[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
DEPOSIT INSURANCE REFORM
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
MAY 16, 2001
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-16
----------
U.S. GOVERNMENT PRINTING OFFICE
69-533 WASHINGTON : 2001
_______________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing
Office
Internet: bookstore.gpo.gov Phone: (202) 512-1800 Fax: (202) 512-2550
Mail: Stop SSOP, Washington DC 20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Ohio JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
Subcommittee on Financial Institutions and Consumer Credit
SPENCER BACHUS, Alabama, Chairman
DAVE WELDON, Florida, Vice Chairman MAXINE WATERS, California
MARGE ROUKEMA, New Jersey CAROLYN B. MALONEY, New York
DOUG BEREUTER, Nebraska MELVIN L. WATT, North Carolina
RICHARD H. BAKER, Louisiana GARY L. ACKERMAN, New York
MICHAEL N. CASTLE, Delaware KEN BENTSEN, Texas
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma MAX SANDLIN, Texas
BOB BARR, Georgia GREGORY W. MEEKS, New York
SUE W. KELLY, New York LUIS V. GUTIERREZ, Illinois
PAUL E. GILLMOR, Ohio FRANK MASCARA, Pennsylvania
JIM RYUN, Kansas DENNIS MOORE, Kansas
BOB RILEY, Alabama CHARLES A. GONZALEZ, Texas
STEVEN C. LaTOURETTE, Ohio PAUL E. KANJORSKI, Pennsylvania
DONALD A. MANZULLO, Illinois NYDIA M. VELAZQUEZ, New York
WALTER B. JONES, North Carolina JAMES H. MALONEY, Connecticut
JUDY BIGGERT, Illinois DARLENE HOOLEY, Oregon
PATRICK J. TOOMEY, Pennsylvania JULIA CARSON, Indiana
ERIC CANTOR, Virginia HAROLD E. FORD, Jr., Tennessee
FELIX J. GRUCCI, Jr, New York RUBEN HINOJOSA, Texas
MELISSA A. HART, Pennsylvania KEN LUCAS, Kentucky
SHELLEY MOORE CAPITO, West Virginia RONNIE SHOWS, Mississippi
MIKE FERGUSON, New Jersey JOSEPH CROWLEY, New York
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
C O N T E N T S
----------
Page
Hearing held on:
May 16, 2001................................................. 1
Appendix:
May 16, 2001................................................. 41
WITNESSES
Wednesday, May 16, 2001
Bochnowski, David, Chairman and CEO, Peoples Bank, Munster, IN;
Chairman, America's Community Bankers.......................... 24
Gulledge, Robert I., Chairman, President and CEO, Citizens Bank,
Robertsdale, AL; Chairman, Independent Community Bankers of
America........................................................ 26
Smith, James E., Chairman and CEO, Citizens Union State Bank and
Trust, Clinton, MO; President-elect, American Bankers
Association.................................................... 23
Tanoue, Hon. Donna, Chairman, Federal Deposit Insurance
Corporation.................................................... 7
APPENDIX
Prepared statements:
Bachus, Hon. Spencer......................................... 42
Oxley, Hon. Michael.......................................... 48
Crowley, Hon. Joseph......................................... 44
Gillmor, Hon. Paul E......................................... 47
Kelly, Hon. Sue W............................................ 45
Ney, Hon. Robert W........................................... 46
Bochnowski, David............................................ 73
Gulledge, Robert I........................................... 130
Smith, James E............................................... 53
Tanoue, Hon. Donna........................................... 49
Additional Material Submitted for the Record
Bochnowski, David:
America's Community Bankers letter to FDIC, Dec. 13, 2000.... 85
Deposit Insurance Reform for a New Century................... 101
Tanoue, Hon. Donna:
Clarification letter to Hon. Spencer Bachus, May 16, 2001.... 52
DEPOSIT INSURANCE REFORM
----------
WEDNESDAY, MAY 16, 2001
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, DC.
The subcommittee met, pursuant to call, at 9:36 a.m., in
room 2129, Rayburn House Office Building, Hon. Spencer Bachus,
[chairman of the subcommittee] presiding.
Present: Chairman Bachus; Representatives Weldon, Roukema,
Baker, F. Lucas of Oklahoma, Kelly, Gillmor, Manzullo, Toomey,
Cantor, Grucci, Hart, Ferguson, Tiberi, Waters, C. Maloney of
New York, Watt, Ackerman, Bentsen, Sherman, Meeks, Moore,
Hooley, Carson, Hinojosa, Lucas of Kentucky, Shows, and
LaFalce.
Chairman Bachus. The hearing will come to order. The
subcommittee meets today for the first of a planned series of
hearings on the subject of reforming our country's deposit
insurance system. And I want to stress that this is the first
of what will be more hearings on the subject. The focus of
today's hearing will be on a report prepared by the FDIC
entitled ``Keeping the Promise: Recommendations for Deposit
Insurance Reform.''
As we commence this hearing, the Vice President is speaking
before the Republican Conference, so on the Majority side, our
attendance may be down some. I understand that the Democrats
are also in a caucus. But our primary focus at today's hearings
will be listening to our witness, and I don't anticipate a lot
of questions, although the Members are free to ask as many as
they want to. I don't say that in a limiting way.
Federal deposit insurance, established during the Great
Depression to restore confidence in the Nation's troubled
banking system, is that rare product of the legislative
sausage-making factory that has actually worked pretty well as
it was intended to. It has enhanced economic stability, largely
eliminated the prospect of panic-driven runs on banking
institutions, and succeeded in minimizing the risk to taxpayers
from bank failures. Yet even the most effective Government
programs require periodic review and updating to ensure that
they continue to serve the purposes for which they were
originally created.
Our objective this morning is to begin what I hope will be
a constructive dialogue about the future of the deposit
insurance system. I can think of no better starting point for
that discussion than the report filed by the FDIC last month.
We are pleased to have FDIC Chairman Donna Tanoue with us
this morning to present the Agency's findings and
recommendations, and I will say that your report and
recommendations basically focus on every aspect of the reforms
that people have proposed.
The subcommittee's consideration of deposit insurance
reform comes at a time when the system itself is as healthy as
it has been in more than 20 years. Thanks largely to sizable
contributions by the banking and thrift industries in the
1990's, the Bank Insurance Fund and the Savings Association
Insurance Fund are both fully capitalized, with combined
balances exceeding $41 billion.
The strong condition of the deposit insurance funds might
cause some to conclude that the status quo should simply be
maintained, or argue for a more proactive approach. As the FDIC
has correctly pointed out, the current system leaves open the
possibility of sizable 23-basis-point premium assessment on
institutions if and when the designated reserve ratio falls
below 1.25 percent.
While there is significant debate within the industry about
the factors that might cause a penetration of this 1.25 hard
target, there is no doubt that a 23-basis-point assessment,
which has been aptly compared to falling off a cliff, would
have serious consequences both for banks' profitability and for
their ability to fund economic growth in the communities they
serve.
If such were to occur in a period of economic weakness, it
would even be worse. The FDIC's request for more flexibility in
setting the reserve ratio, therefore, warrants the
subcommittee's careful consideration.
Perhaps no deposit insurance issue has been more hotly
debated than the question of whether to increase coverage
levels above the current $100,000 per account limit. While
several influential policymakers have been openly skeptical of
the need for such an increase, many of us on this subcommittee
have heard from community bankers in our district who strongly
believe that a substantial coverage increase is critical to
their ability to attract core deposits and remain competitive
in their local markets. In my view, devising solutions to the
funding challenges faced by community banks should be this
subcommittee's highest priority. It is my hope that the
subcommittee will be reviewing various reform proposals with
that in mind.
In this regard I am particularly interested in hearing from
our witnesses on the issue of higher coverage levels for
municipal deposits, which have historically been a vital source
of funding for community banks, but have become increasingly
expensive to attract and maintain.
I notice the FDIC's recommendations for coverage limits is
simply to go up on all deposits--at least that is my
understanding from reading your proposal--and index them for
inflation as opposed to singling out retirement accounts,
pension accounts or municipal accounts.
In closing, I want to commend Chairman Oxley for his
leadership in placing the issue of deposit insurance reform on
the subcommittee's agenda. I look forward to working with him
and other Members of the subcommittee to develop legislation
that ensures the continued strength and vitality of a system
that has served us well for over 70 years.
I now recognize the Ranking Minority Member Ms. Waters for
her opening statement.
[The prepared statement of Hon. Spencer Bachus can be found
on page 42 in the appendix.]
Ms. Waters. I thank you very much, Chairman Bachus. I would
like to be somewhat brief in my opening remarks to allow time
to hear from the witnesses.
First of all, I really do want to thank you for calling
this hearing, and I look forward to working with you on Federal
deposit insurance reform. I want to commend Chairman Tanoue for
her work on this issue. She has worked very hard to produce a
comprehensive analysis of the strengths and weaknesses of the
deposit insurance system, and I think she and her staff have
given their time and attention to this issue than anyone since
Congressman Henry Steagall, who was the original architect of
the system in 1932. It was his infamous partnership with
Senator Carter Glass that produced the system we know today, as
well as other aspects of banking law that we won't necessarily
be talking about today.
In any case, deposit insurance has served America well for
over 65 years. It has maintained public confidence in our
banking system throughout times of prosperity and times that
weren't so good. It is important that we examine these issues
closely in order to maintain and strengthen today's system for
tomorrow's consumers.
I look forward to hearing the testimony of the witnesses so
that we can ensure that we have a deposit insurance system that
will serve us well throughout the new millennium.
I thank you very much, Mr. Chairman, and I yield back the
balance of my time.
Chairman Bachus. Thank you.
Mr. Baker.
Mr. Baker. Thank you, Mr. Chairman. I want to compliment
you for bringing this subject to the subcommittee's attention
and conducting this hearing this morning. My concerns go to the
basic fairness of the current system, and I have read with
considerable interest past studies of how the current system
has been constructed and the consequences of it.
For example, there are a significant number of new
institutions de novo who have enjoyed full and complete
insurance coverage without contributing a penny toward the cost
of that premium expense, while at the same time there are those
institutions which have been operational for many years,
operating at relatively low risk levels, that endured the
difficult years of the S&L bailout and repayment of obligations
not of their own making.
And in looking at the statutorily created risk categories,
the difference between the profile of the most risky
institution and the least risky institution, there is no
differential in premium paid because they pay nothing. There
seems to be little incentive in the current regime to operate
prudently, safely and conservatively.
My view is that there should be some modest increase in the
amount of coverage provided today, given inflationary factors,
but we should be very careful as we move forward in increasing
exposure for the taxpayer.
However, as to whether someone deposits their funds at a
small institution or one of the largest, there should be no
disparity in the coverage given to the depositor, so that there
should be a uniform system from the depositor's side.
However, I would like to know the view of the FDIC with
regard to one particular recommendation. I believe the agency
has evaluated in past years with regard to coinsurance. And
perhaps in looking at the market where you have 10 percent of
the institutions that represent potentially 90 percent of the
exposure to the fund, perhaps a different premium structure
than we currently view today with regard to coinsurance, where
the larger institutions perhaps would contribute significantly
more in premium to those that represent no risk to the fund
ultimately.
My basic question, then, Ms. Tanoue, is can you comment on
the possibility and usefulness of risk sharing, either through
reinsurance or other means, in determining an adequate price
for deposit insurance; and second, if such arrangement could,
in fact, be useful to limit the Government's exposure in a
potential institution's failure?
Chairman Bachus. I am sorry. We are still in opening
statements, Mr. Baker.
Mr. Baker. I am sorry. Rhetorically. Thank you, Mr.
Chairman.
Chairman Bachus. Mr. LaFalce.
Mr. LaFalce. Thank you very much, Mr. Chairman.
Today, the American deposit insurance system appears sound,
with surpluses in both the BIF and the SAIF above the statutory
minimum reserves. However, the current system contains
features, many enacted during the banking and thrift crises of
a decade ago, which do not represent optimal public policy.
Therefore, it is very appropriate for you to have this hearing
and for Congress to examine the structure of this system to
ensure that it provides the protection of depositors and
taxpayers that it should.
The FDIC recently issued a comprehensive report on the
deposit insurance system. In examining the need for reform,
Congress should thoroughly review all of the issues identified
in the FDIC report and other relevant analyses of the current
system.
In my view, a priority should be the merger of the BIF and
the SAIF. This would clearly benefit the deposit insurance
system by creating a single more diversified fund that is less
vulnerable to a regional economic problem.
In addition, a merger of the funds would more accurately
reflect the reality of today's financial services industry, in
which over 40 percent of the SAIF deposits are held by
commercial banks and FDIC-regulated State savings banks. But I
am increasingly of the opinion that the ultimate stability of
any combined fund would be dependent on the adoption of a more
effective risk-based premium system.
Part of the unfortunate fallout of the banking and thrift
crises is the current FDIC recapitalization provision that
requires the FDIC to impose a 23-basis-points assessment if one
of the FDIC funds falls below the required reserve ratio and
the funds cannot be recapitalized in a year. Such a mandatory
assessment could come precisely at the wrong time during an
economic downturn.
Chairman Greenspan recently expressed concern about
precisely this aspect of the current system, and the FDIC has
put forward meaningful recommendations to deal with this
problem. The change in this approach should be a part of any
deposit insurance reform legislation.
Another priority should be a reexamination of the current
risk-based system in which over 92 percent of all banks and
thrifts have paid no deposit insurance premium since 1996. This
zero premium creates a poor set of incentives for risk-taking
that would not exist if pricing were more accurately tied to
risk.
Additionally, the zero premium situation permits
institutions with dramatic deposit growth to significantly
increase the amount of funds protected by the deposit insurance
system without compensating the FDIC.
Many in the industry are understandably concerned that the
current pricing system allows institutions with large growth in
deposits to spread the cost of the increased exposure to the
other members of the system. And this, too, is clearly another
issue that deserves attention in our discussion.
Now, some banks, especially community banks, and a number
of Members of Congress have called for an examination of the
level of deposit insurance coverage. I am not yet convinced of
the wisdom of this, and the burden of proving either the
necessity or desirability of such an increase rests, it seems
to me, on the advocates of an increase. However, this is
clearly a very important issue for the banking industry,
particularly those community banks that rely more on core
deposits for funding. Then it is also an important issue for
many consumers who wish to ensure their savings are secure.
This subcommittee in Congress should give due consideration
to their concerns, but we must also give great consideration to
the views of those such as Chairman Greenspan, former Secretary
of the Treasury Summers, and so forth, who believe that an
increase in the level of coverage will increase the moral
hazard within our deposit insurance system. There may be a way
to increase the coverage, but also at the same time better
assessing both risk and the premiums necessary for that risk. I
look forward to a thoughtful exploration of this issue.
Any debate on comprehensive deposit reform must also
inevitably include a discussion of the proper level of reserves
of the FDIC. In determining the proper level for the FDIC's
reserves and insurance premiums, policymakers must strike an
appropriate accommodation between many objectives, and at least
two: first and most importantly, ensuring that the FDIC is able
to meet its obligation to depositors, while protecting
taxpayers, and that might well include paying for the costs and
examinations and supervision by regulators other than the FDIC;
and second, minimizing transfers of capital from the thrift and
banking industries where that capital can be used to fund
business loans, mortgage and other consumer credit needs. The
current approach that is a hard 1.25 ratio may not best achieve
an appropriate balance.
And I look forward to hearing the testimony of the FDIC
Chairman and other witnesses. I thank the Chair very much.
Chairman Bachus. Thank you.
Are there any Members on the Majority side that wish to be
recognized? Not so.
Ms. Carson.
Ms. Carson. Thank you very much, Mr. Chairman, for
convening this hearing. I look forward to the panelist
testimonies. I thank them for their presence. I am especially
pleased to see here again my good friend Mr. David Bochnowski
from the State of Indiana, who will be testifying on the second
panel. He brings to this hearing a wealth of experience, a
lifetime of public service dedicated to the people of Indiana
and the United States, and I certainly thank him for attending
today.
Mr. Chairman, Members of the subcommittee, since the
1930's, the full faith and credit of the United States has
stood behind $3 trillion of insured deposits at banks and
savings associations. Although Congress has only modified the
system twice, once in 1989 and again in 1991, in response to
financial crisis, there has been a renewed effort to reform the
current system.
In August of last year, FDIC Chairman Donna Tanoue--I hope
I didn't mispronounce your name--released an 84-page overview
of options on deposit insurance reform position paper, which
was opened to public comment until the beginning of this year.
The FDIC in the paper described in detail several possible
approaches to reform the deposit insurance system without
advocating any of them, except to recommend the merger of the
Bank Insurance Fund, BIF, and the Savings Association Insurance
Fund, SAIF.
Today, we are faced with a very different report. One which
takes a strong stance on four key areas of reform, including
the need to merge the BIF and the SAIF, the need to reform how
deposit insurance is priced to reflect risk, the need to adjust
insurance premiums, and the need to keep insurance coverage in
line with inflation. However, while there is general agreement
between FDIC, the banking industry and Congress on some of
these issues, there are still areas that we need to address
with specific care.
Unlike the previous reforms of deposit insurance in 1989
and 1991, economic crisis is not acting as a catalyst. To an
onlooker, concern over deposit insurance may seem to come at an
unlikely time, at least as far as the U.S. banking industry is
concerned. Banks are performing well, along with the U.S.
economy, despite the slight slowdown, downturn, recently, and
the industry has been stable in recent years. However,
interstate banking restrictions have been lifted, and the
barriers between commercial and investment banking are starting
to fall.
U.S. Banks are consolidating in record numbers, and the
size and complexity of our largest banks are growing. While
this consolidation and growth may not in itself be bad, one
thing is clear. The loss of just one of these too-big-to-fail
banks could pose an even greater systemic risk than before. Yet
too much depositor protection could result in such banks taking
too much risk.
Having said this, we are faced with a unique opportunity,
because we are not forced to reform deposit insurance because
of an economic crisis. We have an opportunity to reform deposit
insurance to avert future economic crisis. I stress again we
must do it with care and develop a consensus within the banking
industry on the right way to approach this issue.
There is general agreement that the BIF and the SAIF funds
should be merged, and as my colleague Mr. LaFalce pointed out
when he introduced his legislation to do this, the merger of
the BIF and SAIF would clearly benefit the deposit insurance
system by creating a single more diversified fund that is less
vulnerable to regional problems.
However, there has been a great deal of discussion within
the banking industry as well as here in Congress over some of
the other issues presented in the FDIC report. For example, if
insurance coverage is to be kept in line with inflation, what
is the appropriate year for beginning this inflation
adjustment? The FDIC has pointed out that if the base year were
1980, when the limit increased from $40,000 to $100,000, the
insurance level would be approximately $200,000 today to
account for inflation. If 1974 was chosen as the base year,
when the limit was increased from $20,000 to $40,000, the new
limit would be approximately $135,000.
Both Senator Phil Gramm and Mr. Greenspan initially
expressed opposition at setting the level at $200,000, and
there were also many bankers who were very concerned about the
loss of the current buffer above the 1.25 reserve ratio and a
potential for premium increases that would accompany a doubling
of the insurance limit. There were also bankers who expressed
concern about the political price that would have to be paid if
such an increase were to be enacted.
We must also consider the problems associated with
effectively pricing deposit insurance to reflect risk. We must
establish which financial institutions currently pay FDIC
insurance premiums and which ones do not. Are the distinctions
reasonable, or should they be changed? How can we as
policymakers toughen risk-based premium pricing but still
ensure that it is fair? It is my understanding that many
banking industry trade--officials--and there is one more point
that I want to make, and that is for community bankers who
believe insurance reform will help them compete with larger
banks and want to FDIC to increase the coverage to $200,000.
I am sorry, Mr. Chairman, that I extended my time, but I
appreciate the opportunity to make a few points. Thank you.
Chairman Bachus. Are there any other Members that wish to
be recognized?
All right. At this time we will introduce our first panel,
which is made up of one panelist, the Honorable Donna Tanoue,
Chairwoman of the Federal Deposit Insurance Corporation, whose
report, as she says, has raised some yellow flags, and we look
forward to hearing from you, Ms. Tanoue. And as I have told you
privately, if you want to take longer than 5 minutes, that
would be fine.
STATEMENT OF HON. DONNA TANOUE, CHAIRMAN, FEDERAL DEPOSIT
INSURANCE CORPORATION
Ms. Tanoue. Thank you. Mr. Chairman, and Members of the
subcommittee, on behalf of my colleagues at the FDIC, I want to
extend our sincere appreciation for the subcommittee's
recognition of the importance of Federal deposit insurance
reform and for your holding hearings today.
Chairman Bachus. Chairwoman, if you would move the mike a
little closer.
Ms. Tanoue. OK.
In addition, we appreciate the efforts of several Members
of the Congress who have introduced or cosponsored legislative
initiatives addressing deposit insurance issues. We believe
strongly that these efforts will stimulate and further advance
the debate.
Deposit insurance plays a vital role in promoting financial
stability. As a recent survey by the Gallup organization
showed, the security that Federal deposit insurance provides is
a very important and continuing consideration when Americans
weigh where to place their money.
This morning I would like to talk about why reforming our
deposit insurance system is important, why reform should be
addressed now, what our recommendations are, and why reform of
deposit insurance should be comprehensive.
Why is reform important? As good as it is, our current
system has certain flaws, some of which undercut the very
purpose for which deposit insurance was created. Under our
current system, 92 percent of the insured institutions pay no
premium for coverage. Because deposit insurance has been free
for most of these institutions, our current system distorts
incentives. The results? More than 900 institutions, or about 1
out of every 10 institutions in our country, have never paid
premiums. Major investment firms have begun sweeping large
dollar volumes of brokerage accounts into deposit accounts in
their FDIC-insured subsidiaries.
In addition, underpriced deposit insurance also may promote
moral hazard, the incentive for insured institutions to engage
in riskier behavior than they might otherwise in the absence of
deposit insurance.
Our current system could also have a harmful economic side
effect, a procyclical bias, that is, a tendency to make an
economic downturn longer and deeper than it might otherwise be.
How is that? During a severe downturn, the current statutory
framework would require that the FDIC charge banks high
premiums, thus limiting the availability of credit to
communities when they need it most, and thus impeding economic
recovery.
If we don't reform our system, it is likely to take a toll
on the safety and soundness of the banking industry and on the
economy, because a premium increase would hit when banks are
less healthy and losses might be depleting the insurance funds.
Why do we advocate deposit insurance reform now? Despite
some recent trends that are of some concern, both the economy
and the banking industry remain strong. We need to address the
flaws in our deposit insurance system now, without the
pressures and distractions that a downturn would bring or the
urgent demands for action that might arise during a crisis.
We at the FDIC have five recommendations. Recommendation
number one: the FDIC should be permitted to charge all
institutions premiums on the basis of risk. Insurers generally
price their product to reflect the risk of loss. Today, because
more than 92 percent of our insured institutions are in the
FDIC's best risk category and paying no deposit insurance
assessment, our premium system is ineffective in capturing and
curbing risk.
Recommendation number two: change the law to eliminate
sharp premium swings. If the fund falls below a target level,
the law should allow premiums to increase gradually. Charging
premiums more evenly over time, allowing the fund to absorb
some losses temporarily, and increasing premiums more gradually
than is required at present would soften the blow of an
economic downturn.
Recommendation number three: give the FDIC the authority to
rebate portions of deposit insurance premiums based on past
contributions to the fund when the fund is above a specified
target level. Tying rebates to the current assessment base
would increase moral hazard. Fairness dictates that rebates
should be based on past contributions to the fund. Allowing the
FDIC to pay rebates would create a self-correcting mechanism to
control the growth of the fund. The higher the fund gets, the
larger the rebate. Thus, should the fund continue to grow,
rebates eventually might exceed assessment income and provide a
break on the growth of the insurance fund.
Recommendation number four: merge the Bank Insurance Fund
and the Savings Association Insurance Fund. As I am sure many
of you are aware, the FDIC has made this recommendation for a
number of years, in large part because the resulting fund would
be stronger and more diversified.
Recommendation number five: index deposit insurance
coverage for inflation so that depositors do not see the real
value of their coverage erode over time. While Congress should
decide on the initial coverage level, indexing would provide a
systematic method of maintaining the real value of deposit
insurance coverage.
In closing, I would like to emphasize that it is important
for these recommendations to be implemented and to be
considered and implemented as a package. Picking and choosing
among the parts of our proposal could weaken the deposit
insurance system, magnify economic instability and distort
economic incentives. In particular I can't emphasize enough
that the ability to price for risk is essential to an effective
deposit insurance system and must be included in any reform
package.
Thank you, and I am happy to address any questions or
comments that you might have.
[The prepared statement of Hon. Donna Tanoue can be found
on page 49 in the appendix.]
Chairman Bachus. Chairman Tanoue, I will lead off the
questioning, and I think we are all concerned about a possible
erosion of the ratio below $1.25. And you have pointed out
several factors where that may happen. One, you have talked
about the addition of new deposits. Sort of looking at the
figures--at least up until 6 months ago, the infusion of new
deposits hasn't brought down that ratio that much as it seems
to be--is it about $1.35?
Ms. Tanoue. Yes.
Chairman Bachus. Go ahead.
Ms. Tanoue. That is true. Some recent examples of rapid and
dramatic growth, though, have made people more appreciative and
more sensitive to how the factor of growth in deposits can
affect the reserve ratio level. What we have tried to emphasize
at the FDIC, however, is that it could be a potential
combination of factors, perhaps a slowing of the economy,
unanticipated or expensive bank failures and perhaps continued
deposit growth. It is not inconceivable that those factors
could combine to reduce the current cushion and perhaps to
reduce the reserve ratio over time and, therefore, to cause the
FDIC to charge very steep premiums.
Chairman Bachus. Have you noticed, we have had some periods
of stock market volatility in the past year. We have had large
shifts of deposits from some of the full-service financial
institutions into insured deposits. Has there been any evidence
that that has caused--has the ratio at times dropped three or
four basis points, or has it pretty much been steady at a $1.35
ratio?
Ms. Tanoue. Some of the recent infusion of deposits into
the system has caused a reduction in terms of several basis
points, but I would like to emphasize that the issue of rapid
growth is on the minds of many. The FDIC has made several
recommendations to address this issue of rapid growth. And we
would do so first by recommending that all insured institutions
pay premiums based on risk, including those that are growing
rapidly. If that growth--and I would underscore ``if''--if that
growth presents additional risk exposure to the fund, then we
would recommend that premiums reflect that additional exposure.
In concert with the recommendation to charge all
institutions based on risk, we are recommending that rebates be
paid if the fund meets the target level that is established or
deemed essential by the FDIC and that those rebates take into
consideration past contributions to the fund. We would
recommend that such rebates not be made based on the current
assessment base, because we think that would create some
perverse incentives. In other words, you might have a
situation--if you use the current assessment base for your
rebate methodology--you might have a situation where you are
encouraging growth and actually rewarding institutions that are
growing rapidly, but may not have made past contributions to
the fund.
Chairman Bachus. You have mentioned that if the ratio fell
below $1.25 or 1.25 percent, that it could trigger--well, it
would, if it was not recapitalized within a year--a 23-basis
point premium, and you further said that that could trigger a
$65 billion loss of ability to loan money. Would you give me
some basis for the $65 billion figure?
Ms. Tanoue. Yes. The current statutory framework envisions
a situation if the fund falls below the 1.25 designated reserve
ratio, and the fund isn't recapitalized within a year, the FDIC
would be required to charge premiums as steep as 23 basis
points. We are recommending, again, that institutions be
charged premiums based on risk, but I would like to emphasize
that we are not trying to increase the assessment burden. We
are trying to allocate the existing assessment burden more
evenly over time. So we would avoid that kind of premium
volatility.
We believe that if institutions could pay small, steady
premiums over time, they would be able to manage their
operational expenses better and, again, avoid a situation where
during tougher economic times, they might be called upon to pay
such steep premiums, thereby taking monies out of the economy
and taking monies away really at a time when communities would
really need money for credit extension most.
Chairman Bachus. I guess my question was the $65--you
mentioned there might be a $65 billion reduction in lending.
Ms. Tanoue. Yes.
Chairman Bachus. And was that based on the cost of the
premiums?
Ms. Tanoue. That is based, yes, potentially on the steep
increase in premiums during a downturn.
Chairman Bachus. My time has expired, but I would also be
interested in whether you have any evidence--and I want to ask
this as a question--any evidence that fast growth in and of
itself increases risk, whether you have focused on that, or
whether charging premiums to fast-growing institutions is more
a question of fairness as opposed to risk?
Ms. Tanoue. I would say that fast growth in and of itself
is not risky, per se. At the FDIC we would look at fast growth
in combination with other factors, capital, assets, management,
the quality of an asset portfolio.
Chairman Bachus. Thank you.
Ms. Waters.
Ms. Waters. Mr. Chairman, we all must be concerned about
whether or not we are going to take resources away from
consumers, that whether or not the recommendations that you are
making would place consumers who would need loans, need to have
access to the resources of the banks, in jeopardy here, and I
guess, you know, what I would like you to respond to that a
little bit more, and I would also like to understand a little
bit better your discussion about how you determine risk. You
make the case that the risk now is determined for the short
term rather than the long term, and you believe that it should
be looked at over a longer period of time. I would like you to
explain that a little bit better, and I would also kind to like
the ask the question that if under the present system we have a
surplus, we have excess to the point of rebate, then what is so
terribly wrong with it?
Ms. Tanoue. Well, perhaps I could take that last issue
first. In terms of the size of the fund, an appropriate level
of the fund, the FDIC would conduct an analysis based on
expected loss presented by the institutions that are insured by
the fund, but there is always a tradeoff between the size of
the fund, ensuring that the fund is sufficient and adequate to
protect taxpayers, and also ensuring that the fund doesn't grow
so large that funds over and above, say, the level that is
deemed necessary by the FDIC might not be otherwise returned to
institutions to be put back into the communities for community
lending.
In terms of assessing risk, that is our job basically, and
we have put forward in the recommendations an example of how we
might assess the risk exposure of institutions, particularly
the small institutions. And we consider a number of factors,
including supervisory ratings based on examinations as well as
a number of different types of financial ratios.
Going back to the earlier point that you made, one of the
central features of our recommendation is to avoid the
potential premium volatility that exists potentially under the
current statutory framework. We want to, again, allocate the
assessment burden of our institutions more evenly over time and
to avoid a situation where we might be calling upon them to pay
premiums again as high as 23 basis points at a time when the
economy might be suffering a sharp downturn.
We believe that if you moderate the premiums more slowly
and steadily over time, you would avoid that type of sharp
premium increase at the roughest part of the economic cycle,
and we would avoid a situation where we are exacerbating the
economic downturn by extracting large sums of money from
insured institutions at a time when communities might need that
money for lending purposes and also to help an economic
recovery.
Mr. Weldon. [Presiding.] The gentlelady yields back her
time.
The hearing will stand in recess for a vote on the floor of
the House and reconvene in about 10 minutes.
[Recess.]
Chairman Bachus. The hearing will come back to order.
Mr. Gillmor, you are recognized for questions.
Mr. Gillmor. Thank you very much, Mr. Chairman and Madam
Chairwoman. I would like to just ask you to comment on the
question of municipal deposits. Concerns that I hear expressed
on a number of occasions in my district are from local
communities who would like to put public funds into their local
financial institutions, but because some of these institutions
are relatively small and also because of the FDIC coverage
limit, they have to put the money in some other institution
outside the community. This is detrimental because it takes
money out of the community, which could be utilized there. I
am--along with some other Members--considering legislation that
would extend the level of insurance for municipal deposits in
local banks. I would just like what ever comments you would
want to make on that subject.
Ms. Tanoue. Thank you. We have taken a look at the issue of
raising coverage for municipal deposits. Raising the coverage
level for this category of deposits could potentially provide
banks with greater latitude to invest in other assets. Higher
coverage level also might help such institutions be more
competitive for public deposits. But the collateralization
requirements that are placed by different States also place
limits on the ability of riskier institutions to attract public
moneys, while a higher deposit insurance coverage level might
not. And I would also point out that giving higher coverage or
full coverage for municipal deposits might also relieve some of
the State treasurers or community treasurers from having to
vigorously monitor local institutions or financial
institutions, and that might result in a loss of some level of
depositor discipline. But having said that, I will say that
there are obviously potential benefits as well as consequences
of favoring these types of deposits with higher coverage levels
and the full potential benefits and consequences are not yet
certain. It is our view that this issue should be looked at
further, analyzed further and discussed with the parties that
have a stake in the system.
Mr. Gillmor. If I might attempt to characterize your
response, I guess I would say if this is accurate, it is
cautiously favorable, but we still want to look at it; is that
pretty close to on the mark?
Ms. Tanoue. I would say cautious.
Mr. Gillmor. But also favorable, we hope.
Ms. Tanoue. I guess what I would also point out is that
there are obviously other calls for higher coverage levels that
might favor other classes of depositors, and these will all
present issues for Congress to consider. Some people are asking
for higher coverage for certain types of retirement accounts,
and we could anticipate that the calls for higher coverage for
different categories might expand. Those might include deposits
by charities or savings for college You would have to take a
hard look from a public policy standpoint at the potential
benefits and consequences.
Mr. Gillmor. Well, I think my time is about to expire, but
I might say, I think you can find a lot of worthy types of
deposits, but the one thing that distinguishes this category of
deposits from others is that it is local money raised in that
community, which may not be the case with other deposits, and
the failure to provide that protection is taking money out of
those communities, which means small businesses aren't getting
loans, which means that some home mortgages aren't being made.
So I think there is a little bit of a distinguishing character
to these types of deposits, but I appreciate your comments.
Chairman Bachus. Would the gentleman yield?
Mr. Gillmor. Yeah, I yield.
Chairman Bachus. I would also say, Chairman, you talked
about moral hazard, or that this may encourage some lack of
supervision, but I would focus on the fact these are community
banks, and these would be the cities in which they do business,
and I would think those cities would probably be more aware of
those banks and the soundness in that there would probably be a
local board of directors, and they would probably be well
qualified to make judgments on the soundness of the bank, you
know.
Ms. Tanoue. Again, we would want to look hard and we
probably want to do more analysis on any potential significant
increase in deposit coverage for any new category of expanded
deposit insurance coverage.
Chairman Bachus. I am not sure these cities now are
depositing their moneys with different banks, so I think they
would simply be transferring a lot of that money into banks,
into the city, would try to invest it or deposit it in their
own city or in their own county to ensure that it was loaned
within their own communities. But we may further explore this
with you with some.
Ms. Tanoue. We would be happy to discuss it further.
Mr. Chairman, if I could, you had asked me a question
earlier about the $65 billion potential contraction in lending,
and I was wondering if I might call up one of my staff members
to explain how we calculated that.
Chairman Bachus. Certainly.
Ms. Tanoue. And to explain it more directly, if I could ask
Fred Carns who is with our Division of Insurance.
Chairman Bachus. If you could just identify yourself for
the record. I know the Chairman just did that.
Mr. Carns. I am Fred Carns, Associate Director of the
Division of Insurance with the FDIC. Just in simple terms, the
$65 billion, a 23 basis-point assessment with today's total
deposits of about $4 trillion would result in about $9 billion
in assessments from that 23 basis point rate, and then with the
industry's average capital ratio in the neighborhood of 14
percent, that translates into lending of about 7 times that
amount, or somewhere in the neighborhood of $65 billion.
Chairman Bachus. Thank you.
Ms. Tanoue. Thank you, Mr. Chairman.
Chairman Bachus. Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman. And I thank the
Chairwoman for being here today. Right at the outset of your
prepared comments, you expressed appreciation to the efforts of
Members of Congress who have introduced or cosponsored
legislative initiatives addressing deposit insurance and
applauded those efforts which stimulate and further advance the
debate. I happen to be one of those people as cosponsor of H.R.
557, which acknowledges that there is an excess in the deposit
insurance fund and advocates first the application of that
excess to FICO assessments, and then subsequently to rebates
after the FICO bonds have been paid off. I notice that you
have, I guess, pretty much for the first time, acknowledged the
possibility that there might be value to some rebates, and I
won't ask you to comment particularly on our bill. I want to go
through and compare how your recommendations match up with the
bill, but I am delighted to see that you have acknowledged that
rebating some of these excess insurance deposits might help us
get more money into the lending process, and I take it that is
what this last set of comments was about in response to the
Chairman's questions.
Let me ask a question about, just for my own edification,
the banks that are currently exempt from paying insurance,
paying into the insurance fund, I take it that that was, that
is based on some analysis of that those banks don't
substantially contribute to risk. How does that correspond with
the movement toward a risk-based analysis to get to assessing
the premium?
Ms. Tanoue. Well, essentially, in 1996, when the Congress
passed the legislation recapitalizing the SAIF and the BIF, the
Congress chose to limit the FDIC's discretion to differentiate
among its institutions and to charge premiums to those
institutions that are basically rated one or two. So under the
current law, the FDIC can only charge premiums to institutions
that are rated 3, 4 or 5.
Mr. Watt. Isn't that, in and of itself, a somewhat of a
risk-based system that Congress has put in place? Isn't that a
determination that banks that are rated 1 and 2, much, much
less likely to contribute to a draw on the insurance fund?
Ms. Tanoue. Congress did envision a risk-based premium
system, and as I testified earlier, our system is painfully and
obviously deficient. In terms of the 1- or 2-rated institutions
that fall within the best category for insurance purposes, I
would want to emphasize that you can't assume that a 1- or 2-
rated institution does not present risk to the fund.
Mr. Watt. How do they get to be 1 or 2, then, if they are
presenting risk?
Ms. Tanoue. Well, I would mention that our studies show
that in looking back over historical periods, 2 years prior to
failure, almost 47 percent of the institutions that failed
during the crisis period had ratings of 1 or 2, and if you look
3 years prior to the failure, over 60 percent of the banks are
rated 1 or 2. We have further studies that also show that the
5-year failure rate for CAMELS 2-rated institutions since 1984
was more than 2\1/2\ times the failure rate for 1-rated
institutions.
So again, I think there is a great deal of information that
shows that institutions, even if they are rated 1 or 2, do
present risk. And our point is that currently, our system
doesn't distinguish among those institutions. Again, more than
92 percent of the industry, thousands and thousands and
thousands of institutions, do not pay premiums even though
there are large and discernible and identifiable differences in
terms of risk exposure among those institutions. And so
essentially you have those institutions that are less risky
subsidizing those that are riskier.
Mr. Watt. I than think my time is expired although the
clock seems to move faster. Maybe if I just talk slower.
Chairman Bachus. We have actually two clocks.
Mr. Watt. I yield.
Chairman Bachus. Thank you, Mr. Watt.
Mr. Weldon.
Mr. Weldon. Thank you, Mr. Chairman. Madam Chairwoman, on
the issue of rebates, you have testified that they should be
based on past contributions to the fund and not on current
premium assessments. What is your recommendation to us as to
how those rebates should be calculated? For example, what I am
talking about, the banks that helped recapitalize the BIF and
the SAIF, should they be entitled to a greater refund if there
is going to be a rebate than, say, those who did not contribute
to that recapitalization?
Ms. Tanoue. There are a number of ways that the FDIC could
develop rebate methodology, but again, one of our most
important recommendations is that rebates be based on past
contributions to the fund, and that would mean essentially that
those institutions that helped to build the fund over time
would see rebates earlier and in larger amounts.
Mr. Weldon. What about those institutions that have
contributed nothing to the fund?
Ms. Tanoue. Those institutions would, assuming the risk-
based premium system is put into effect and all institutions
are charged premiums, those institutions, once they started
putting money into the system, would eventually over time earn
the right to attain rebates.
Mr. Weldon. Some people would advocate retiring FICO bonds
early as opposed to issuing rebates. Can you comment on that?
Ms. Tanoue. Yes, our recommendations basically would
recommend rebates once target levels of a fund are met, but we
would leave it to the institutions themselves to decide how to
use those moneys once they are rebated. Now I know that there
is the bill that Congressman Lucas mentioned, H.R. 557, that
would use funds above a certain level to pay for the FICO
obligation. I would emphasize that that bill would not base
rebates on past contributions. Old members of the fund would
benefit from reduced FICO payments, even those that had never
paid a penny in terms of insurance assessments.
Mr. Weldon. You talked about indexing insurance coverage,
and I think you also mentioned increasing the limit. Should we
do both, increase the limit and index? Which do you think is
more important: indexing it or increasing the limit if we are
going to increase the limit on FDIC, the size of FDIC
insurance?
Ms. Tanoue. Our recommendation really goes only to
recommending indexation of the current coverage level. We
believe that Federal deposit insurance is a valuable program
and confers a valuable benefit. And like other important
Federal import programs like Social Security and Medicare,
those benefits are indexed to inflation, and so Federal deposit
insurance coverage should be as well. As to increasing coverage
levels, that is a public policy decision that we would leave to
Congress. We would point out, however, that you can index based
on different points, from 1974, 1980, or you could start from
today and those would result in very different coverage levels
over time. I would also want to emphasize that in looking at
any potential increase in coverage, we would strongly recommend
that one part of any package of recommendations must be the
putting into place of an effective risk-based premium system
which would lend itself to mitigating any concern about
increased moral hazard as a result of increasing coverage
levels.
Mr. Weldon. And finally, can you comment for me on the too-
big-to-fail doctrine? Do you think this permits certain large
institutions to take on too much risk?
Ms. Tanoue. We have not addressed the too-big-to-fail
issue, or the issue of systemic risk directly in our
recommendations. There has been some concern that there is
implicitly greater coverage for those institutions that are
very large in size, and we would not recommend at this time
charging premiums that would take such a factor into
consideration.
Mr. Weldon. Thank you very much. Mr. Chairman, I believe my
time has expired.
Chairman Bachus. Ms. Hooley.
Ms. Hooley. Thank you, Mr. Chairman.
Madam Chairwoman, some people and some regulators have
testified that the current zero premium creates improper
incentive s for bankers to take risk. Do you agree with this,
and can you explain why?
Ms. Tanoue. I do think that when you have a zero-based
deposit insurance premium, that that can sometimes create the
wrong incentives or create no incentives. We believe that it
might increase the tendency of some institutions to take more
risk, to engage in riskier activities than they might
otherwise, if there was a risk-based premium system in place, a
truly effective system in place.
Ms. Hooley. Is that problem more acute when the economy is
in a downturn, or does that, do you think that has an impact at
all?
Ms. Tanoue. I think it is an issue regardless of the
economic circumstances.
Ms. Hooley. So you think that banks will take more risk,
and it doesn't really matter whether the economy is in a
downturn. Is that what I heard you say?
Ms. Tanoue. Well, if the institutions are not paying
anything in premiums, that would probably exacerbate the impact
on the economy.
Ms. Hooley. OK. Do you think it will have a negative impact
on the economy?
Ms. Tanoue. It could potentially have a negative impact,
yes.
Ms. Hooley. OK. Thank you. I yield back the rest of my
time.
Chairman Bachus. Thank you. Mr. Toomey. Ms. Hart.
Ms. Hart. I have no questions.
Chairman Bachus. Mr. Grucci, do you have questions?
Mr. Grucci. No, sir.
Chairman Bachus. Mrs. Roukema.
Mrs. Roukema. All right. I will take the opportunity, and I
do apologize for not being here for your full testimony. There
were unavoidable conflicts so you may have already addressed
this, and I must say that I am not fully apprised of the
totality of Chairman Greenspan's statement, recent statement,
and it was reported in the paper the other day. I believe he
recommended a regulatory policy that would quote: ``flatten out
or even reverse the cyclicality of the current system.''
Did you address that question, or what is your reaction to
Chairman Greenspan's statement, and what is the implications of
it? I am not quite sure I understand it in its totality, and
when Chairman Greenspan speaks, many of us listen. Could you
assess that for us or give us an initial reaction?
Ms. Tanoue. I think our recommendations are very consistent
with what Chairman Greenspan was talking about there. One of
the key features that we focus on in our recommendation is the
potential procyclical bias that our system has and that we
would charge institutions potentially very steep premiums
during a severe economic downturn, and our recommendations
really go to avoiding that circumstance, avoiding charging
institutions the highest premiums at a time when they are least
able to pay, and we tried to allocate the assessment burden
more evenly over time and to avoid such a procyclical bias in
our system.
Mrs. Roukema. So you feel that that is consistent with
Chairman Greenspan's perspective and will resolve the problem
and make it sound and secure?
Ms. Tanoue. Well, we think that the recommendations that we
have put forward would go a long way to strengthening the
system.
Mrs. Roukema. All right, thank you. I will, of course,
review your testimony. If there are further questions, I will
submit them to you in writing, because this is certainly
something that I believe strongly in, and I certainly am for
merging the funds and want to work to make them secure for the
future.
Ms. Tanoue. Thank you.
Mrs. Roukema. Thank you.
Chairman Bachus. Mr. Bentsen, I want to apologize to you, I
was down the list and I overlooked you earlier.
Mr. Bentsen. No apology necessary, Mr. Chairman. I was
trying to remember everything I read about your invigorating
testimony that I looked at.
Madam Chairwoman, a couple of questions. It would look like
what your study is--what the FDIC is proposing is to move to a
more of a subjective-based premium, risk based premium, and a
subjective reserve ratio, and as I read through your testimony,
in looking at the example that you go through in the back, is
it the idea would be, if I understand correctly, is to
reinstate a premium on all insured deposits, and then adjust
that premium based upon some risk analysis that the FDIC comes
up with. And then on top of that, assuming that the total DRR
is between, say, 115 and 135, then lay back a rebate of 30
percent to insured depository institutions based upon first, or
maybe only their history and paying premiums, those that have
paid, who have paid the most premiums would be first in line
for rebates.
Is that generally a correct analysis? And is this just a
model that you all are proposing, or one idea of how you would
establish the structure, or is this the basic concept?
Ms. Tanoue. We have put forth the basic concepts, and then
we have put forth some numerical examples to illustrate how
those concepts might work, but obviously these are designed to
engender further discussion and further narrow the debate. One
thing that caught my attention was when you mentioned
subjective premium system and a subjective reserve ratio. We
would be asking that the FDIC be given discretion to establish
an appropriate range or target, appropriate level.
Mr. Bentsen. And that is fine. I will swap adjectives with
you. ``Discretionary'' is probably a better adjective. I
understand as opposed to a statutory DRR, but is the idea--I
think your concept is interesting and I am sure some of the
subsequent panelists will tell us what might be wrong with it,
but it seems to me your idea sort of mirrors what our colleague
from New Jersey just talked about with what the Chairman of the
Federal Reserve had said, which is to establish sort of a
current flow of funds so you don't have either a procyclical or
countercyclical effect, if all of a sudden the economy turns
downward and the fund starts to get hit, that you have to jack
premiums up so high that you have a countercyclical effect
coming out of the fund with everything else going on in the
economy.
And this way, given the FDIC, a substantial amount of
discretion I would add would allow you basically to go back and
say within this range of 115 to 135, everybody pays a premium
to start, but then, based upon your payment history, not your
payment history, but how long you have been paying premiums,
and what I don't know is based upon, well, I guess your initial
premium would be set.
Ms. Tanoue. Based on certain risk exposure, yes.
Mr. Bentsen. But the rebate, I am curious why the rebate
would only be set on how long you had been paying premiums. I
understand that, but why you also wouldn't look at some risk
bases as well unless you think you have already accounted for
that?
Ms. Tanoue. There is a potential to incorporate risk-based
factors into the rebate methodology as well. So, for example,
whether a rebate should be given to an institution that is
actually paying premiums, because it is in serious financial
trouble that would be a factor that would have to be looked at
as we further look at how to develop the rebate methodology.
Mr. Bentsen. It seems to me, and you sort of acknowledge
this--I know my time is up. If I can just finish this point.
You seem to acknowledge the historical aspect will go away as
new funds are melded in and everybody will sort of equal out
for the most part. So it would seem to me that you would want
to have some risk basis associated with the rebate function so
thank you. Thank you, Mr. Chairman.
Mr. Baker. [Presiding.] Thank you, Mr. Bentsen. Obviously
Mr. Bachus stepped out for a moment, and fortunately I am next
in line so I will recognize myself.
You may recall this question from earlier comments. I have
grave concerns about the basic equity of the current assessment
requirements. The compression of the rating from the best to
the least under the current regime seems not to reward
conservative management, and in fact, there is no penalty of
significance for being a bad operator in the current assessment
of premium, much less the new entries into the market who paid
nothing for 100 percent coverage plus the sweep account issue
that you have talked about.
So in looking at the reconstruction of the insurance pool,
I strongly recommend and support whatever the agency recommends
in the way of appropriately assigning risk to the responsible
parties, and then join those who suggest that some premium be
assessed to everybody continually. I know that this is, to some
extent, modestly controversial, but it is apparent that should
we have significant downturn in our economic condition and a
very small number of the very large institutions run into
trouble, that we could rapidly dissipate the reserves that we
have built up.
However, my specific question is, and I have to read this
to make sure I get it constructed properly, can you comment on
the possibilities and usefulness of risk sharing, either
through reinsurance or other means in determining an adequate
price for deposit insurance; and second, if such arrangement
could, in fact, be used to limit the Government's exposure in a
potential institution's failure.
And my point here is that we have talked internally in the
office in looking at this issue, and reports generated by the
FDIC of maintaining for the individual depositor, uniformity in
the level of coverage, so when you walk in the bank, you don't
know how the premium is paid or anything else. You just know
that no matter where you are, you get the same coverage. But
for those larger institutions which represent the bulk of the
risk to the fund, coinsurance, some differing manner of
assessment that brings about more market discipline in
understanding the risk, those institutions really pose to the
fund, and I don't know if you want to answer that today or get
back to me at a later time.
Ms. Tanoue. Well, let me just say that the FDIC shares your
interest in exploring the potential for reinsurance and we
think that reinsurance does have the potential to offer us
additional information about how we might be pricing risk in
terms of the institutions of various classes of institutions.
You may be aware that the FDIC, several months ago,
contracted with a company for this very purpose, and
essentially they have developed a prospectus, and we will be
going to the market to ascertain what interest there might be
in the private sector in this issue with the FDIC, and we would
be happy to keep you apprised of the developments.
Mr. Baker. Thank you very much. I appreciate that.
Mr. Moore.
Mr. Moore. I have no questions, Mr. Chairman.
Mr. Baker. Mr. Hinojosa.
Mr. Hinojosa. Thank you, Mr. Chairman. Thank you for coming
to speak to our subcommittee. I was looking at your conclusions
and you talk about the economy being strong and that there is a
window of opportunity to make improvements to the deposit
insurance system. I am pleased that you are proactive instead
of reactive, and I want to address the part where you talk
about, you say in particular, the ability to price for risk is
essential to an effective deposit insurance system. I have
concerns that I want to express to you, and that is that as you
make the risk calculations for each of the banks and knowing
that even if they have a rating of 1 and 2, that some of them
could go under, I would like to see what your response is.
What assurances can you give me that any policy decisions
that are being made to change and improve the system will not
hurt the smaller community banks, many of which I have in a
congressional district like mine?
Ms. Tanoue. Well, let me just say as the primary supervisor
for State chartered non-member institutions, we always have
taken into consideration how proposals might affect
institutions, and particularly community institutions, and let
me also say that in developing any kind of methodology to
assess premiums based on risk, it would be envisioned that the
FDIC would have to go out for notice and comment through a
public rulemaking.
So in other words, the methodology that we might come up
with would have to be put out for the public to comment on
before any kind of rulemaking could occur.
Mr. Hinojosa. And how long would you have as a period to
get input?
Ms. Tanoue. Usually the rulemaking process allows for
certain substantial periods of time to allow interested parties
to comment fully.
Mr. Hinojosa. Give me an idea, would it be 90 days? 6
months?
Ms. Tanoue. Excuse me just one moment. I was just checking
as to whether the Administrative Procedures Act had some
minimum timeframe and sometimes, apparently, it is usually
about 90 days, but an agency can always provide for more time
for public comment.
Mr. Hinojosa. Very well. Mr. Chairman, I have no other
questions.
Ms. Tanoue. If I could just add one other thing. During
this whole process that we have been looking at the deposit
insurance issues, I would emphasize that the FDIC has worked
very hard to provide for extensive outreach opportunities with
the industry, and we have worked very closely and extensively
with all the banking trade organizations and made a significant
effort to be aware of their concerns throughout the process,
and we would continue to do so.
Chairman Bachus. [Presiding.] Chairman, has any
consideration been given to granting banks the power to, or the
ability to purchase on an optional basis, additional insurance
for municipal deposits?
Ms. Tanoue. Yes. That subject was raised earlier and we
have taken a look at that. We believe that conferring
additional coverage for any category of deposits, including
municipal deposits, does warrant further analysis and study and
discussion with the parties.
Chairman Bachus. If we were able to calculate, if we had
some preset level and a definition and it was limited to local
deposits or to, in State deposits and the premium was
calculated and would fully cover the additional risk to the
insurance fund, would that address most of your concerns or
your concern?
Ms. Tanoue. You know, I am not sure at this point if higher
coverage was to be provided for municipal deposit, what the
potential impact or effect would be in terms of additional risk
to the fund. But again, we are happy to look at that issue
further and then get back to you.
Chairman Bachus. When you look at it, could you also maybe
look at the collateral requirements.
Ms. Tanoue. Well, the collateral requirements vary from
State to State, but we can take that into consideration as
well.
Chairman Bachus. All right. Thank you.
Mrs. Maloney.
Mrs. Maloney. First of all, I would like to thank Donna
Tanoue for your service and leadership at the FDIC, and I wish
you the best in all your future endeavors, and I certainly
thank Chairman Bachus for holding this important hearing on
modernizing the deposit insurance system.
For over 65 years, our deposit insurance system has
effectively maintained public confidence in the banking system
during periods when financial institutions have been profitable
and when they have suffered failures. As we consider
modernizing the system, maintaining public confidence in our
financial institution and guarding their safety and soundness
must be our driving focus. We are fortunate to be considering
this topic at a time when banks are highly profitable and well
capitalized.
At the same time, uncertainty about the future of the
economy is a warning that the good times will not last forever.
While the insurance funds are still comfortably above their
mandated reserve ratios, the uncertainty about equity market
has driven a substantial amount of funds into the banking
system, increasing the deposit base. The possibility that this
trend continues makes the need to merge the insurance funds
even more timely.
I really want to compliment you on a very thoughtful
proposal for the future of the insurance system, and I agree
with the FDIC's position that a modern insurance system should
include a general principle of risk-based pricing. But I would
like to know, since today, we have 92 percent of our
institutions do not pay for deposit insurance, yet many of
these institutions have made substantial contributions in the
past to the funds.
Individually, many are highly rated for safety and
soundness and are well capitalized. How do you balance the fact
that risk-based pricing may be the future but that many
institutions have a history of contributing to and stabilizing
the financing of the funds?
Ms. Tanoue. Again, I would emphasize that if you have a
system as we do now where 92 percent of the institutions are
assigned to the same risk category, you don't truly have a
risk-based pricing system, and there are large and identifiable
differences in terms of risk exposure among these institutions
that are presently classified in the best category.
Our recommendations include a recommendation to charge
premiums for all institutions, but also coupled with that, we
are recommending that when the fund meets certain targets or
ranges that are established by the FDIC from time to time, that
consideration be given to giving rebates back to the insured
institutions to prevent the fund from growing overly large, and
to make sure that funds are going back into the communities as
appropriate.
Mrs. Maloney. So I know that you have suggested rebates,
but would institutions, but would institutions that have
contributed to the funds be subject to charges under this
system?
Ms. Tanoue. Yes. We would recommend that all institutions
again be charged based on risk, but in terms of the
recommendation for rebates, the rebates would be based taking
into consideration not the current assessment base, but past
contributions. So it would be a very important consideration.
Mrs. Maloney. So you will take in consideration the past?
Ms. Tanoue. Yes.
Mrs. Maloney. Thank you very much, and again,
congratulations on your service to the country and we
appreciate the proposal that you have put forward today.
Ms. Tanoue. Thank you.
Chairman Bachus. This concludes----
Mr. Watt. Mr. Chairman, could I, before you excuse the
witness, make a brief comment?
Chairman Bachus. Mr. Watt.
Mr. Watt. I just wanted to thank her for flattering me by
confusing me with Mr. Lucas.
Ms. Tanoue. Excuse me, that is right. Because you mentioned
the bill. I apologize.
Mr. Watt. I would suggest to you that you might want to
drop Mr. Lucas and apologize to him.
Chairman Bachus. One has a southern accent and the other
has a Midwestern accent. The subcommittee does want to wish you
well in your further endeavors and thank you for your service
to the country and to the banking system.
Ms. Tanoue. Thank you very much. I appreciate the
opportunity to testify today. Thank you.
Chairman Bachus. This concludes our first panel and we will
ask the second panel of witnesses, all of whom are veterans
testifying before this subcommittee, to take their seats.
The subcommittee would like to welcome the second panel.
All of you gentlemen testified before us in March on business
checking. We welcome you back. To my left is Mr. James Smith,
chairman and chief executive officer of Union State Bank and
Trust of Clinton, Missouri, also president-elect of the
American Bankers Association, who will be testifying on behalf
of the ABA; Mr. David Bochnowski, Chairman and Chief Executive
Officer, Peoples Bank, Munster Indiana, we welcome you back.
You are testifying as Chairman of America's Community Bankers;
Mr. Robert Gulledge, President and Chief Executive Officer,
Citizens Bank of Robertsdale, Alabama, Chairman of the
Independent Community Bankers of America. Bob, welcome back to
Washington.
At this time, Mr. Smith, we will start with you, not
because you are an ex-New York Yankee.
STATEMENT OF JAMES E. SMITH, CHAIRMAN AND CEO, CITIZENS UNION
STATE BANK AND TRUST, CLINTON, MO; PRESIDENT-ELECT OF THE
AMERICAN BANKERS ASSOCIATION
Mr. Smith. I want to thank you, Mr. Chairman, for holding
this hearing. Assuring that the FDIC remains strong is of the
utmost importance to the banking industry. Over the past
decade, the industry has gone to great lengths to ensure that
the insurance funds are strong. In fact, with $41 billion in
financial resources, the FDIC is extraordinarily healthy. The
outlook is also excellent. There have been few failures and the
interest income on BIF and SAIF easily exceeds the FDIC's cost
of operation. Thus now is a good time to consider how we might
improve an already strong and effective system.
I would like to commend the FDIC under the leadership of
Chairman Tanoue for developing an approach to the key issues.
While we do not agree with every detail in the FDIC report and
are particularly concerned about the possibility of increasing
premiums, that provides a reasonable basis for congressional
discussion.
An industry consensus is key to any bill being enacted. As
you will see today, while some differences remain the positions
of the ABA, America's Community Bankers and the Independent
Community Bankers of America are very similar. Our three
associations have agreed to discuss the issues together and
work with this subcommittee to develop legislation that would
have broad support.
I would add that while there is willingness to work with
Congress, we do have concerns that such legislation could
increase banks' costs or become a vehicle for extraneous
amendments. If that were to be the case, support among banks
would quickly dissipate. In my testimony today, I would like to
make several key points. First, today's system is strong and
effective, but some improvements could be made. The current
system of deposit insurance has the confidence of depositors
and banks. Its financial strength is buttressed by strong laws
and regulations, including prompt corrective action and
enhanced enforcement powers, just to name a few. Even more
important is that the banking industry has an unfailing
obligation to meet the financial needs of the insurance fund.
Simply put, the system we have today is strong, well-
capitalized and poised to handle any challenges that we may
encounter.
Second, a comprehensive approach is required as
improvements are considered. Because deposit insurance issues
are interwoven, any changes must consider the overall system. A
piecemeal approach would only leave some important reforms
undone, but worse, could lead to unintended problems. Since
last year, support for our comprehensive approach has clearly
grown. We are pleased that the FDIC's proposal is comprehensive
and acknowledges the important interactions between issues. A
comprehensive reform system should include, among other things,
a mutual ownership approach for determining rebates. Permanent
indexing of the insurance limit, consideration of an increase
in the $100,000 level, but one that does not result in
significant cost that would outweigh the value of the increase.
A higher level of coverage for IRAs and Keoghs, some method to
address the issue of fast-growing institutions and a cap on the
fund and expanded rebate authority.
On this last point, I would like to thank Mr. Lucas and Mr.
Watt for introducing their bill that caps the fund and issues
rebates to pay the FICO premium.
My third point is that changes should be adopted only if
they do not create material additional costs to the industry.
The current system is strong, and we see no reason why changes
should be made that impose significant new costs or additional
burdens on the industry. For instance, the example used by the
FDIC in its report would result in unacceptable premium
increases for many banks. We see no justification for such
increases when the insurance funds are above the required
reserve ratio.
Mr. Chairman, we are prepared to work with you and the
Members of this subcommittee to pass a reform package that
would enhance the safety and soundness of the deposit insurance
system. Thank you.
[The prepared statement of James E. Smith can be found on
page 53 in the appendix.]
Chairman Bachus. Thank you.
Mr. Bochnowski
STATEMENT OF DAVID BOCHNOWSKI, CHAIRMAN AND CEO, PEOPLES BANK,
MUNSTER IN; CHAIRMAN, AMERICA'S COMMUNITY BANKERS
Mr. Bochnowski. Thank you, Mr. Chairman. It is a pleasure
to be here representing America's Community Bankers and to
speak to you on deposit insurance reform. Our complete
recommendations, which we provided to the FDIC last December,
are included in ``Deposit Insurance Reform for a New Century, a
Comprehensive Response to the FDIC Reform Options,'' which has
been made available to this subcommittee.
[The information can be found on page 101 in the appendix.]
Bankers do have varying views on deposit insurance reform,
but let me assure you in this subcommittee that we are engaged
in an open and constructive dialogue. The staffs of our
respective associations have met to begin a more detailed
discussion of our respective policy positions. The entire
industry has every incentive to cooperate, because the safety
and soundness of the deposit insurance system is important to
our customers and the Nation's economic health.
Under Chairman Tanoue's leadership, the FDIC took advantage
of the health of our banking system and the banking climate to
review deposit insurance issues. ACB commends Chairman Tanoue
for taking this important initiative.
The most urgent deposit insurance issue we face today stems
not from any weakness in the system, but ironically, from its
strength. A few companies are taking advantage of that
situation by shifting tens of billions of dollars from outside
the banking system into insured accounts at banks they control.
The problem is not that the FDIC is holding fewer dollars, BIF
and SAIF balances are stable, but that those dollars are being
asked to cover a rapidly rising amount of deposits in a few
institutions.
The situation could get worse. Under current law, if a fund
falls below 1.25 percent, the designated reserve requirement,
and the FDIC does not expect it to return to that level within
a year, all insured institutions would have to pay a 23-basis-
points premium. For a community bank with $100 million in
deposits, that equals $230,000.
ACB believes that Congress should act quickly on
legislation to help ensure the continued strength of the FDIC
and prevent unnecessary diversion of billions of dollars away
from communities that could go into home lending, consumer
lending and small business lending.
A bill is before you today that would do just that.
Representatives Bob Ney and Stephanie Tubbs Jones have
introduced the Deposit Insurance Stabilization Act, H.R. 1293.
It has three key features. First, it would permit the FDIC to
impose a fee on fast-growing institutions for their excessive
deposited growth. Second, it would merge the BIF and SAIF
insurance funds, creating a more stable, actuarially stronger
insurance deposit fund. And third, it would allow for the
flexible recapitalization of the deposit insurance fund.
Acting on this bill now would not preclude action on
broader deposit insurance reform. In fact, H.R. 1293 is an
excellent place to begin.
We are pleased that many of the FDIC's recommendations are
consistent with our own for comprehensive reform, but they
differ in one key respect. We agree on merging the Bank
Insurance Fund in the Savings Association Insurance Fund,
giving the FDIC flexibility to gradually recapitalize the fund
in the event of a shortfall and establishing rebates based on
past contributions, as well as indexing coverage levels.
However, unlike the FDIC, ACB does not believe that the
highest-rated institutions should be required to pay premiums
when there are ample reserves in the fund. Rather, as provided
in the Ney-Tubbs Jones bill, ACB recommends that the FDIC have
the authority to assess a special premium on excessive growth
by existing institutions, such as Merrill Lynch, if necessary
to preserve adequate reserves.
ACB also recommends indexing the coverage levels to help
maintain the role of deposit insurance in the Nation's
financial system.
Congress should use as a base the last time it adjusted
coverage primarily for inflation, which was done in 1974. Under
that system, which was at $40,000 then, adjusted for inflation,
the coverage limit would be approximately $135,000 today.
To recognize the increasingly important role that
individual retirement accounts play in the economy and in our
pension system, ACB recommends that Congress substantially
increase the separate deposit insurance coverage for IRA,
401(k) and similar retirement accounts. ACB also recommends
that Congress set a ceiling on the composite insurance fund
designated reserve ratio, giving the FDIC the ability to adjust
that ceiling, using well-defined standards after following full
notice and comment procedures.
ACB appreciates the opportunity to present our views on
these important issues. The deposit insurance system is strong
today, but could be made even stronger. We hope that Congress
will use the work the FDIC and the industry have done to craft
legislation that will make the improvements necessary to ensure
the continued stability of this key part of our Nation's
economy.
Thank you for this opportunity. I look forward to answering
your questions.
[The prepared statement of David Bochnowski can be found on
page 73 in the appendix.]
Chairman Bachus. Mr. Gulledge.
STATEMENT OF ROBERT I. GULLEDGE, PRESIDENT AND CEO, CITIZENS
BANK, ROBERTSDALE, AL; CHAIRMAN, INDEPENDENT COMMUNITY BANKERS
OF AMERICA
Mr. Gulledge. Good morning, Chairman Bachus, Ranking Member
Waters and Members of the subcommittee. My name is Bob
Gulledge, and I am a community banker from Robertsdale,
Alabama. I also serve as Chairman of the Independent Community
Bankers of America, on whose behalf I appear before you today.
Chairman Bachus, I commend you and Chairman Oxley for
moving this important issue forward. It has been 10 years since
the Congress last took a systematic look at the deposit
insurance program. Now is the time, during a non-crisis
atmosphere, to modernize our very successful Federal Deposit
Insurance system. I have been asked to testify on the FDIC's
impressive and comprehensive deposit insurance reform
recommendations.
First, deposit insurance coverage levels have been badly
eroded by inflation and must be increased and indexed for
inflation. Today, in real dollars, deposit insurance is worth
less than half what it was in 1980 and even less than what it
was worth in 1974 when the coverage was raised to $40,000. The
charts and table attached to my written testimony illustrate
this dramatic loss in real value.
Higher coverage levels are critical to support local
lending, especially to our small businesses and agricultural
customers. They are critical to meet today's savings and
retirement needs, especially with a graying population. A
Gallup Poll showed that four out of five consumers think that
deposit insurance should keep pace with inflation. And they are
critical because many community banks increasingly face funding
pressures, because funding sources other than deposits are
scarce.
Examiners are warning against our growing reliance on
Federal Home Loan Bank advances. We don't have access to the
capital markets like the large banks do. In troubled times, we,
unlike large banks, are too small to save.
A recent Grant Thornton survey revealed that four out of
five community bank executives believe higher coverage levels
will make it easier to attract and keep core deposits. The ICBA
strongly supports the Hefley bill in the House and the Johnson-
Hagel bill in the Senate. Both bills would substantially raise
coverage levels and index them for inflation. This feature of
deposit insurance reform is essential for our support of the
legislation.
The ICBA supports full FDIC coverage for municipal deposits
and higher coverage for IRAs and retirement accounts.
The second issue that must be addressed is the free rider
issue. Free riders, the Merrill Lynches and Salomon Smith
Barneys, have moved more than $83 billion in deposits under the
FDIC umbrella without paying a nickel in insurance premiums;
and by owning multiple banks, they offer their customers
multiple accounts and higher coverage levels than we can. This
is a double-barreled inequity, which must be addressed.
Third, a risk-based premium system should be instituted
that sets pricing fairly. Currently, 92 percent of the banks
pay no premiums. The FDIC says this is because the current
system underprices risk. This proposal, as well as a proposal
to charge premiums even when the reserve ratio is above 1.25
percent, will face controversy. But we believe that as a part
of an integrated reform package, most community bankers would
be willing to pay a small, steady, fairly-priced premium. In
exchange, we would get less premium volatility and a way to
make sure the free riders pay their fair share. The ICBA
generally supports a risk-based premium system.
Fourth, the FDIC proposes that the 1.25 percent hard target
be eliminated and replaced with a flexible range with
surcharges if the ratio gets too low and rebates if the ratio
gets too high. We support the FDIC recommendation as a part of
the integrated package that includes higher coverage levels.
Using a more flexible target would help eliminate wild
fluctuations in premiums. The statutory requirement that banks
pay a 23 cent premium when the fund is below the designated
reserve ratio should be repealed.
We also strongly support the FDIC proposal to base rebates
on past contributions to the fund rather than on the current
assessment base. This would avoid unjustly rewarding those who
haven't paid their fair share, like the free riders.
Fifth, the FDIC proposes to merge the BIF and the SAIF. The
ICBA supports the merger as part of an overall comprehensive
reform package.
In conclusion, Mr. Chairman, now is the time to consider
these important FDIC reforms. Thousands of communities across
America and millions of consumers and small businesses depend
on their local community banks. And without substantially
increased FDIC coverage levels, indexed for inflation,
community banks will find it increasingly difficult to meet the
credit needs of our communities.
The less deposit insurance is really worth due to inflation
erosion, the less confidence Americans will have about their
savings in banks, and the soundness of our financial system
will be diminished. Congress must not let this happen. We
support the overall thrust of the FDIC's recommendations. We
urge Congress to adopt an integrated reform package as soon as
possible, and I will entertain questioning that you might have.
Thank you very much.
[The prepared statement of Robert I. Gulledge can be found
on page 130 in the appendix.]
Chairman Bachus. Thank you.
Mr. Smith, in your testimony, you suggest that retirement
accounts should have a higher level of deposit insurance
coverage. What do you see as an appropriate level of insurance
coverage for retirement accounts, 401(k)s, IRAs?
Mr. Smith. Well, basically, in 1978, when we had insurance
coverage of $40,000, Congress chose to give us insurance
coverage on those types of accounts at $100,000. While
insurance on regular accounts has risen to $100,000, the IRA
accounts are still at a level that we think is too low. So we
would like to see that that amount increased so we can
encourage savings in our country, encourage our customers to
save more; and I think this would be a great move that we could
do to entice that.
Chairman Bachus. For instance, going back to 1980 and
increasing it according to the CPI increase?
Mr. Smith. Well, it was 2\1/2\ times in 1978, so if we did
it 2\1/2\ times today, the regular coverage would be $250,000
per account, and taking in inflation and indexing that to
inflation, I think that would be a very appropriate number to
look at.
Chairman Bachus. You suggest we should eliminate the too-
big-to-fail doctrine. Congress has repeatedly tried to limit
that doctrine. How would you advise us, or what suggestions do
you have for us in eliminating that doctrine?
Mr. Smith. I don't know that I have any specific
suggestions. I think this topic should be on the table to be
addressed under comprehensive reform. It was looked at in
FDICIA and FIRREA, and some steps were taken, some measures
were taken, to eliminate it; but the fact is that it is still
there to some extent, and I think whatever Congress can do to
eliminate the too-big-to-fail doctrine and put that issue on
the table, it would be appropriate.
Chairman Bachus. OK. Thank you.
Mr. Bochnowski, your testimony doesn't address the issue of
municipal deposits, which it wasn't required to do, but do
America's Community Bankers have a position on proposals that
would either increase the coverage limits on such deposits or
permit institutions to purchase coverage in excess of $100,000?
Mr. Bochnowski. Mr. Chairman, we have been neutral on this
in both speaking with our members and surveying them. It is not
an issue which comes to the fore. A number of our States
provide municipal deposit insurance--not privately, but at
least through the State system, and it has not been an issue
that has been a major concern to our members.
Chairman Bachus. I thank you.
Mr. Gulledge, let me continue on that thought. In your
testimony, you support further coverage of municipal deposits.
Would that increase the risk to the Federal Deposit Insurance
Fund, ultimately to other institutions or the taxpayer?
Mr. Gulledge. Well, we do support the 100 percent coverage
of municipal deposits, and we do feel that this is very
important because this is a great source of funding for
community banks and a great source of the funds to make
meaningful contributions to their community in providing the
services that they are organized for. And we do feel that this
is not going to be a detriment to the fund.
At the end of 2000, there were $162 billion in municipal
deposits. Of that $162 billion, only $113.8 billion of those
were uninsured at that time. The BIF has $31 billion in
reserves, and it presently has a reserve ratio of 1.35. If the
BIF-insured deposits were increased by that $113.8 billion,
then that would bring down the ratio to a 1.28 ratio, which
still is above the statutory minimum.
Chairman Bachus. All right. Thank you.
At this time, Ms. Waters.
Ms. Waters. Thank you very much. Let me just say to Mr.
Gulledge that I appreciate the clearness of the case that you
make about the free riders.
Mr. Gulledge. The case of what? I am sorry.
Ms. Waters. The free riders must pay their fair share. I am
surprised, even as I learn more about FDIC, that this has gone
on for this long; and it must be corrected. And I strongly
support the remedy to the free rider problem as you have
articulated it. And I am anxious that we not allow the Merrill
Lynches and the Smith Barneys or anybody else to be able to
have that kind of an advantage. So I just wanted to say that so
then you would understand that for at least one person here
today, your testimony certainly has struck a very strong chord
with me.
Let me just ask Mr. Smith, what were you referring to when
you said that some of the recommendations would cause
unacceptable increases? What were you referring to?
Mr. Smith. The FDIC recommendations would advocate that we
start assessing certain rated banks that are not now paying
premiums. They would have to start paying premiums. Right now
banks that are CAMEL-rated 1 or 2 pay no premiums if they are
well capitalized, and so I think under the FDIC
recommendations, they certainly would start charging 2-rated
banks a premium; and possibly some portion of the 1-rated
banks, I think they want to change.
Ms. Waters. Did you hear what the chairwoman said about a
47 percent failure among 1- and 2-rated banks? I think that is
what she said--within 2 years?
Mr. Smith. She quoted a specific period of time, and I am
not sure how that equates out. I could only say from a banker
who experienced the ag depression in the 1980's, who was in an
ag bank--I experienced the depression in our bank, and the risk
assessment is very real and very important. And the fact now
that we have 92 percent of the banks in the 1 and 2 category, I
would say, hurrah, because I think that is a great incentive,
at least for me.
I am in that category; I do not have to pay FDIC premiums.
And so I try to run my bank to make sure we have the proper
safety and soundness procedures in effect. I try to run my bank
to make sure that we are taking care of our community properly,
because that is my market. And at the same time, I want to try
to make sure I don't have additional costs on my balance sheet
with FDIC premiums.
So I am not sure what timeframe Chairman Tanoue was talking
about when she said 47 percent of the banks that were rated 1
or 2 failed.
Ms. Waters. Well, Congressman Watt just clarified exactly
what she said. She said that 47 percent of those banks that
drew on the FDIC had shown that--what was it, the last 2 years?
Mr. Watt. Rated either as 1 or 2 in the last 2 years. That
is what she said.
Ms. Waters. That is what she said. So I guess, you know,
what I was asking you was, given the information, the facts
that have been presented to us, I guess I am wondering how you
can make the case that the large number of banks that are not
participating should not be participating.
I just don't have an appreciation for the way the risk is
determined, perhaps, whether or not it has been looked at as
short-term risk or long-term risk, but I just don't see that
you make the case that it would be unacceptable increases to
have them pay in a small amount and spread the amount of the
fund to be collected among all of the banks, small and large,
so that no one small sector of the banking community is bearing
all of the burden of capitalizing the fund.
I mean, I just don't see the case that you make.
Mr. Smith. Well, I think what we are trying to say there,
Congress will set a designated reserve level, whatever that
level is. Our position is that banks that are well capitalized
and CAMEL-rated 1 or 2 should not have to pay premiums if we
have met the designated reserve level or exceeded it.
Obviously, we don't like the hard, designated reserve level
of 1.25. We would like to have a softer level, maybe a range
where we start paying if it falls down below, but also we could
have the dividends on rebates if it gets above that. And I
think two things have to happen. You have to be at the
designated reserve level, and you have to be a well capitalized
bank. And you have to be a CAMEL 1- or 2-rated by your
regulatory agency.
And my bank just underwent a safety and soundness exam in
January from the FDIC, and I think that is risk assessment,
because they do come in and take a look at everything in your
bank, and they give you a rating from that.
Ms. Waters. Yeah. But you still don't answer the question
that we are raising--some of us are raising--despite that kind
of reserve and despite what appears to be low-risk situation,
that you still fall within that 47 percent who have been rated
1 and 2 within 2 years before they drew on FDIC. I mean, the
fact of the matter is, it could happen.
Mr. Smith. Well, I don't know that I have an answer there,
depending upon the timeframes that they are looking at, because
that probably was during the ag depression or during the real
estate crisis that we experienced, which was, I think, a
combination of an oil crisis and a real estate crisis, and we
had an ag crisis, almost a domino effect across the country. I
think we have a better regulatory structure in place today; I
think we are smarter. I know, as a banker, I feel like I am
smarter and have more things in place today in order to assess
the risk and be sure that I am out front of any problems that
we are going to address in our banks.
Ms. Waters. How do you answer the question of Merrill Lynch
and Smith Barney and the others with banks that do not pay into
the fund?
Mr. Smith. Well, I think FDIC has said that they do not
have the authority to charge them premiums at this time.
Ms. Waters. They have banks, though.
Mr. Smith. Pardon me?
Ms. Waters. They have banking operations.
Mr. Smith. That is correct, but I think if you are well
capitalized and you fall under the criteria that are set, the
FDIC is saying that if they fall under these criteria, we do
not have the authority to charge them for the funds going into
the system. You know, obviously, they are looking to
capitalization and the things that are taking place there.
Ms. Waters. Thank you.
Chairman Bachus. In the FDICIA, the Congress actually set
the criteria for their charging the premium and--with CAMEL
ratings, when they are in the--either ranked 1 or 2. I might
point out, we have heard that 47 percent of the banks who
failed--now, we are talking about the banks who failed--47
percent of those that failed had a rating system of 1 or 2 in
the 2 years prior.
Another way of saying that is that 53 percent of those
banks that could have failed did not, and they were within--92
percent of the banks in this country are rated 1 or 2. So
within the 92 percent of your total institutions, most--in
other words, over 9 out of 10 banks do have a 1 or 2 rating;
yet, less than 1 out of 2 failed within that category. So it
actually confirms that we are doing, I think, a fairly good job
of identifying the 8 percent, singling out the 8 percent who do
not have a 1 or 2 rating. Most of the failures came from that
group.
And I would predict that when you look at 6 months or a
year, if you shorten that period to 6 months as opposed to 2
years, that you would probably find almost all of the banks who
failed had a rating of 3 at the time they failed. Some do go
down. You know, this can be a 2-year process.
Ms. Waters. Mr. Chairman, if I may----
Chairman Bachus. Do you understand what I am saying?
Ms. Waters. Yes, I do.
Chairman Bachus. That most of the failures came within that
8 percent?
Ms. Waters. Well, you certainly can make that case.
I guess what I am looking at is the fact that while we are
smarter and we can predict certain things, we are sitting here
now and we don't know what the energy crisis is going to cause
in this country.
I never would--nobody could have predicted that in the
State of California we would be facing rolling blackouts.
Nobody could have predicted we would be up to $3 per gallon of
gasoline. Nobody could have predicted that NASDAQ took the dip
that it took this year. So what we do know is that there is
enough volatility in our economy where, even though we have
calculated as best we can, anything can happen. And so I just
kind of keep that as a reference when I look at whether or not
we are, in some cases, spreading the risk, we are being fair to
all.
The independent community banks are very important to me
because, I think, despite the sophistication of banking, that
these are the units that really keep middle America and small-
town America and small-city America running. And so I want to
make sure that they are not disadvantaged, that they have the
ability to--I am not sure, and I have to ask this one question:
The calculation by the FDIC, did it also calculate the
retention of the reserve requirements for the banks, along with
spreading out the FDIC charges? What did they say about reserve
rates for the banks?
Mr. Smith. No. That is not included in it, because each
bank holds their own reserves for any loan losses or any
problem situations.
And I would like to clarify that we do advocate that those
large, fast-growing institutions with funds from Merrill Lynch,
and so forth, be charged a premium. I was merely stating that
the FDIC has told us that they don't have the authority to
charge those; but we do think that they should be charged and
that should be addressed in this bill.
Ms. Waters. Thank you very much, Mr. Chairman.
Chairman Bachus. Thank you. So I think there is agreement
there.
Mrs. Kelly.
Mrs. Kelly. Thank you, Mr. Chairman. I am sorry that I
wasn't here earlier, because I am caught in a markup, but this
is an important hearing and I wanted to know if I have
permission to put a statement into the record and also if you
are going to hold the hearing open, if I may have permission to
submit written questions to the panels?
Chairman Bachus. Yes. In fact, it is a good point. Mrs.
Kelly, all Members will have 5 days with which to enter in
written statements or any other material they have.
Mrs. Kelly. Thank you. I would like to yield my time to Mr.
Weldon.
Mr. Weldon. I thank the gentlelady.
Mr. Gulledge, you are of the strong opinion that raising
the coverage level on the deposit insurance will help ease the
liquidity problems facing the small community bankers, members
of your association. In your view, is there anything else that
Congress can do to help stem the tide of core deposits leaving
community banks? Are there new products, for example, that
Congress could authorize or other measures that we could take
to address the funding issues that I know are of tremendous
importance to your association? And maybe some of the other
members may want to comment on this as well.
Mr. Gulledge. Well, certainly I would voice the opinion
that the increase of insurance coverage is the most important
issue that is on the table at this point. This is very crucial
to many, many community banks and particularly those in rural
areas.
Now, last year, the work that was done with the Federal
Home Loan Banks did make advances from the Home Loan Banks more
available, and this has helped a great deal. But there are
problems with that. Some of the examiners are now questioning
the heavy use of withdrawing at the windows there. The program
that we need is to develop stronger core deposits, and I do
believe the increase in insurance coverage and particularly
with the municipal coverage, if that can be extended to full
coverage, and also the increased coverage for the retirement
accounts, I think that would be very helpful.
Mr. Weldon. Mr. Bochnowski, did you want to add to that at
all?
Mr. Bochnowski. Thank you, Congressman. Yes, I would
appreciate that opportunity.
We would basically see it a little bit differently. We
think that indexing coverage in 1974 would put behind us the
issue of advancing coverage as time goes by. We do not favor
moving to $200,000. We think that current market conditions
maybe prove the point slightly, because all of us at the
community bank level are experiencing an influx of funds as a
result of what is happening in the equity markets. So we are
not totally sure that increasing coverage is what would trigger
consumers to bring money in.
We think that the action of this subcommittee in the House
in passing business checking was a very wise decision. We think
that is a wonderful opportunity for all of us to bring in more
deposits.
We would agree that to increase coverage for IRA accounts,
401(k) accounts, the Keogh accounts, that that could make a
difference, particularly as time is going to go on, because so
many of those accounts have built up great values in our
institutions. And I think that those of us who are baby
boomers, that as we age, we are going to see more and more of
our funds go back into the banking system, and increased
coverage there would be very helpful.
Mr. Weldon. Mr. Gulledge, opponents of raising the level of
deposit insurance claim that it will not really lead to any
more deposits, rather a consolidation of accounts. Thus, while
one bank may gain from the consolidation, another may actually
lose accounts. Do you have any response to that criticism?
Mr. Gulledge. My response would be that this goes straight
to the area of competition, which banks should be strongly
engaged in. My experience in my bank is that there are many
customers who come in, and I see them take cashier's checks out
of my bank to another bank simply and purely because we do not
have the coverage of that. I think that it would make us all
more competitive, and I think we would serve the public better
if we had the additional coverage and we got out and had to
work and compete for those deposits.
Mr. Weldon. Mr. Bochnowski, in your testimony, you talk
about setting a 1.35 percent ceiling on the reserves in the
fund and using the excess to pay off the FICO bonds. What are
banks paying now on FICO bonds?
Mr. Bochnowski. I would have to ask. It is 2.1.
Mr. Weldon. 2.1?
Mr. Bochnowski. 2.1 basis points.
Mr. Weldon. Do you have any idea how much this would cost
to do what you are talking about?
Mr. Bochnowski. In specific numbers, no. It is about $800
million a year.
Mr. Weldon. $800 million a year for the industry, or your
members?
Mr. Bochnowski. For the industry.
Mr. Weldon. For the industry, industry-wide.
I know I am asking you a lot of detailed questions. You can
ask the people behind you. How long would it take to pay off
the FICO bonds in that scenario?
Mr. Watt. 217.
Mr. Weldon. Pardon me? Is that correct, 217,000? The
gentleman from North Carolina says 217,000.
Mr. Bochnowski. Seventeen years of interest.
Mr. Weldon. Seventeen years of interest, OK.
I think my time has expired; is that right? I had one more
question.
Chairman Bachus. Go ahead and ask your--we will----
Mr. Weldon. No. I will yield back.
Chairman Bachus. No. If you----
Mr. Weldon. Mr. Bochnowski, in your testimony, you call for
a special premium on institutions that have grown rapidly.
Mr. Bochnowski. Right.
Mr. Weldon. Can you define ``excessive growth''--I think
that is the term you use--and isn't this going to be a penalty
on banks that are successful if we implement something like
this?
Mr. Bochnowski. I think ``excessive growth'' would be
defined anything that is outside of the norm, and I think the
FDIC can calculate for us what normal growth rates are across
the banking industry.
I don't see it as a penalty. I think that they have not
paid into the fund, and they are the free riders that we are
describing. When I look at the impact of the free riders on the
First Congressional District of Indiana--and this gets back to
Mr. Bachus' question earlier.
The FDIC Chairman talked about the $65 billion impact on
lending. We have 16 independent banks and thrifts left in our
community; together, they have about $5 billion in deposits. If
this 23-basis-points premium were imposed, if we fell over that
cliff and we had to pay it because of what the outsiders are
causing us to do, it would have an impact on $80 million of
loans.
Mr. Weldon. That would be sucked out of the district?
Mr. Bochnowski. Correct, loans that we wouldn't be able to
make. And what is astounding about that, Congressman, is that
we haven't done anything.
Mr. Weldon. Right.
Mr. Bochnowski. We have just done our job, and someone from
the outside can come in and cause that mischief. And that is
why we think bill H.R. 1293 is important, because it goes to
the heart of the problem immediately. And I think that that is
an experience that we are all going to have.
Mr. Weldon. H.R. 1293? Is that what you are talking about?
Mr. Bochnowski. Yes, sir.
Chairman Bachus. OK. Thank you.
Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman.
Let me just ask a couple of quick questions that I think I
can get yes and no answers to, to try to get to a subsequent
point.
Is there any prohibition against banks currently reinsuring
deposits beyond $100,000?
Mr. Smith. No, there is not.
Mr. Watt. Would there be any prohibition against banks
advertising that if they chose to do that?
Mr. Smith. Not that I am aware of, no.
Mr. Watt. Is there anybody out there who is writing
reinsurance?
Mr. Smith. I am.
Mr. Watt. A lot of people are?
Mr. Smith. Yes.
Mr. Watt. Are doing reinsurance?
Mr. Smith. It is a private insurance carrier, but we
provide insurance if they want more coverage, over the $100,000
limit.
Mr. Bochnowski. Congressman, we do that a little bit
differently. We don't do the reinsurance, but we do repurchase
agreements where we can cover more than $100,000 by permitting
our customer to buy a security that we own.
Mr. Watt. OK.
My visceral response is that I strongly favor indexing the
$100,000 figure and moving it up and then indexing it.
My visceral response on either an unlimited coverage for
retirement accounts or for municipal accounts being 100 percent
insured is that that would be fairer done in some reinsurance
or separate fund, because you are basically creating a
different level of coverage for people, which I think ought to
be the same. Can I just get your reaction to that?
I mean, I obviously haven't studied this to any great
degree. I am just giving kind of a visceral, gut response to
it. Is there anything wrong with the analysis that I am--with
my visceral response, I guess is the question.
Mr. Bochnowski. We really haven't looked into that issue
directly. I think the problem with reinsurance may be how the
reinsurer rates each individual bank: Where are they going to
get their information from; are they going to want access to
our individual examination reports?
Mr. Watt. How are you doing it now?
Mr. Bochnowski. Well, we are not.
Mr. Watt. What would be the difference, Mr. Smith?
Mr. Smith. No. Our banker bond carrier offers deposit
insurance coverage, and they do not come in and rate the bank.
Obviously, we have done business with this company for a number
of years, and they provide the insurance level that we request.
We have no criteria.
Mr. Watt. Does it cost you more than the premium would be
into the FDIC?
Mr. Smith. At this point, depending upon, of course, what
level you would have to pay into the FDIC for the coverage, the
premium now is costing about 4 cents.
Mr. Watt. And your FDIC premium--you are not in. But what
is the typical----
Mr. Smith. Well, out of the 23 cents, if you were paying
the maximum, that would be very healthy plug for our bank.
Depending upon what level, of course, risk that the FDIC----
Mr. Watt. Healthy level is what?
Mr. Smith. The average level right now is, I think, about 6
cents for people falling out of the 1 or 2.
Mr. Watt. So you are actually paying less to fully insure
municipal deposits than you would be paying if we just upped
the coverage for municipal deposits under FDIC to full
coverage; isn't that right?
Mr. Smith. I think----
Mr. Watt. I mean, shouldn't that be a cost that you are
passing basically factoring into the quotes you are giving to
municipalities and factoring into whatever proposal you are
making to a municipal government?
Mr. Smith. Well, in the municipal deposits, every State is
different, and I can only give you the example of my State of
Missouri. We have to collateralize every dollar over the
$100,000 that they have in the bank, so we pledge a security
for that.
Now, that does not cost us anything in actual dollars
except some opportunity costs, possibly. The cost there is the
burden of bookkeeping and recordkeeping that we have to go
through to pledge a specific security to, say, the school
system. And, for instance, if that security matures or that
security is called, we have to go get that security released,
and then we have to reassign another security for the school
system to cover their deposits. There is no specific dollar
cost on my books for that.
What I was talking about, the additional deposit cost was
if an individual comes in and they want to put $200,000 in the
bank. They say, we would like to have coverage over the
$100,000. We try to provide them that coverage.
Now, probably I would somehow try to give them a rate that
would help pay some of the cost of that coverage, and they
understand that, because I explain it up front; but they would
prefer to have the additional coverage over the $100,000 limit
and possibly have some sharing there.
Mr. Watt. Mr. Chairman, I am going to yield back, the point
I am making is, I think in some of these individual municipal
transactions, it seems to me that it would be fairer to think
about building that into their costs rather than spreading it
to all depositors, the cost of doing this.
I mean, I obviously haven't reached a conclusion on this,
and maybe you all want to talk to me more about it if we move
in that direction. But my kind of gut reaction is, I am not
sure that I think it is necessarily a good idea for us to be
100 percent insuring any individual class of depositors and
putting that class of depositors in some separate category than
the regular insurance fund, because the whole idea of a regular
insurance fund, an FDIC insurance fund, was to give kind of a
Social Security theory more than it is insuring 100 percent, as
I understand it.
Maybe I am just wrong about that.
Mr. Bochnowski. Mr. Watt, if I could add an observation. In
Indiana we do have a public deposit insurance fund so, in
theory, those deposits are covered. But insurance is not an
issue. It is price-driven. The consideration of the depositor
is--if the money is currently at a large securities firm right
now, earning a certain yield, for us to bid on those funds
successfully, we have to meet their price. Some days we want to
meet that price, and some days we don't, and it is really a
cost factor.
Insurance, I think, at least in our State, is not as
significant to bringing those funds in as price.
Chairman Bachus. Thank you.
Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman.
Yeah, I--on the municipal--and I don't want to ask too much
about that, but I am not sure I see the case yet to do that on
municipal, and I am not sure we would want to get that confused
if we were looking at doing an FDIC reform bill, because there
are a lot of avenues for municipalities to set up their funds,
and I think you intertwine yourself with different State codes,
and even municipal codes, on how funds can be deposited.
But let me go back to the FDIC's proposal.
I looked at two out of three of the testimonies, but in
listening to everyone's testimony, it would appear obviously
that everyone is in favor of some broad concept of reform of
the insurance system. And would it be fair to say--clearly, I
think this is what the ABA is saying, and I didn't get a chance
to go through the others--but, would it be fair to say that
everyone is in favor of some form of a mutual insurance system,
which is a term that the ABA uses in their testimony, as
opposed to the current system?
And getting more specific--and I am not necessarily saying
that the FDIC concept is the prototype or the ideal model, and
I would ask this of Mr. Smith in particular--is the primary
concern with the FDIC model that both the risk-based premium
might result in a higher premium for some banks or thrifts and
that the rebate mechanism might result in some banks and
thrifts paying a net-net higher premium than they would under
the current system?
And I guess I would add to that, is there an objection to
having an ongoing payment, even if it is rebated back in a
greater amount?
Mr. Smith. Well, as I travel around the country, clearly I
don't think we have a consensus among the bankers, because we
find a lot of bankers want the $200,000 level. A lot of bankers
want maybe a lesser level, and I have found a lot of bankers
that don't want any increase in the insurance. So I think it is
important that we have a consensus.
And if I don't get eaten up here, I think it is important
that we have a consensus among the bankers, because I think
cost is going to drive this consensus in order to get the
bankers to agree upon a bill. And I think if we increase the
cost to a significant number of bankers, then I think it is
going to be difficult to get those bankers to agree upon.
Mr. Bentsen. Excuse me.
In terms of cost--I am not focusing as much on the level of
insurance of--I mean, I think we will work out the 100,000 to
whatever at some point; but I guess I am focusing more on the
premium mechanism for the funds.
Is the concern that the FDIC model would result in--I mean,
on the one hand, it seems to me the FDIC model would bring
everybody into the system; everybody who is accessing the fund
would have some obligation to pay into the fund. And I think--
and I would gather from what everyone said, there is consensus
among this panel on that.
Where the consensus breaks down, or where the concern
rises, is the way the rebate model is structured under the FDIC
proposal, is that for some would end up paying more premium, or
paying a premium, since someone is paying a premium right now,
as opposed to the status quo. Is that the concern?
Mr. Smith. We like the model, but basically we just don't
necessarily like the numbers that they have put with the model.
And I think--yes, I think we are interested in the model, in
approving that model, but I think we would like to see what we
can do about the numbers and how that would play out with the
cost to our bankers across the United States.
Mr. Bochnowski. We would not object to certain parts of
their model, but do object, obviously, to others. We think that
the CAMEL-1-rated banks should not pay a premium at all. We
would be open to CAMEL-2s paying some premium. But we think
that, in the end, it gets back to what is the maximum level of
the fund and how will rebates come back; and to the extent that
the mutual model provides opportunity for all to participate in
that, then that would be something we could support.
Mr. Gulledge. Well, in my testimony, I indicated earlier
that it was our belief that our banks would be willing to pay a
premium if it was small, steady and fairly priced.
And in order to get an integrated reform package, I would
comment here also that the purpose of the study that the FDIC
made is not to enhance revenues or total premiums. It is to
find a more workable situation. And certainly--and I have
testified earlier in my comments that the rebates should be
based on what had been paid in previously by the banks rather
than from the assessment base now.
So I approve of the model.
Mr. Bentsen. Let me very quickly ask this, because I have
been sitting here for a while.
Is it fair to say that everyone here would agree, though,
with going to more of a risk based--and arguably we have that
under FIRREA or FDICIA--but, to more of a risk-based premium
model? Obviously, more details are critical, but also--and I
think Mr. Gulledge answered this.
On the rebate, would you agree with what the FDIC talks
about on historical payments, or would you see that there, as
well, you would want to have a risk-based model for the level
of rebates or who receives the rebates?
Mr. Bochnowski. I think that it is probably a hybrid.
Again, if we have fast-growth institutions, should they be
participating fully in the rebate? I am not sure that we are
prepared to say that they should.
Mr. Smith. And I would agree with that.
Mr. Bentsen. Thank you.
Thank you, Mr. Chairman.
Chairman Bachus. Thank you. Mrs. Maloney, and if you have
additional time, you are going to yield to Mr. Crowley?
Mrs. Maloney. Absolutely.
Chairman Bachus. And then we will conclude with his
questions.
Mrs. Maloney. The FDIC indicated that the 23 basis points,
that is currently required by law if the reserve ratio dips
below 2.5 percent, would reduce lending by $65 billion. Do you
have any idea what the impact on lending would be from the
FDIC's proposal of risk-based pricing combined with rebates?
Would it reduce lending?
Mr. Smith. I can give you only the example of my bank
during the early 1990's, when we had a 23-cent premium; it cost
our bank about $120,000 a year. And if you extend that over a
10-year period, that is a lot of money. And if you loan that
money in your community, and your customers buy goods and spend
money, the United States Chamber of Commerce itself tells us
every dollar turns over seven times, so I think you can see
where this could--the multiplier effect could really have a big
effect on what is available in our communities with these
dollars.
Mr. Bochnowski. We know, Congresswoman, if we were to
follow that 23 basis points in our company, it would impact us
by not having approximately $5 million in lending, and that is
20 percent of our loan growth from last year.
On a smaller scale, though, if we have--for the 1- and 2-
rated companies--some modest premium, I think it is possible to
say that--and that is to suggest that it is, you know, a 2- or
3-basis points premium--it is not going to be that steep. It is
the higher end that causes the problem.
Mr. Gulledge. Well, we believe that the enhancement in the
safety and soundness of the banks resulting from these reforms
would be good for everybody.
Mrs. Maloney. Thank you very much, and I yield my time to
my distinguished colleague from New York.
We have a vote taking place right now, so we don't have a
lot of time.
Chairman Bachus. We have about 9\1/2\ minutes, so you have
plenty of time.
Mr. Crowley. OK. Thank you, Mr. Chairman.
I thank my colleague from New York, Mrs. Maloney. I have
two questions, kind of playing a little bit of devil's
advocate.
If you can say on the record or off the record--and Mr.
Bochnowski, I hope I am----
Mr. Bochnowski. Bochnowski.
Mr. Crowley. Bochnowski. That is correct.
At least many of the large banks are saying that Gramm-
Leach-Bliley was in part done to create this benefit for the
consumer, their customers--I am talking about the free rider
issue--to have access for their consumers and their customers,
the protections of FDIC accounts and all the protections that
go along with them.
Now, despite the fact that that may anger some, isn't that
the argument they are making upon a fine argument?
Mr. Bochnowski. It is a curious argument. I had an
opportunity earlier in my testimony to suggest that if we were
to have a premium enforced upon us in the First Congressional
District in Indiana, it would have an impact of reducing the
available dollars for loans by $80 million. I hardly think that
Congress intended when they passed that law to put those of us
who are community bankers in the position of having an $80
million retraction of credit in the First District of Indiana.
And I don't know how that plays across the country and all
other districts, but that is an example.
So I think it is a very specious and curious argument that
they make.
Mr. Crowley. Thank you.
And this really is to the entire panel, if anyone wants to
jump in: The increase in the amount of money that would come
into these accounts and from these large banks, based on
security brokerage accounts, common sense tells me that it
would increase substantially the level of insured dollars
within the FDIC; and because of that, the ratios would be
changed and that although they are pretty flush at this point
in time, right at this time, that there has been a slight
decrease in the DRR since then, albeit they have only been
around for about a year-and-a-half or so.
Is it your contention or the panel's contention that you
expect you will see a further decrease in DRR?
Mr. Bochnowski. I believe that the numbers are that for
every 100 billion that comes across the DR--declines by about 6
basis points. So there is approximately $180 million that the
chairman has suggested that the bank security firms'
combination have under their control that could move over.
Mr. Crowley. How much do we anticipate will be rolled in
these FDIC accounts?
Mr. Bochnowski. I would have no way of knowing what they
would do.
Mr. Crowley. Even if the return is going to be
substantially less than what they could get?
Mr. Bochnowski. It depends on market conditions. It also
depends on a fiduciary question that they face. If the return
is the same on the----
Mr. Crowley. Insured accounts.
Mr. Bochnowski. They might take the insured account.
Mr. Crowley. Got you. Thank you.
Thank you, Mr. Chairman.
Chairman Bachus. Thank you.
In conclusion, we are going to adjourn this hearing. I do
want to say that we have some additional information. The FDIC
indicated that the failure rate was actually significantly
lower than what was initially indicated.
And let me also say this: Of over 10,000 banks last year,
we had one bank failure of a small institution in West
Virginia. So, I think when we talk about bank failures, we are
talking about something that in the last few years--and we have
passed additional regulations and put additional structures in
place. They have been very successful.
A bank failure today is rare indeed. It is a very unusual
event.
With that, the hearing is adjourned, and I thank you,
gentlemen.
[Whereupon, at 12:27 p.m., the hearing was adjourned.]
A P P E N D I X
May 16, 2001
[GRAPHIC] [TIFF OMITTED] T2577.001
[GRAPHIC] [TIFF OMITTED] T2577.002
[GRAPHIC] [TIFF OMITTED] T2577.003
[GRAPHIC] [TIFF OMITTED] T2577.004
[GRAPHIC] [TIFF OMITTED] T2577.005
[GRAPHIC] [TIFF OMITTED] T2577.006
[GRAPHIC] [TIFF OMITTED] T2577.007
[GRAPHIC] [TIFF OMITTED] T2577.008
[GRAPHIC] [TIFF OMITTED] T2577.009
[GRAPHIC] [TIFF OMITTED] T2577.010
[GRAPHIC] [TIFF OMITTED] T2577.011
[GRAPHIC] [TIFF OMITTED] T2577.012
[GRAPHIC] [TIFF OMITTED] T2577.013
[GRAPHIC] [TIFF OMITTED] T2577.014
[GRAPHIC] [TIFF OMITTED] T2577.015
[GRAPHIC] [TIFF OMITTED] T2577.016
[GRAPHIC] [TIFF OMITTED] T2577.017
[GRAPHIC] [TIFF OMITTED] T2577.018
[GRAPHIC] [TIFF OMITTED] T2577.019
[GRAPHIC] [TIFF OMITTED] T2577.020
[GRAPHIC] [TIFF OMITTED] T2577.021
[GRAPHIC] [TIFF OMITTED] T2577.022
[GRAPHIC] [TIFF OMITTED] T2577.023
[GRAPHIC] [TIFF OMITTED] T2577.024
[GRAPHIC] [TIFF OMITTED] T2577.025
[GRAPHIC] [TIFF OMITTED] T2577.026
[GRAPHIC] [TIFF OMITTED] T2577.027
[GRAPHIC] [TIFF OMITTED] T2577.028
[GRAPHIC] [TIFF OMITTED] T2577.029
[GRAPHIC] [TIFF OMITTED] T2577.030
[GRAPHIC] [TIFF OMITTED] T2577.031
[GRAPHIC] [TIFF OMITTED] T2577.032
[GRAPHIC] [TIFF OMITTED] T2577.033
[GRAPHIC] [TIFF OMITTED] T2577.034
[GRAPHIC] [TIFF OMITTED] T2577.035
[GRAPHIC] [TIFF OMITTED] T2577.036
[GRAPHIC] [TIFF OMITTED] T2577.037
[GRAPHIC] [TIFF OMITTED] T2577.038
[GRAPHIC] [TIFF OMITTED] T2577.039
[GRAPHIC] [TIFF OMITTED] T2577.040
[GRAPHIC] [TIFF OMITTED] T2577.041
[GRAPHIC] [TIFF OMITTED] T2577.042
[GRAPHIC] [TIFF OMITTED] T2577.043
[GRAPHIC] [TIFF OMITTED] T2577.044
[GRAPHIC] [TIFF OMITTED] T2577.045
[GRAPHIC] [TIFF OMITTED] T2577.046
[GRAPHIC] [TIFF OMITTED] T2577.047
[GRAPHIC] [TIFF OMITTED] T2577.048
[GRAPHIC] [TIFF OMITTED] T2577.049
[GRAPHIC] [TIFF OMITTED] T2577.050
[GRAPHIC] [TIFF OMITTED] T2577.051
[GRAPHIC] [TIFF OMITTED] T2577.052
[GRAPHIC] [TIFF OMITTED] T2577.053
[GRAPHIC] [TIFF OMITTED] T2577.054
[GRAPHIC] [TIFF OMITTED] T2577.055
[GRAPHIC] [TIFF OMITTED] T2577.056
[GRAPHIC] [TIFF OMITTED] T2577.057
[GRAPHIC] [TIFF OMITTED] T2577.058
[GRAPHIC] [TIFF OMITTED] T2577.059
[GRAPHIC] [TIFF OMITTED] T2577.060
[GRAPHIC] [TIFF OMITTED] T2577.061
[GRAPHIC] [TIFF OMITTED] T2577.062
[GRAPHIC] [TIFF OMITTED] T2577.063
[GRAPHIC] [TIFF OMITTED] T2577.064
[GRAPHIC] [TIFF OMITTED] T2577.065
[GRAPHIC] [TIFF OMITTED] T2577.066
[GRAPHIC] [TIFF OMITTED] T2577.067
[GRAPHIC] [TIFF OMITTED] T2577.068
[GRAPHIC] [TIFF OMITTED] T2577.069
[GRAPHIC] [TIFF OMITTED] T2577.070
[GRAPHIC] [TIFF OMITTED] T2577.071
[GRAPHIC] [TIFF OMITTED] T2577.072
[GRAPHIC] [TIFF OMITTED] T2577.073
[GRAPHIC] [TIFF OMITTED] T2577.074
[GRAPHIC] [TIFF OMITTED] T2577.075
[GRAPHIC] [TIFF OMITTED] T2577.076
[GRAPHIC] [TIFF OMITTED] T2577.077
[GRAPHIC] [TIFF OMITTED] T2577.078
[GRAPHIC] [TIFF OMITTED] T2577.079
[GRAPHIC] [TIFF OMITTED] T2577.080
[GRAPHIC] [TIFF OMITTED] T2577.081
[GRAPHIC] [TIFF OMITTED] T2577.082
[GRAPHIC] [TIFF OMITTED] T2577.083
[GRAPHIC] [TIFF OMITTED] T2577.084
[GRAPHIC] [TIFF OMITTED] T2577.085
[GRAPHIC] [TIFF OMITTED] T2577.086
[GRAPHIC] [TIFF OMITTED] T2577.087
[GRAPHIC] [TIFF OMITTED] T2577.088
[GRAPHIC] [TIFF OMITTED] T2577.089
[GRAPHIC] [TIFF OMITTED] T2577.090
[GRAPHIC] [TIFF OMITTED] T2577.091
[GRAPHIC] [TIFF OMITTED] T2577.092
[GRAPHIC] [TIFF OMITTED] T2577.093
[GRAPHIC] [TIFF OMITTED] T2577.094
[GRAPHIC] [TIFF OMITTED] T2577.095
[GRAPHIC] [TIFF OMITTED] T2577.096
[GRAPHIC] [TIFF OMITTED] T2577.097
[GRAPHIC] [TIFF OMITTED] T2577.098
[GRAPHIC] [TIFF OMITTED] T2577.099
[GRAPHIC] [TIFF OMITTED] T2577.100
[GRAPHIC] [TIFF OMITTED] T2577.101
[GRAPHIC] [TIFF OMITTED] T2577.102
[GRAPHIC] [TIFF OMITTED] T2577.103
[GRAPHIC] [TIFF OMITTED] T2577.104