What Is the Deposit Insurance Fund?

The Deposit Insurance Fund (DIF) is a private insurance provider devoted to ensuring the deposits of individuals covered by the Federal Deposit Insurance Corporation (FDIC). The money in the Deposit Insurance Fund (DIF) is set aside to pay back the money lost due to the failure of a financial institution. The DIF is funded by insurance payments made by banks. The organization has over 6,000 member banks.

Key Takeaways

  • The Deposit Insurance Fund (DIF) is a private, industry-sponsored insurance fund that covers all deposits above the Federal Deposit Insurance Corporation (FDIC) limits at member banks.
  • Any DIF member bank is also a member of the FDIC and is insured by that organization to at least $250,000.
  • The two insurers together make the guarantee that any member banks have full deposit insurance on their deposit accounts.

How the Deposit Insurance Fund Works

Account holders at banks feel more secure if their deposits are insured, and the Deposit Insurance Fund provides the assurance that they are. For example, if your bank closed its doors in 2009, you would be covered for up to $250,000. This reduces the same type of fear that caused the bank run in the 1930s. A common use of the DIF account balance is to compare it to the total assets of banks on the "FDIC Problem Banks List," which is issued quarterly. The FDIC can not run out of money because it can borrow from the Treasury Department, but large losses would mean higher premiums for the remaining banks in the following years.

Recent Reforms of the Deposit Insurance Fund

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) modified the FDIC's fund management practices by setting requirements for the Designated Reserve Ratio (DRR) and redefining the assessment base, which is used to calculate banks' quarterly assessments. The DRR ratio is the DIF balance divided by estimated insured deposits. Responding to these revisions, the FDIC developed a comprehensive, long-term plan to manage the DIF in a way that reduces pro-cyclicality while achieving moderate, steady assessment rates throughout economic and credit cycles and maintaining a positive fund balance in the event of a banking crisis. As part of this plan, the FDIC Board adopted the existing assessment rate schedules and a 2% DRR. 

The Federal Deposit Insurance Act requires the FDIC's Board to set a target or DRR for the DIF annually. Since 2010, the Board has stuck with the 2% DRR each year. However, an analysis, using historical fund loss and simulated income data from 1950 to 2010, showed that the reserve ratio would have had to exceed 2% before the onset of the two crises that occurred during the last 30 years to have maintained both a positive fund balance and stable assessment rates throughout both crises. The FDIC views the 2% DRR as a long-term goal and the minimum level needed to withstand future crises of similar magnitude.