By Patrick Mitchell and Brittany Kleinpaste
ABA DataBank
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Executive summary
The FDIC’s 2% Designated Reserve Ratio, or DRR, is a board-designated long-run target intended to keep the Deposit Insurance Fund positive through severe stress while avoiding sharp, procyclical assessment increases. While the FDIC has a statutory obligation to establish a DRR every year, the only requirement is that the DRR may not be less than 1.35% of estimated insured deposits. In 2010, the FDIC set the DRR at 2% — a policy calibration rooted in a historical simulation and a particular moment of crisis uncertainty—and has reaffirmed it at the same level every year since.
After 16 years, amid significant changes in the banking industry, it’s time for an updated analysis of the calibration underlying the current target. A core analytical concern is that the 2010 calibration relied on loss provisions recorded while the industry and the broader economy were still in crisis. With the benefit of hindsight, we can now see that crisis-era provisions materially exceeded realized failure-resolution losses. The gap matters, because using provisions rather than realized losses pushes the implied long-run target upward. For simplicity and consistency, this essay refers to loss estimates recognized through provisions, including the contingent loss reserves used in the FDIC’s original 2010 simulation framework. Separately, the simulation relies heavily on losses associated with the S&L crisis at FDIC-insured banks — a substantially different period for banking practices and policy four decades ago.
A constructive policy path forward is methodological, rather than rhetorical: The FDIC should re-run and publish a similar historical simulation framework using realized, failure-year losses (rather than provisions), and include updated institutional conditions and analysis to account for industry changes. More broadly, the original framework is inherently backward-looking and deterministic, which highlights the importance of reassessing its calibration as new data and industry changes emerge and are better known and understood. The analysis should adjust for updated industry conditions, as ABA has previously highlighted in comment letters here and here, including enhanced capital and liquidity requirements. The updated simulation should inform whether the current DRR remains appropriate in light of information now available that was not available in 2010. The analysis should still support the FDIC’s own objective: moderate and steady pricing, without systematically over-sizing the DIF. This essay does not argue for a specific DRR level but instead evaluates how the existing framework performs when updated with information that was not available at the time of the original calibration.
An important policy consideration is that both underfunding and overfunding the DIF can carry costs. A fund that is too small may increase the likelihood of restoration plans, special assessments, or procyclical pricing during periods of stress. Conversely, maintaining a fund materially larger than necessary to achieve the FDIC’s objectives requires banks to prefund losses that may never occur, potentially increasing assessment burdens beyond what is needed to support fund resilience and pricing stability. The policy question is therefore not whether the DIF should be large or small, but whether the target is calibrated appropriately to balance resilience, stability, and cost.
What is the 2% DRR?
The DRR is the FDIC’s long-run target for the DIF reserve ratio (that is, the DIF balance divided by estimated insured deposits). The DRR differs from the statutory Minimum Reserve Ratio, or MRR, of 1.35%, which triggers restoration-plan requirements if the MRR falls below the statutory requirement. (For a technical analysis of the reserve ratio assessing whether the denominator should reflect the assessment base, click here.)
The FDIC’s public materials describe the 2% DRR as a “long-range, minimum goal” that will increase the likelihood of the DIF remaining positive throughout periods of significant losses due to bank failures. The FDIC’s rules prescribe progressively lower assessment rates (i.e., the rate FDIC-insured banks pay into the DIF) as the reserve ratio exceeds 2% and 2.5%. The framing of the DRR’s purpose is important: the level is an outcome of a model and policy judgment, not a statutory constant — unlike the 1.35% floor, which is embedded in statute.
Rather than debating the concept of a long-run target, a practical way to evaluate whether 2% remains appropriate is to revisit the numerical calibration using updated data and the FDIC’s own framework.
How a historical simulation determined today’s 2% DRR
The FDIC’s long-run framework was built around a historical simulation using fund loss experience and simulated income data over a long historical window (1950–2010). The key design objective was to maintain a positive fund balance during severe stress while avoiding sharp swings in assessments paid by FDIC-insured banks.
The FDIC’s analysis concluded that to maintain a positive fund balance and stable assessment rates through major crises in the sample window, the reserve ratio would have needed to exceed roughly 2% before the onset of each crisis. The recommended level reflected both reserve adequacy considerations and a broader policy objective of promoting steady, predictable assessments that would reduce the likelihood of sharp pricing increases during periods of stress. This resulted in today’s 2% DRR as a long-range target.
A key technical concern: provisions vs realized losses
The FDIC’s reliance on loss provisions in the 2010 calibration was both reasonable and necessary at the time. During an active crisis, realized resolution losses are not yet observable, and provisions represent the best contemporaneous estimate of expected losses and therefore an important driver of the DIF balance. In that sense, the original framework appropriately reflected the best information available at the time and the need to ensure fund resilience in an extremely uncertain environment. With the benefit of hindsight, however, a meaningful share of those provisions subsequently reversed as realized losses came in well below initial expectations.
This evolution does not imply that the original approach was flawed ex ante, but it does suggest that revisiting the calibration using realized outcomes may yield a more accurate assessment of the fund level required to achieve the FDIC’s stated objectives without potential oversizing resulting from provision estimates that were later revised downward.
A key consideration is that provisions reflect contemporaneous expectations under uncertainty, while realized losses reflect outcomes conditional on economic outcomes. The purpose of re-estimating the framework using realized losses would not be to suggest that real-time fund management should ignore expected losses under stress. Rather, it would allow the FDIC and the public to distinguish between the prefunding needed to absorb realized historical losses and the additional margin embedded to account for uncertainty, estimation risk and policy judgment.
In addition to the challenges discussed above, because the DIF balance is an accounting measure rather than a cash balance, it is affected by loss provisions as they are recorded, not only by realized resolution losses. In this sense, provisions were the operative contemporaneous measure of expected losses. Because provisions incorporated worst-case expectations that later reversed, the simulation tends to imply a larger pre‑funded balance is required to maintain a positive fund under a steady pricing policy. Re-estimating the historical simulation using realized failure-year losses would represent a natural extension of the FDIC’s original framework, rather than a departure from it.
These realized outcomes reflect macroeconomic recovery and resolution decisions taken during crises, which should be considered when interpreting the gap between provisioned and realized losses. One important possible limitation is that using realized losses could understate the tail risk observed at the point of stress.
ABA analysis highlights the magnitude of this gap. Using data from the FDIC’s Quarterly Banking Profile, the DIF accumulated approximately $102.6 billion of loss provisions from the first quarter of 2008 to the first quarter of 2010, with over $99 billion accumulated in 2008 and 2009. Ultimately, according to the FDIC’s failed bank data, realized losses were approximately $69 billion for receiverships established between 2008 and 2013, with roughly $59 billion occurring between 2008 through 2010. Moreover, starting in 2010, the FDIC booked negative annual loss provisions (for both future and existing bank failures) for 13 straight years, interrupted only by the events of spring 2023. As such, while the DIF balance must reflect provisions in practice, calibrating long‑run funding levels based on provision patterns that later reverse may overstate the required reserve.
Prior to the early 1990s, provisions for insurance losses largely tracked realized outcomes. For example, negative provisions occurred only twice (1979 and 1980) between 1934 and 1991. Since 1992, the historical record indicates that provisions have tended to exceed subsequent realized losses, with large provisions recorded during stress periods and frequently reversing in subsequent years. As evidence, the FDIC reported negative provisions in 27 of the 34 years since 1992, consistent with a tendency to overstate losses ex ante. Whether this pattern reflects appropriate estimation under uncertainty, changes in economic conditions, resolution outcomes, or other factors, it suggests value in re-estimating the long-run calibration using the expanded body of realized experience now available.
Because the 2010 DRR calibration relied on provision-based losses during an ongoing crisis, the calibration embeds conservatism directly into the estimated fund size needed. Re-running the same framework using realized failure-year losses could yield a lower implied reserve ratio under similar assumptions, although the outcome would depend on the timing and clustering of losses within the simulation.
Even a partial adjustment from provision-based to realized loss calibration, holding all else equal, would mechanically reduce required pre-crisis reserve levels, though quantifying that effect would require re-estimation of the full simulation.
A second key concern: original calibration ignores structural changes in banking
Beyond the provisions-versus-realized-losses concern, the original historical simulation implicitly relied on crises that occurred under very different institutional regimes.
The S&L crisis is frequently used as a key reference point in long-run fund sizing exercises; however, the structure of the industry and the policy regime have changed materially. Today’s banking system and business models are more diversified and resilient, and post-crisis reforms like FDICIA and the Dodd-Frank Act have introduced stronger capital, liquidity and resolution planning requirements. For example, common equity capital ratios are materially higher than pre-2008 levels. The liquidity coverage ratio and high-quality liquid asset requirements enhance systemwide liquidity, while resolution planning frameworks are designed to reduce loss severity.
This does not imply that bank failures will not occur. Rather, both the probability and loss severity profile associated with failures may differ, and the correct way to reflect this change is to update the empirical calibration instead of reusing a fixed historical target. The relevant question is not necessarily whether S&L-era losses should be ignored, but whether the calibration should disclose how sensitive the implied reserve ratio is to loss experience generated under materially different institutional regimes.
Current dynamics: DIF moving toward 2% faster than expected
Recent DIF dynamics provide an additional reason to revisit the calibration now: The reserve ratio has increased rapidly, rising from 1.11% following the spring 2023 failures to 1.43% as of first quarter 2026. If the reserve ratio continues to grow at its recent pace, it would reach 2% as early as 2030. The FDIC’s own projections show the reserve ratio reaching 2% by the end of 2031 under the current assessment rate schedules. (These projections do not incorporate the potential impact of the notice of proposed rulemaking regarding lower assessment rates published in June 2026.)
These projections are a mechanical implication of the current schedule and baseline assumptions, relevant because it appears the DIF is on track toward the long-run target at a relatively fast pace. If a long-run target is set above the level implied by an updated calibration, rapid accretion could result in cumulative assessments that exceed those implied by a steady pricing path under alternative assumptions.
Taken together, these observations raise a question about how the 2010 calibration would perform if re-estimated using updated data and institutional conditions. One interpretation is that the original framework, when recalibrated using realized losses, may imply a lower long-run reserve ratio consistent with the FDIC’s objective of maintaining a positive fund while avoiding procyclical pricing. An alternative interpretation could be that provision-based calibration appropriately captures tail risk and uncertainty that may not be reflected in realized outcomes. A third possibility is that both effects are present, suggesting that the appropriate reserve ratio ultimately reflects a policy judgment balancing the benefits of additional prefunding against the costs of maintaining a larger fund than necessary to achieve the FDIC’s stated objectives.
Implications for DRR calibration
The 2% DRR was a reasonable post-crisis calibration under uncertainty, tied to a specific historical simulation and a “steady, moderate” pricing concept. Today, the data needed to update the calibration are available, making the reasonableness of the 2% target a question that can be reassessed within the FDIC’s existing framework. The FDIC should publish an updated version of the historical simulation using today’s data and institutional framework. Whether that analysis ultimately supports retaining the current calibration or suggests an alternative calibration would be an empirical question.
An empirical reassessment could include two components: First, it would re-run the FDIC’s historical simulation using realized failure-resolution losses allocated to year of failure, rather than provisions, and publish results alongside the original simulation to enable comparison. Then it would assess whether the DRR target remains well calibrated after accounting for updated industry and institutional conditions, including enhanced capital, liquidity, supervision and resolution frameworks.
Reassessing the 2% DRR is ultimately an empirical question best addressed within the FDIC’s existing framework rather than through conceptual debate. Re-estimating the historical simulation using realized failure-year losses, alongside analysis that reflects modern regulatory and industry conditions, would provide a transparent basis for evaluating whether the current target remains well calibrated to the FDIC’s stated objectives. Such an exercise may imply a different reserve ratio under unchanged assumptions, or reinforce the current target, but in either case would ensure that the DRR reflects observed loss experience and current conditions rather than legacy assumptions. Aligning the long-run target with updated evidence would support the FDIC’s dual goals of maintaining fund resilience while avoiding unnecessarily elevated or procyclical assessment burdens.
Patrick Mitchell is head of economic policy research at ABA. He previously served as director of the Federal Deposit Insurance Corporation’s Division of Insurance and Research. Brittany Kleinpaste is a VP for economic research at ABA. The views expressed are those of the authors and should not be attributed to the Federal Deposit Insurance Corporation.
