The Bank Insurance Fund (BIF) is a term closely associated with the Federal Deposit Insurance Corporation (FDIC) in the United States.
The Federal Deposit Insurance Corporation (FDIC) is a government agency that was formed in 1933 by the Banking Act of 1933, also known as the Glass-Steagall Act, in response to massive bank failures during the 1930s Great Depression. Its principal goal is to ensure financial stability and public trust in the country's financial system by insuring deposits in banks and savings associations.
The Bank Insurance Fund (BIF) is a Federal Deposit Insurance Corporation (FDIC) component. It provided insurance coverage to regular banks, not savings and loan associations. This fund was founded due to bank troubles during the late 1980s savings and loan crisis.
Understanding the Bank Insurance Fund (BIF)
The FDIC established the Bank Insurance Fund (BIF) in 1989, a money fund that guaranteed deposits made by Federal Reserve System institutions. The primary objective was to separate bank insurance from thrift insurance money.
A thrift bank, also known simply as a thrift, is a type of financial organization that specializes in savings accounts and home mortgages. The Savings Association Insurance Fund (SAIF) provided the funds for thrift insurance. Banks often changed their classification from bank to thrift or vice versa to save on fees, depending on which fund offered lower costs at the time.
The Federal Deposit Insurance Act of 2005 was enacted in response to this issue. The Deposit Insurance Fund replaced the Savings Association Insurance Fund and the BIF with a single fund, the Deposit Insurance Fund.
What is Deposit Insurance Fund (DIF)
The Deposit Insurance Fund (DIF) is a distinctive insurance company that focuses on protecting people's deposits that are insured by the Federal Deposit Insurance Corporation (FDIC). The DIF sets aside funds to help compensate for losses if a bank or financial institution fails. Insurance payments made by banks finance this fund. The organization includes over 6,000 banks.
The primary goals of the Deposit Insurance Fund (DIF) are to protect deposits and ensure the security of depositors in insured banking institutions. It also manages the liquidation of bankrupt banks.
The DIF is primarily funded by quarterly payments received from insured banks and generates interest on the securities it holds. Setting aside money for future losses from failed banks and funding the FDIC's operations costs affect the DIF's balance.
The Dodd-Frank Act, or the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, changed how the FDIC manages the fund. It established guidelines for the Designated Reserve Ratio (DRR), which determines how much the DIF should hold compared to the expected insured deposits. The act also redefined the assessment basis used to compute the quarterly payments made by banks. (Divide the DIF balance by the expected insured deposits to determine the reserve ratio.)
Important Factors to Consider
The FDIC developed a comprehensive, long-term plan for managing the DIF in response to these legal changes. This concept aimed to smooth out the ups and downs in assessment rates across economic cycles and keep the fund balance positive even during banking crises. As part of this plan, the FDIC Board adopted the current rate schedules and established a 2% DRR.
The DIF's balance reached $110.3 billion during the fourth quarter of 2019, a $1.4 billion rise from the previous quarter. This expansion was supported by income from assessments and interest collected on the DIF's investment instruments. The reserve ratio, which indicates the strength of the DIF, remained unchanged from the previous quarter at 1.41%.
Furthermore, according to the FDIC, the number of troubled banks fell from 55 to 51 during the fourth quarter. The number of troubled banks was the lowest since the fourth quarter of 2006. The combined assets of these troubled banks dropped as well, from $48.8 billion in the third quarter to $46.2 billion in the fourth.
In terms of the entire year 2019, the banking industry recorded a net income of $233.1 billion, a $3.6 billion (1.5%) decrease from the previous year, principally due to slower growth in net interest income and higher provisions for possible loan losses. Reduced noninterest income also contributed to the drop in net income. The average return on assets fell from 1.35% in 2018 to 1.25% in 2019.
The BIF and its successor, the DIF, have played an important role in ensuring financial stability through building confidence in the banking system throughout their history. The insurance coverage provided by these funds reassured depositors that their money was safe even during economic instability.
The Bottom Line
The Bank Insurance Fund (BIF) was established as a component of the Federal Deposit Insurance Corporation (FDIC) to protect deposits in banks, distinct from savings and loan associations. Its goal was to prevent bank runs and maintain public trust in the banking sector. It combined with the Savings Association Insurance Fund in 2006 to form the Deposit Insurance Fund (DIF), which ensures stability by protecting depositors' funds in member banks.
