic insolvency during the mid-1980s.
  • Effects of bank consolidation on the Bank Insurance Fund, Oshinsky, R. (1999). Mergers of major banks in the 1990s changed the industry dramatically, with attention on the largest one hundred baking companies increasing from 54.6 percent at the 1990-year end to or 72.6 percent at mid-1990. The paper investigates the changes in BIF ‘s potential to remain solvent using Monte Carlos model of simulation of top 100 banking companies. The findings demonstrated that based on historical loss and failure rates, the mergers that occurred between 1990 and 1997 raised the risk of BIF insolvency by approximately 50 percent and that megamerger that took place or was announced during the 18 months between year-end 1997 and mid-year 1999 increased the risk of insolvency further.
  • Federal Reserve lending to banks that failed: Implications for the Bank Insurance Fund, Gilbert, R. A. (1994). Federal Reserve Bank of St. Louis Review, 76(1), 3. There was a debate that focused on the changes in public policy to reduce loses of deposit insurance funds. Lending by the Federal reserve to troubled banks was one of the major aspects of public policy that was subjected to scrutiny. And there was a report that was prepared by congressional staff indicating that more than 300 banks that failed in 1985-91 were borrowing from Federal bank by the time they failed similarly to banks that borrowed for extended periods. Additional evidence indicates that Federal Bank extended the lifespan of the borrowers that ultimately failed.
  • Should the FDIC worry about the FHLB? The impact of Federal Home Loan Bank advances on the Bank Insurance Fund, Bennett, R. L., Vaughan, M. D., & Yeager, T. J. (2005). ). The author is trying to investigate the impact of Federal Home Loan Bank (FHLBank) prepayments on Banking Insurance Fund. The paper outlays the approach developed by investigators that involved modeling the link between advances and expected losses. We then quantify the effect of advances on default probability with a CAMELS-downgrade model. Finally, we assess the impact on loss-given-default by estimating resolution costs in two scenarios: the liquidation of all banks with failure probabilities above two percent and the liquidation of all banks with advance-to-asset ratios above 15 percent. The investigation findings showed that FDIC is to add the price on FHLBank related risks.
  • The effect of industry consolidation and deposit insurance reform on the resiliency of the US bank insurance fund, Jones, K. D., & Oshinsky, R. C. (2009). Journal of Financial Stability, 5(1), 57-88. The paper examines the impacts of structural change in US banking industry besides regulatory changes covering the resent Deposit Insurance reform law, resiliency of FDIC in managing Bank Insurance Fund by estimation and comparison of probability od BIF insolvency with time. Undertaking these involved use of the Markov switching model and Monte Carlos simulation Model. The finding indicated a major increase in insolvency risks from bank insurance fund as a result of mergers.
  • The bank insurance fund: trends, initiatives, and the road ahead, Konstas, P. (1992). FDIC Banking Rev., 5, 15.  The author stated that the changes to financial conditions of the Bank insurance fund that have occurred over the past decade and the recent measures taken for BIF restoration to financial viability. The author continued and recommended that a moving-average assessment policy is implemented after the BIF reserve reaches its target of 1.25 percent of insured deposits.
  • The effects of setting deposit insurance premiums to target insurance fund reserves, Pennacchi, G. G. (1999). Journal of Financial Services Research, 16(2-3), 153-180. The paper states the ordinary feature of many insurance systems of being supported by insurance fund the premiums are set with the reserve in mind. The author study is based on the Federal Deposit Insurance Corporation fund targeting policy. There is also an examination of the distortions to banks’ cost of deposit financing that result from setting premiums in this manner. The study’s framework is covering many periods, multibank contingent claims model in which the stochastic rates of return on individual banks’ assets are assumed to be correlated and match the actual empirical distribution of a sample of U.S. banks. The advantages of targeting premium policy and flat rate insurance policy were examined, and the real impacts insurance mispricing was approximated.
  • Taxpayer loss exposure in the bank insurance fund, Kane, E. J. (1993). Challenge, 36(2), 43-49. The paper clarifies the wreck of Federal Savings and Loans Insurance Corporation (FSLIC) and discredits the standard models of value and deposit-insurance fund management. The Federal Deposit Insurance Corporation advancement together with Basle Accord of international banking supervision made capitalization requirements as the cornerstone of US. Te Accord established similar standards across all countries for measuring and controlling risks that a deposit’s institution financial structure divides between government safety nets and private parties that explicitly provides funds to bank assets. A system of discipline in which penalties escalates as a company comes to violate capital standards more and more.
  • The market valuation effects of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, Sundaram, S., Rangan, N., & Davidson III, W. N. (1992). Journal of Banking & Finance, 16(6), 1097-1122. There is an evaluation of the impacts of events leading to the passage of Financial Institutions Reforms, Recovery, and Enforcement act of 1989 by the author of this paper. The facts suggested there was the production of strange positive returns for both banks and S&Ls following the signing of Act by President Bush. The Act brought more risks to both banks and S&Ls.

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