What Is the FDIC Improvement Act (FDICIA)?
The FDIC Improvement Act (FDICIA) was passed in 1991 at the height of the savings and loan (S&L) crisis. The act fortified the role and resources of the Federal Deposit Insurance Corporation (FDIC) in protecting consumers. The most notable provisions of the act raised the FDIC's U.S. Treasury line of credit from $5 million to $30 million, revamped the FDIC auditing and evaluation standards of member banks, and included the Truth in Savings Act, also known as Regulation DD.
- The FDIC Improvement Act was passed in 1991 to strengthen the FDIC's role in overseeing banks and protecting consumers.
- The FDICIA was created in response to the savings and loan crisis, which resulted in the failure of nearly a third of the U.S. savings and loan associations from 1986 to 1995.
- It included the Truth in Savings Act, which forced banks to provide disclosures about savings account interest rates.
- The FDICIA requires financial institutions with over $150 million in assets to undergo financial audits and comply with additional annual reporting requirements.
- Financial institutions that fail to comply with FDICIA requirements could face civil penalties and additional administrative actions.
Understanding the FDIC Improvement Act (FDICIA)
The FDIC was established in 1933 with the passing of the Emergency Banking Act to boost confidence in the American banking system. It is an independent government agency that provides deposit insurance for consumer bank accounts and other qualified assets when and if financial institutions fail. The FDIC divides institutions into three tiers based on consolidated total assets, including:
- Institutions with less than $500 million in consolidated total assets
- Institutions with consolidated total assets between $500 million and $1 billion
- Institutions with consolidated total assets greater than $1 billion
Thousands of financial institutions fell under between 1986 and 1995, resulting in the savings and loan crisis. The FDICIA was put into place to strengthen the FDIC's power. It established the need for greater oversight and more rigorous audits for financial institutions with over $500 million in assets. Under the act, they:
- Have annual reporting requirements
- Must provide written statements regarding management's responsibilities in preparing the institution's financial statements
- Must abide by certain audit committee provisions
Institutions that fail to comply with these audit standards could face FDIC civil penalties or administrative actions.
While it may be hard to fully appreciate the changes made to the internal workings of the FDIC through the FDICIA, most consumers can agree that the Truth in Savings Act has gone a long way toward forcing banks to deliver on their advertised promises. The Truth in Savings Act, which is part of the FDICIA, forced banks to begin disclosing savings account interest rates, using the uniform annual percentage yield (APY) method. This has helped consumers to better understand their potential return on a deposit at a bank, as well as to compare multiple products and multiple banks simultaneously.
Since the FDICIA was signed into law in 1991, the FDIC exercised its delegated authority to update and revise its regulations imposing annual reporting requirements on insured depository institutions. The FDIC's Annual Independent Audits and Reporting Requirements outline these changes.
History of the FDICIA
After establishing the FDIC in 1934, bank failures in the United States averaged roughly 15 annually until 1981, when the number of bank failures began to rise. It reached about 200 per year by the late 1980s, and this trend was due in large part to the surge and subsequent collapse in several industries.
Between 1980 and the end of 1991, nearly 1,300 commercial banks either failed or required failing bank assistance from the FDIC. The FDIC closed down insolvent institutions. By 1991, it became severely undercapitalized, which made the legislation necessary.
Savings and Loan (S&L) Crisis
Besides bank failures, the S&L crisis contributed to problems in the financial services industry, which ultimately led to the passing of FDICIA. In the late 1970s, there was a large, unanticipated increase in interest rates. For savings and loan institutions, this meant depositors moving funds out of savings and loan institutions and into institutions that were not restricted on the amount of interest they could pay depositors.
The congressional deregulation of savings and loans in 1980 gave these institutions many of the same capabilities as banks with less regulation, causing regulatory forbearance as an additional strain in the early 1980s.
From 1983 to 1990, nearly 25% of savings and loans were closed, merged, or placed in conservatorship by the Federal Savings and Loan Insurance Corporation (FSLIC). This collapse drove the FSLIC into insolvency, leading to its abolishment by the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) in 1989.