FDIC Improvement Act (FDICIA)

What Is the FDIC Improvement Act (FDICIA)?

The FDIC Improvement Act (FDICIA) was passed in 1991 at the height of the savings and loan 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 created the Truth in Savings Act (Regulation DD).

Understanding the FDIC Improvement Act (FDICIA)

While it may be hard to fully appreciate the changes made to the internal workings of the Federal Deposit Insurance Corporation (FDIC) through the FDIC Improvement Act, most consumers can agree that the Truth in Savings Act has gone a long way towards forcing banks to deliver on their advertised promises. The Truth in Savings Act, which was 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.

History of FDIC Improvement Act (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.

From 1980 until 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 had become severely undercapitalized, which made the legislation necessary.

Savings and Loan Crisis

Besides bank failures, the savings and loan (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.

Special Considerations

Since the FDICIA was signed into law in 1991, the FDIC has made a number of changes to the act regarding annual reporting requirements for insured depository institutions. Effective Dec. 15, 2016, the FDIC's Annual Independent Audits and Reporting Requirements outline these changes.

The FDIC divides institutions into three tiers based on consolidated total assets. The three tiers are comprised of institutions with less than $500 million in consolidated total assets, institutions with consolidated total assets between $500 million and $1 billion, and institutions with consolidated total assets greater than $1 billion.

Those financial institutions with over $500 million in assets must undergo more rigorous audits and have greater FDIC oversight. These institutions have additional annual reporting requirements, must provide written statements regarding management's responsibilities in preparing the institution's financial statements, and must abide by certain audit committee provisions. Institutions that fail to comply with these audit standards could face FDIC civil penalties or administrative actions.