[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
VIEWPOINTS OF SELECT REGULATORS
ON 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
__________
JULY 26, 2001
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-39
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74-493 WASHINGTON : 2001
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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 JAMES H. MALONEY, Connecticut
WALTER B. JONES, North Carolina DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois JULIA CARSON, Indiana
PATRICK J. TOOMEY, Pennsylvania BARBARA LEE, California
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
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Page
Hearing held on:
July 26, 2001................................................ 1
Appendix:
July 26, 2001................................................ 31
WITNESSES
Thursday, July 26, 2001
Bair, Hon. Sheila C., Assistant Secretary for Financial
Institutions, U.S. Department of the Treasury.................. 5
Hawke, Hon. John D., Jr., Comptroller, Office of the Comptroller
of the Currency................................................ 7
Meyer, Hon. Laurence H., Member, Board of Governors, Federal
Reserve System................................................. 3
Seidman, Hon. Ellen, Director, Office of Thrift Supervision...... 9
APPENDIX
Prepared statements:
Bachus, Hon. Spencer......................................... 32
Oxley, Hon. Michael G........................................ 34
Bair, Hon. Sheila C.......................................... 50
Hawke, Hon. John D., Jr. (with attachment)................... 59
Meyer, Hon. Laurence H....................................... 35
Seidman, Hon. Ellen.......................................... 86
Additional Material Submitted for the Record
Bair, Hon. Sheila C.:
Written response to a question by Hon. Spencer Bachus........ 56
Written response to a question by Hon. Frank Mascara......... 58
Hawke, Hon. John D., Jr.:
Written response to a question by Hon. Frank Mascara......... 84
Meyer, Hon. Laurence H.:
Written response to a question by Hon. Frank Mascara......... 48
Seidman, Hon. Ellen:
Written response to a question by Hon. Frank Mascara......... 98
VIEWPOINTS OF SELECT REGULATORS ON DEPOSIT INSURANCE REFORM
----------
THURSDAY, JULY 26, 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 10:05 a.m., in
room 2128, Rayburn House Office Building, Hon. Spencer Bachus,
[chairman of the subcommittee], presiding.
Present: Chairman Bachus; Representatives Bereuter, Barr,
Biggert, Grucci, Hart, Capito, Tiberi, Waters, C. Maloney of
New York, Watt, Sherman, Meeks, Mascara, Moore, Gonzalez,
Kanjorski, Hooley, Hinojosa and Lucas.
Chairman Bachus. The Subcommittee on Financial Institutions
and Consumer Credit will come to order. Without objection, all
Members' opening statements will be made a part of the record.
The subcommittee meets today for a second hearing in this
Congress on reforming the Federal deposit insurance system. At
our first hearing on this subject in mid-May, Donna Tanoue, the
outgoing Chairman of the Federal Deposit Insurance Corporation,
(FDIC), presented the agency's recommendations for reform.
Today, we will hear the perspectives of the other Federal bank
regulators as well as the Treasury Department.
Since the subcommittee last met to consider these issues,
there have been significant developments. First, President Bush
chose to replace Ms. Tanoue at the FDIC. His choice was Don
Powell, who has been confirmed by the Senate and is expected to
assume his responsibilities shortly. My hope is that Chairman
Powell will appear before the subcommittee in September to
share his views on deposit insurance reform.
Second, the FDIC released data last month reflecting that
in the first quarter of this year, the ratio of reserves to
insured deposits in the Bank Insurance Fund, (BIF), dropped
from 1.35 percent to 1.32 percent. That ratio now stands at its
lowest point since 1996. As most of the people in this room are
well aware, once the number falls below the current ``hard
target'' of 1.25 percent, every bank in America faces a 23-
basis-point premium assessment. It is estimated that such an
assessment would require banks to pay billions of dollars in
premiums, a rude awakening after an extended period in which
over 90 percent of banks paid no premiums at all. Such a
massive outflow of funds from the banking system would curtail
lending to consumers and small businesses with potentially
devastating consequences for our economy and for communities
and families throughout America.
By contrast, the FDIC reports that the designated reserve
ratio in the Savings Account Insurance Fund, (SAIF), which
covers thrifts, held steady in the first quarter at 1.43
percent, unchanged from the last report at the end of 2000.
Assuming that current trend continues, the possibility exists
that banks will face sizable premium assessments at a time when
most of their thrift counterparts are paying no premium.
The significant growth in insured deposits that has
triggered the decline in this reserve ratio in the first
quarter is, in some respects, a ``good news/bad news'' story.
The bad news is obvious for banks. They could find themselves
on the receiving end of a multi-billion-dollar premium payout
if current patterns persist and the current law remains in
effect.
The ``good news'' is an apparent reversal of the trend of
core deposits leaving the banking system in recent years, in
search of higher returns elsewhere. As we all know, those
higher returns did not always materialize.
The outflow of deposits made it difficult for some banks to
meet loan demand in their local communities. The $84 billion
jump in insured deposits in the first quarter reported by
FDIC--coming on the heels of a substantial increase in deposits
in the fourth quarter of last year--is a welcome development
for those concerned about the future of small community banks
in America. Whether this flow of funds back into the banking
system will be sustained or prove to be temporary, driven by
investors seeking safe haven from more speculative investments,
remains to be seen.
Another contributor to the declining BIF ratio has been the
subject of heated debate: large infusions of money by large
brokerage firms from uninsured cash management accounts to
insured accounts at banks owned by those same brokerage firms.
Former Chairman Tanoue addressed the so-called ``free
rider'' issue and made it a centerpiece in her reform proposal.
I, for one Member, welcome that. We will learn at today's
hearing whether the other banking regulators share her concerns
in this regard.
Let me now recognize the Ranking Minority Member, Ms.
Waters, for her opening statement.
[The prepared statement of Hon. Spencer Bachus can be found
on page 32 in the appendix.]
Ms. Waters. Good morning. I'd like to thank Chairman Bachus
for calling this hearing, the second in a series on Federal
deposit insurance reform. 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 will yield back the balance of my time.
Chairman Bachus. I want to welcome our panel today. The
first panelist, going from my left, is Governor Laurence Meyer,
Governor of the Board of Governors of the Federal Reserve, who
has testified before our subcommittee on several occasions, and
we welcome you back and look forward to your testimony. It's
always insightful. We appreciate that.
We have a new Madam Assistant Secretary for Financial
Institutions, Ms. Bair. We want to welcome you to the
subcommittee and look forward to a long and cooperative
relationship with you.
Ms. Bair. Thank you.
Chairman Bachus. I talked to her earlier and she brought
her daughter to the Senate confirmation hearings, and I was,
for one, looking forward to meeting her, but I think it's
probably better that she's in a more comfortable environment
than here.
Ms. Bair. There will be future opportunities, I'm sure.
Chairman Bachus. Thank you. I want to welcome back an old
friend of this subcommittee, the Honorable John D. Hawke, the
Comptroller of the Currency. And then the Honorable Ellen
Seidman, who is the Director of the Office of Thrift
Supervision, (OTS). And Ms. Seidman, I appreciate the service
that you have given to the OTS.
At this time we will welcome opening statements from the
witnesses. You do not have to limit yourselves to 5 minutes, if
you want to go over that. We would rather hear from you rather
than enforce some arbitrary limit, and we have time.
STATEMENT OF HON. LAURENCE H. MEYER, MEMBER, BOARD OF
GOVERNORS, FEDERAL RESERVE SYSTEM
Mr. Meyer. Thank you. Mr. Chairman, Congresswoman Waters,
Members of the subcommittee, it's a pleasure to appear before
you to present the views of the Board of Governors of the
Federal Reserve System on deposit insurance reform as proposed
by the FDIC this past spring.
Deposit insurance has played a key role, sometimes a
critical one, in stabilizing banking and financial markets. In
addition, deposit insurance has provided a safe and secure
place for those households and small businesses with relatively
modest amounts of financial assets to hold their transactions
and other balances.
But these benefits have not come without cost. The very
same process that has ended deposit runs has made insured
depositors largely indifferent to the risks taken by their
banks. It has thus increased the ability of insured depository
institutions to take risks while reducing market monitoring of
that risk, necessitating greater governmental supervision. The
crafting of reforms of the deposit insurance system must
therefore struggle to balance the tradeoffs between these
benefits and costs. The FDIC has made five broad
recommendations.
The Board strongly supports the FDIC's proposal to merge
the BIF and SAIF funds. Because the charters and operations of
banks and thrifts have become similar, it makes no sense to
continue the separate funds.
The Board also strongly endorses the FDIC recommendations
that would require a premium be imposed on every insured
depository institution and eliminate the statutory restrictions
on risk-based pricing. The current rule requires the Government
to give away its valuable guarantee to well-capitalized and
well-rated banks when the fund reserves meet some ceiling
level. At the end of last year, 92 percent of banks and thrifts
were paying no premium. Included in this group are new banks
that have never paid any premium for their, in some cases
substantial, coverage, and fast-growing entities whose past
premiums were extraordinarily small relative to their current
coverage.
Although the establishment of a robust risk-based premium
system would be technically difficult to design, a closer link
between insurance premiums and individual bank and thrift risk
would reduce banks' incentive to take risk. We note, however,
that for risk-based premiums to do their job of inducing
behavioral change, a substantial range of premiums is required.
Thus, if a cap is required, as the FDIC recommends, it should
be set quite high so that risk-based premiums can be as
effective as possible in deterring excessive risk-taking.
The current rules can result in sharp changes in premium
when the reserves of the fund rise above or fall below 1.25
percent of insured deposits. These rules are clearly
procyclical, lowering or eliminating fees in good times and
abruptly increasing fees sharply in times of weakness. We
strongly support the FDIC's proposal for increased flexibility
and smoothing of premiums by the establishment of a targeted
fund reserve range. However, we recommend that the FDIC's
suggested target reserve range should be widened in order to
further reduce the need to change premiums sharply.
The FDIC proposals would be coupled with rebates for
stronger entities when the fund approaches the upper end of the
target range, and surcharges when the fund trends below the
lower end of the range. The FDIC also recommends that the
rebates vary with the size and duration of past premiums and
the scale of the current FDIC exposure to the entity. These
proposals make considerable sense, and the Board endorses them.
The FDIC recommends that the current $100,000 ceiling on
insured deposits be indexed. The Board does not support this
recommendation and believes that, at this time, the current
ceiling should be maintained. In the Board's judgment, it is
unlikely that increased coverage today, even by indexing, would
add measurably to the stability of the banking system. Thus,
the problem that increased coverage is designed to solve must
be either with the individual depositor, the party originally
intended to be protected by deposit insurance, or the
individual bank or thrift, clearly, both of which would prefer
higher coverage if there were no costs. But Congress needs to
be clear about the problem for which increased coverage would
be the solution.
Our surveys of consumer finances suggest that depositors
are adept at achieving the level of deposit insurance coverage
they desire by opening multiple accounts. Such spreading of
asset holdings is perfectly consistent with the counsel always
given to investors to diversify their assets across different
issuers.
Does the problem to be solved by increased deposit
insurance coverage concern the individual depository
institutions? If so, the problem necessarily would be
concentrated at smaller banks that generally do not have access
to the money market or to foreign branch networks for
supplementary funds. Since the mid-1990s, and adjusted for the
effect of mergers, the smaller banks, those below the largest
1,000, have actually grown almost twice as rapidly as all
banks. Most important, the uninsured deposits at the smaller
banks have grown nearly twice as rapidly, over a 20 percent
annual rate, compared to the larger banks. Clearly, small banks
have a demonstrated skill and ability to compete for uninsured
deposits.
With no obvious problem to be solved, the Board, as I
noted, has concluded that there is not a case for increasing
the current $100,000 level for insured deposits, even by
indexing. There may come a time when the Board finds that
households and businesses with modest resources are finding
difficulty in placing their funds in safe vehicles, and/or that
there is a reason to be concerned that the level of deposit
coverage could endanger financial stability. Should either of
those events occur, the Board would call our concerns to the
attention of Congress and support adjustments to the ceiling by
indexing or other methods.
Thank you.
[The prepared statement of Hon. Laurence H. Meyer can be
found on page 35 in the appendix.]
Chairman Bachus. Madam Assistant Secretary Bair.
STATEMENT OF HON. SHEILA C. BAIR, ASSISTANT SECRETARY FOR
FINANCIAL INSTITUTIONS, U.S. DEPARTMENT OF THE TREASURY
Ms. Bair. Thank you, Mr. Chairman, Congresswoman Waters,
and Members of the subcommittee, I appreciate the opportunity
to comment on the Federal Deposit Insurance Corporation's
recent paper recommending reform of the deposit insurance
system.
The Treasury Department has a substantial interest in this
issue, as we have a critical role to play in deposit insurance.
The deposit insurance funds have authority to borrow up to $30
billion from the U.S. Treasury. In addition, Congress has
assigned to the Secretary of the Treasury the final
responsibility for determining whether the resolution of a
failing bank poses a systemic risk to the financial system.
My comments this morning will be general in nature,
focusing on the key policy issues raised in the FDIC paper, and
I would add that even though we are not in complete agreement
with those recommendations, we think it's an excellent piece of
work. The FDIC staff should be commended. It certainly provides
an excellent starting point, a framework for considering this
important issue.
We are in general agreement with the FDIC report on three
points. First, the potential procyclical effects of deposit
insurance pricing and reserving should be reduced. Reserves
should be allowed to grow when conditions are good in order to
better absorb losses under adverse conditions without sharp
increases in premiums. Allowing growth above a designated
reserve ratio in good times or growth within a wide range would
afford greater room for the insurance fund to handle bank
failures without exhausting its resources. It also would allow
for more stable premiums that would smooth over time the costs
borne by the industry.
Second, all insured depository institutions should pay
premiums on current deposits, with potential rebates taking
into account each institution's recent history of premium
payments. Banks and thrifts benefit every day from deposit
insurance, and they should compensate the FDIC for that
benefit, preferably through relatively small, steady premiums.
Most banks and thrifts now pay no premiums for deposit
insurance, which creates incentives to increase deposits and
thus raises the FDIC's uncompensated risk exposure.
Third, the bank and thrift insurance funds should be
merged. A larger combined insurance fund would have a greater
ability to diversify its risks than either fund separately. A
merger would underscore the fact that BIF and SAIF are already
hybrid funds. Each one insures the deposits of commercial
banks, savings banks, and savings associations.
We have different views from the FDIC report in two areas.
First, while we agree with the FDIC report on the conceptual
appeal of risk-based premiums, at this stage we would give
priority to reforms that would charge every institution a
premium on current deposits that is relatively stable over
time. We would defer development of a new risk-based premium
structure, a process that promises to be complex and time
consuming, for a later time.
Second, and most importantly, we have a different view with
respect to insurance coverage. We believe that the deposit
insurance coverage level should remain unchanged. We see no
clear evidence that the current limit on deposit insurance
coverage is burdensome to consumers, nor do we see clear
evidence that increasing coverage across the board would
enhance competition for the banking industry. Moreover, an
increase in the coverage level would increase risks to the FDIC
and ultimately taxpayers. In other words, there would be little
if any tangible benefit and definite risk and excess costs to
the fund and ultimately taxpayers.
Finally, two issues not addressed in the FDIC report should
be considered. While we recommend that all institutions pay
premiums assessed on current deposits, we also feel that it
would be a missed opportunity not to consider what should
constitute the assessment base. In particular, reform efforts
should consider whether the existing assessment base should be
modified to account for the effect of liability structure on
FDIC's expected losses.
Also, we support Comptroller Hawke's and Director Seidman's
call for addressing the uneven distribution of supervision
costs between national and State-chartered banks. We believe
that the Office of the Comptroller of the Currency's proposal
is an interesting approach that deserves further consideration,
and there may be other approaches and considerations that
should also be explored.
We look forward to working with the incoming FDIC Chairman
Powell and the FDIC Board to devise a solution to this problem.
Thank you, Mr. Chairman, again for the opportunity to
appear before you today, and I look forward to working with you
in my new capacity.
[The prepared statement of Hon. Sheila C. Bair can be found
on page 50 in the appendix.]
Chairman Bachus. We appreciate your testimony.
Comptroller John Hawke.
STATEMENT OF HON. JOHN D. HAWKE, JR., COMPTROLLER, OFFICE OF
THE COMPTROLLER OF THE CURRENCY
Mr. Hawke. Thank you, Chairman Bachus, Congresswoman Waters
and Members of the subcommittee, I appreciate this opportunity
to discuss reform of our Federal deposit insurance system. Too
often, reform occurs against the backdrop of a crisis.
Fortunately, we are not in that position today. The deposit
insurance funds and the banking industry are strong.
Nevertheless, the flaws in the current deposit insurance system
pose an unnecessary risk to the stability of the banking system
and so merit a careful and timely review by the Congress.
Let me summarize our positions on the major issues that
have been raised in connection with reform proposals. We think
the Bank Insurance Fund and the Savings Association Insurance
Fund should be merged. A merged fund would enable the FDIC to
operate more efficiently and to realize the benefits of
diversification.
Deposit insurance premiums should be more sensitive to
risk.
Chairman Bachus. Comptroller, several on the panel are
having problems hearing you. I don't know whether that mike is
on. If you'll just pull it closer. I think there's something
wrong with the mike.
Ms. Bair. Do you want to use mine?
Chairman Bachus. If you can just substitute.
Mr. Hawke. Thank you.
Chairman Bachus. Oh, that's much better.
Mr. Hawke. Saved by the Treasury Department once again.
[Laughter.]
Mr. Hawke. Deposit insurance premiums should be more
sensitive to risk. Today, 92 percent of all insured
institutions pay no premiums, yet common experience, as well as
the markets, tell us that these institutions have widely
varying risk characteristics.
The requirement that the premium for banks in the lowest
risk category be set at zero whenever the insurance fund
reserve ratio equals or exceeds 1.25 percent of insured
deposits should, in our view, be eliminated. Furthermore, we
believe that to compensate the Government for the benefits
conferred by deposit insurance on all banks, even the least
risky banks should pay some reasonable minimum insurance
premium.
We strongly support eliminating the current designated
reserve ratio (DRR) of 1.25 percent of insured deposits.
Instead, we favor empowering the FDIC to establish a range for
the fund based on the FDIC's periodic evaluation of the risks
borne by the fund and its assessment of potential losses. The
FDIC should have the authority to pay rebates when the upper
end of the range is exceeded and to impose surcharges when the
ratio falls below the lower end of the range.
We see no compelling case for an increase in deposit
insurance coverage. There is no evidence that depositors are
demanding increased coverage, nor is there a reliable basis for
projecting whether an increase would bring new deposits into
the system or simply result in a disruptive reshuffling of
deposits among banks.
There is one further set of issues that should be
considered in the context of deposit insurance reform, in our
view: the way the insurance fund is used, and should be used,
to support the cost of bank supervision and the inequitable
treatment of national banks in the way the BIF is currently
used to pay the costs of supervision of State banks. These same
issues apply to the way the SAIF fund is used with respect to
thrift institutions.
Under the current system, the FDIC draws on the insurance
funds for about $600 million a year to fund the cost of its
supervision of State non-member banks, that is, its costs of
performing for State banks exactly those functions that the OCC
performs for national banks. None of these costs are passed on
to State banks in the form of direct assessments. By contrast,
the OCC must charge national banks directly for the full cost
of their supervision.
This disparity is compounded by the fact that more than
half of the funds spent by the FDIC for Federal supervision of
State non-member banks are attributable directly to the
accumulated contributions of national banks to the insurance
fund. Thus, the earnings of a fund that has been built up by
all banks finance the supervisory costs of only a portion of
the banking industry. In other words, for every dollar that the
FDIC spends on the supervision of State banks, national banks,
by our estimates, effectively contribute about 55 cents. And,
that is in addition to paying the full cost of their own
supervision to the OCC.
Fee disparity presents a constant incentive for national
banks to convert to the heavily-subsidized State charter. And,
that incentive can be strongest when the banking system is
under stress and the OCC faces the need to expand its
supervisory resources--and thus its assessments--to deal with
an increased level of problem banks.
A key principle at the heart of deposit insurance reform is
that the premiums paid by individual institutions should be
closely related to the expected costs they impose on the funds.
The objective is to identify and eliminate subsidies in the
current system that, among other things, result in healthy,
well-managed banks bearing the costs and risks presented by
less well-managed. riskier banks. Similarly, bank supervision
should not be based on a system of subsidies--such as those
embedded in the current deposit insurance system--that result
in national banks paying a substantial portion of the FDIC's
cost of supervising State banks, because one of the main
purposes of bank supervision is to protect the insurance fund.
Ensuring that supervision is funded in a fair and equitable
manner is inextricably related to the subject of deposit
insurance reform.
Attached to my written testimony is a paper that discusses
the disparity in funding supervision in greater detail and
proposes a remedy. We believe it would make sense to extend the
existing arrangement to cover the costs of both State and
national bank supervision from the FDIC fund, just as the fund
today is used to cover the FDIC's costs of supervision. In
other words, instead of funding supervision through direct
assessments on banks, we propose that it be funded by payments
to supervisors from the insurance fund, to which all banks
contribute. This would ensure that all supervisors have access
to the resources needed to deal with stresses in the system and
could eliminate the perverse situation we have today in which
our resources can be significantly depleted at the very time
when the heaviest supervisory demands may be placed on us.
Thank you, Mr. Chairman.
[The prepared statement of Hon. John D. Hawke Jr. can be
found on page 59 in the appendix.]
Chairman Bachus. Thank you.
Director Ellen Seidman.
STATEMENT OF HON. ELLEN SEIDMAN, DIRECTOR, OFFICE OF THRIFT
SUPERVISION
Ms. Seidman. Thank you. Good morning, Chairman Bachus,
Ranking Member Waters, and Members of the subcommittee. Thank
you for the opportunity to testify about Federal deposit
insurance reform.
Over the past several years, those of us who have worked
closely with the deposit insurance system have come to realize
that while it is very important to serve the American people
well, it is not optimal. Several areas are in need of reform if
the system is to continue to serve the American people.
The current economic period, with few failures and adequate
reserves, provides a perfect opportunity to improve the system.
The FDIC has done a fine job of both laying out the areas in
which the system needs improvement and suggesting possible
solutions. Nevertheless, I believe there are some refinements
in thinking about risk parameters that might usefully be added
to the discussion. And there is one additional issue--how
supervisory costs are paid for--that needs to be part of the
discussion of deposit insurance reform.
The FDIC has identified four areas of weakness in the
Federal deposit insurance system: Maintenance of two separate
funds that provide identical insurance; inadequate pricing of
insurance risks, which distorts incentives and increases moral
hazard; excessive premium volatility and a tendency for
premiums to increase in economic downturns; and coverage levels
that do not adjust on a regular basis.
On the first point, the FDIC recommends merging the funds.
We agree. There are still very real differences between the
operations of banks and thrifts, who remain overwhelmingly
residential mortgage lenders. Nevertheless, experience since
the BIF and SAIF were established in 1989 argues strongly in
favor of fund merger. Because, while the differences between
banks and thrifts remain, those between the BIF and the SAIF
have become increasingly artificial and tenuous.
The two funds no longer insure distinct types of
institutions, with many banks and thrifts holding deposits
insured by both funds. The funds provide identical products.
Yet keeping them separate raises the possibility of premium
differentials that could handicap institutions that happen to
be insured by the fund that charges the higher premiums.
Industry consolidation has also increased the funds'
exposure to their largest institutions. Merging the funds will
alleviate these problems and strengthen the entire system by
diversifying risks and eliminating the possibility of fund
premium differentials.
To address the inadequate pricing of insurance risks, the
FDIC recommends implementing a system of risk-based premiums
under which all institutions would be required to pay annually
for the cost of insurance. I believe this is an extremely
important part of comprehensive reform. Deposit insurance is a
valuable good to institutions as well as to depositors. And
like all casualty insurance, it should be paid for even if the
eventuality insured against does not arise.
The most glaring problem in our current system is that it
provides free deposit insurance coverage to the vast majority
of institutions. Risk-based premiums would provide risk
management incentives to institutions and allocate insurance
costs based on the individual institution's risk profile. The
system that prices appropriately would reward those who
minimize fund exposure, but not impose too great a cost on
those with a more aggressive, but still not unreasonable risk
profile.
Implementing an effective risk-based system will entail
enhancing the current risk groupings for insured institutions.
The FDIC's proposed scorecard is an attractive approach for
refining existing risk groupings. The approach permits the
incorporation of information beyond the prompt-corrective
action (PCA) category and safety and soundness ratings into the
risk classifications. This is increasingly important as non-
traditional activities and funding, including asset
securitization and collateralized funding sources, play a
greater role in defining the relationship between deposits and
the risk of loss to the fund.
While the FDIC's approach is a good start, my experience
over the past several years leads me to be interested in an
enhancement that would focus on whether an institution,
particularly a larger institution, presents a heightened risk
of sudden failure. Sudden failure presents a problem that often
frustrates the use of supervisory tools. A sudden failure can
put maximum pressure not only on the deposit insurance fund,
but also on the financial system as a whole.
One way to address this issue would be to identify indicia
of high risk for sudden failure and charge higher premiums for
those who present such risks. This could help discourage such
risks as well as shift the costs of sudden failure risks to
those who take them.
The current pricing structure, which restricts how the FDIC
sets fund targets and insurance premiums, also tends to promote
premium volatility and make the system procyclical. In good
times, the FDIC levies no premiums on most institutions. When
the system is under stress projected to last more than a year,
the FDIC is required to charge high premiums, which can
exacerbate problems at weak institutions and reduce lending at
sound ones.
Increasing the FDIC's flexibility to set fund targets and
premiums would reduce premium volatility and institutions'
exposure to overall economic conditions and to sectoral
industry problems. Authorizing the FDIC to rebate excess funds
is also an important element of an effective risk-based pricing
system, as it allows the FDIC to charge premiums to all
institutions at all times, but also avoids the possibility of
the fund building to an excessive level.
I believe the most important point in addressing the issue
of raising or indexing deposit insurance coverage levels is not
whether it should be done, but how and when. Improved risk-
based pricing and other reforms should be regarded as
preconditions to even considering any action to raise or index
the deposit insurance ceiling. Optimally, any action to
increase deposit insurance coverage levels would be considered
only as a part of the comprehensive deposit insurance reform
package.
The final point I want to address is the importance of
allocating costs within the insurance system based on a
structure that preserves the integrity of the system's pricing
mechanism. Currently more than 40 percent of the FDIC's
operating budget, which comes from the insurance funds, is used
to pay for the supervisory costs relating solely to the FDIC's
role as primary Federal regulator of State non-member banks.
This is particularly ironic as premiums paid by OTS and OCC-
supervised institutions and the earnings on those premiums
account for the bulk of the current balance of the insurance
fund.
Whether the costs of day-to-day bank supervision should be
paid from the insurance funds can certainly be debated.
However, I think there are really only two logical conclusions.
Either all bank supervision is an insurance function for all
charters, in which case all supervisory costs, Federal and
State, should be paid from the insurance funds, or it is not.
And if it is not, the only costs of supervision that should be
paid from the insurance funds are the often considerable costs
that arise when there is a higher risk of failure. And in such
cases, again, all supervisory costs, not just those of the
FDIC, should be paid from the insurance fund.
Since the issue affects the proper pricing of insurance, it
is an integral element in getting deposit insurance reform
right.
I thank you for this opportunity to testify on the subject
of Federal deposit insurance reform. As you know, this may be
my last opportunity to testify before this subcommittee. I want
to thank each and every one of you for the opportunity to work
with you over the past 3\1/2\ years. I've enjoyed my time as
OTS Director, and I appreciate having had the opportunity to
meet individually with many of you to discuss some of the
issues facing the thrift industry, OTS, and the financial
system as a whole. Thank you very much.
[The prepared statement of Hon. Ellen Seidman can be found
on page 86 in the appendix.]
Chairman Bachus. Thank you.
We certainly appreciate the testimony of all our witnesses.
Let me read back over just a portion of Governor Meyer's
testimony. And I'd like maybe a comment on this issue. You
said: ``At the end of last year, 92 percent of banks and
thrifts were paying no premium. Included in this group were
banks that have never paid any premium for their, in some cases
substantial, coverage and fast-growing entities whose past
premiums were extraordinarily small relative to their current
coverage. We believe that these anomalies were never intended
by the framers of the Deposit Insurance Fund Act of 1996 and
should be addressed by the Congress.''
What are your suggestions for Congress addressing this
change?
Mr. Meyer. I think that, first of all, all banks should
have to pay a premium, as opposed to now, where we have 92
percent of banks paying zero premium. And the way this is
accomplished in the FDIC proposal is to have a range, rather
than a point. And as long as the fund was within that range,
the premiums are stable and all the banks are paying.
If the reserves would go above the upper end, then there
would be a flexible approach to gradually returning the funds
to within that range by rebates. But those rebates would be
small enough so that the banks would generally still be paying
some premium, and we would be having both risk-based premiums
and never having a zero cost for the Federal guarantee.
Chairman Bachus. Thank you.
OK, Assistant Secretary.
Ms. Bair. We would certainly agree that the current
statutory restriction on the FDIC's inability to charge
premiums to well-capitalized banks that have a high CAMEL
rating be eliminated. All banks pose some risk to the fund. All
banks derive a benefit from deposit insurance, and all banks
should pay a premium.
Chairman Bachus. Comptroller Hawke.
Mr. Hawke. I would just note, Mr. Chairman, that the so-
called ``free rider'' problem that you're alluding to of banks
getting the benefit of deposit insurance despite never having
paid into the fund is kind of a slippery issue to deal with.
Banks that have paid into the fund over the years have had the
benefit of deposit insurance in return. It is a little bit like
a term life insurance policy, though, where once the policy
comes to an end, you generally have to pay more premium. So,
any bank that has increased its deposits at a time when it
isn't paying any premiums is, in a sense, getting a free ride.
I think the real problem here is not the free ride. It's
the fact that we have a hard-wired designated reserve ratio of
1.25 percent that really aggravates the problem. Banks that
have paid in over the years see the potential for dilution of
the fund down below that reserve ratio, with the consequent
imposition of costs on them, and they understandably are
concerned about that. We would prefer to see the 1.25 ratio
eliminated and instead have the FDIC set a range for the fund,
which I think would mitigate to a great extent the concerns
about free riders. Of course, that should be combined with a
new approach to premium setting and a basic minimum premium for
the benefit of deposit insurance.
Chairman Bachus. Director Seidman.
Ms. Seidman. I think substantively, everything has been
said. I would like to say that this is a very good example of
how everything is interconnected. For example, simply removing
the restriction that the 1996 Act put on the FDIC's ability to
charge premiums when the fund is at 1.25 percent will generate
new problems, and in particular, could generate very fast fund
growth.
So I think that it really is a good example of the
interconnectedness of the whole system.
Chairman Bachus. The subcommittee assembled at least one
estimate of the cost of the premiums. I almost hesitate to use
this figure, but I'm going to throw it out--$65 billion of
premiums. When I first saw that, I questioned it. I sent it
back and said, this can't be right. But apparently, that would
be the cost of tripping that 1.25. But, do you have a comment?
Have the agencies looked at the actual cost?
Ms. Seidman. Let me just say that I was surprised when I
saw that number also and traced it back to what, I think, was
to some extent a piece of rhetoric in the FDIC's original
options paper. It is a calculation that starts with the fund
ratio not only falling down below 1.25, but falling low enough
for long enough that the trigger that says you have to do 23
basis points would come into play. As you know, if, for
example, the fund goes down to 1.22, that trigger will probably
not come into play. You'll be able to have a much smaller
premium amount that will bring it back to 1.25 within a year.
So first it assumes that it falls low enough for long
enough so that the projection is you can't bring it back within
a year at anything less than 23 basis points. The 23 basis
points generates about $7 billion in premiums. And the theory
is that that full $7 billion would then, with a multiplier
effect, result in $65 billion less lending.
Well, the problem is that the full multiplier effect is
also subject to a lot of questions. First of all, it is quite
clear that any number of banks would react to having to pay
greater premiums the way they react to any increase in cost--
they reduce other costs, they reduce dividends, they do
something other than reduce lending. Second, the multiplier is
largely an effect of the capital of the bank. In the current
situation, many banks are heavily overcapitalized, and it is
therefore unclear that the full multiplier would apply in any
event. And third, banks might take the premium increase out of
some other part of their operations, not lending.
So, I think it is a number that got thrown out there. It's
a very big number. It's a very scary number. I think it's one
of these numbers where a whole chain of very bad things all
have to occur for it to really be true. But I do think, again,
it is a reason for us to think about the kind of structure
we've created and to recognize that while $65 billion may not
be the number, it is likely that some decline in lending would
indeed, occur.
Chairman Bachus. I appreciate that. Let me compliment you
on that answer. Does any other panelist wish to comment?
Ms. Bair. I would just say whatever the right number is, we
need to get rid of the 23 basis point cliff. I think that's the
important thing, especially for small banks. You'd be taking
tremendous amounts of capital out to rebuild the fund, probably
in an economic downturn, which is the worst possible time to be
taking the money out. So I think, again, I would agree with
Ellen, whatever the right number is, we need to get rid of that
cliff.
Chairman Bachus. All right. Because I think we know that
these deposits are fleeing the stock market on a downturn and
they're going back to deposits. So it would occur in all
likelihood during a downdraft in the economy.
Governor Meyer.
Mr. Meyer. I certainly agree that we should get rid of the
cliff. We don't want to extend that argument and say,
therefore, banks shouldn't have to pay for deposit insurance.
Chairman Bachus. Thank you.
The Ranking Member is recognized.
Ms. Waters. Thank you very much. I too, would like to thank
our panelists today for sharing with us the information they
have shared relative to reform of Federal deposit insurance.
I'd like to know what risk factors do you believe should be
used in determining risk-based premiums. I'd like you to be as
specific as you can be. I'd like to know what factors should be
accorded the most weight in determining deposit insurance
rates. And would you consider certain activities to be part of
that risk calculation? What behaviors would you seek to
discourage by classifying them as risks? And if you don't mind,
I'd like you to discuss this in relationship to the expanded
activities of financial institutions, such as proposed real
estate brokerage and management. I'll start with the Honorable
John Hawke.
Mr. Hawke. Thank you, Congresswoman Waters. I think your
question shows how complex the issue of setting truly risk-
related deposit insurance premiums is. A risk-related premium
system that is really prospective would have to get into
enormous detail, looking at the quality and risk presented by
different kinds of assets. That is one of the reasons we think
that what's really needed here is a better tuning of the
existing system, which is essentially based on a matrix that
takes into account the CAMEL rating of the institution and the
capital adequacy level of the institution. It is risk-related,
but it's not prospective in nature the way I think you were
suggesting it might be done.
The real problem with the risk relationship in the present
system is that the matrix is too coarse. It treats 92 percent
of the banks as presenting an equivalent risk to the fund when
we know, and the market tells us, that there are very
significant variations in the risks presented by those banks.
So we are not proposing that the FDIC attempt to create a
very finely tuned, forward-looking mechanism for determining
risk, for example, along the lines of what the Basel Committee
is presently considering, which is enormously complicated, and
looks at the prospective risks, the expected loss and
unexpected loss that attach to different types of assets.
Ms. Waters. I'd like to hear from Assistant Secretary Bair
on that question.
Ms. Bair. Thank you, Congresswoman. The Treasury Department
has a slightly different view on the necessity for extending
risk-based premiums at this time.
We believe that that process, though in an ideal world,
would have premiums that accurately reflect the risk that the
institution posed to the fund. In practice, developing complex
risk-based premium matrices is quite difficult and we think
promises to be quite time consuming.
We believe it's more important to, again, as I said, get
rid of the cliff for those 92 percent of the banks that
currently are paying no premiums. They should start to pay some
premium, a small premium that would remain constant over time
to gradually build up the fund to some range that needs to be
determined in lieu of the 1.25 DRR, but save for a later day,
really extending dramatically the risk-based structure that we
currently have. Because we just think, though again it sounds
like a nice idea, in practice it could be quite complicated and
bog down the urgency of other reforms.
Ms. Waters. How would you calculate any premiums? How would
you do that? How would you determine the premium for any given
institution?
Ms. Bair. I think that's a difficult job. The FDIC sets out
some criteria. It leaves several issues open. If you read
Director Seidman's testimony, if you read Governor Meyer's
testimony, they have a little different approach on some of
these issues.
Another problem, I think, is to come up with a matrix that
would accurately assess risk for each institution, the spread
among premiums that would accurately reflect risk may be so
wide as to be politically impractical, and that is acknowledged
in the FDIC study, that for some reason the premiums would be
so high that they would cap it. The Fed may have a different
view. That's just one of many issues, I think, which would need
to be worked out if we're going to extend risk-based premiums,
which is why we're saying hold that for a later time.
Ms. Waters. Mr. Meyer.
Mr. Meyer. Thank you. We do support a risk-based pricing
structure, and we recognize that it would be a challenging
task, but we believe that the FDIC is pointed in a reasonable
direction. They've identified three kinds of information that
could be used to differentiate the risk across banks. One they
call objective factors, the second, supervisory information,
and the third, market signals.
In objective factors, we could use such information as the
amount of capital that the bank has relative to their assets,
their net income relative to assets, because earnings are the
first cushion if there are problems in the loan portfolio, the
amount of non-performing loans relative to assets that indicate
the risk exposure in the current portfolio, the amount of
liquid assets relative to assets, because liquidity is also a
very important factor in problems, and the degree of asset
growth, because there is a correlation between very rapidly
growing banking organizations and risks.
And then, in terms of market information, when available--
and for the larger banks, this information is available--we
have information coming from subordinated debt spreads and
information that can be gleaned from equity prices about the
probability of default for the bank.
Now, this information can be used to separate the banks
into risk class. Once you identify the different risk classes,
you would use information the FDIC suggested on the historical
pattern of losses within each group to identify the premiums
that would just, on average, pay for those losses over, they
suggested, a 5-year period.
So I think this is a very reasonable methodology. I think
it's a challenging one. I think it can be refined over time.
But I think we have a good direction to move in here.
Ms. Waters. Thank you very much.
I would also like to hear from Director Seidman on this
question. But I'd also like to ask you to add a little
something and discuss it in relationship to small banks. And if
you use the general kind of criteria that was just described,
would this not disadvantage small banks, small financial
institutions?
Ms. Seidman. Could I add something about large banks first?
Ms. Waters. Yes, of course.
Ms. Seidman. Let me just say that we not only have the
example in the FDIC options paper, our neighbors to the North
have done a rather good job of this. This does not have to be
as enormously complicated, as Comptroller Hawke has said, as
the Basel proposal.
I would suggest that the concentration of activities is an
area the Canadians take into account that is not mentioned in
the FDIC matrix, and it's one that I would think would be quite
important.
Now, with respect to small versus large institutions, I'm
not sure how it cuts precisely. I realize that there are
certain issues like the extent to which small institutions,
particularly small institutions down the midsection of the
country, are fully lent up, that would make them come out worse
on the FDIC's matrix. On the other hand, other small
institutions, particularly on the coasts, have a tendency, in
fact, to have very high amounts of deposits and less reliance
on non-deposit funds and fewer problem assets, and things like
that, than large institutions. So I'm not sure it's purely a
small versus large issue. I think it's worth running the
numbers and seeing how they come out and seeing whether when
you do get the answer it looks right. That's always an
important thing to do when you're doing detailed mathematical
calculations.
But the lending up problem, I think, is the one that
everyone is focused on. It is a serious issue in the midsection
of the country for small institutions, and I think it's worth
taking a look at.
Ms. Waters. Mr. Chairman, if I may just get another minute
here. The S&L scandals have led us to understand what happens
when institutions get away from the concentration of
activities, kind of the terminology you used, their basic core
activities. We're looking now at institutions that may be
delving into all kinds of commercial activity. Doesn't this
make it extremely difficult to do the kind of assessments to
determine the risk that we would like to know about in order to
develop pricing for the premiums?
Ms. Seidman. Because you mentioned the S&L situation, I
guess I have to take the first answer here, but then I'm going
to leave it to my colleagues to finish up. I think we're
talking about concentration in two somewhat different ways.
There's no doubt but that a significant portion of what
happened at the beginning of the 1980s with respect to the S&Ls
was that they went beyond what they had traditionally done.
On the other hand, they went beyond what they had
traditionally done in an era of a good deal less supervision,
when they were trying to fight a very bad interest rate risk
problem that was causing them to want to bet the farm in ways
that they should never have been allowed to do. The ones that
stuck to their knitting, that stuck to the residential mortgage
lending that they had always done, in general, came through it.
At least where they didn't have a massive real estate bubble to
deal with, they came through it OK.
However, some diversification of activities is definitely a
good idea. A diversified portfolio, as Governor Meyer pointed
out, is the traditional recommendation about how you reduce
risk. It is important, however, to diversify into activities
that you know how to do, and to do them well, and to monitor
them thoroughly, and to make sure you have the systems that
support them.
Chairman Bachus. Thank you.
Mr. Bereuter.
Mr. Bereuter. Thank you, Mr. Chairman. I'd like to, of
course, add my welcome to the panel today. I think I must share
some of the concerns the gentlelady from California has from
her comments about small banks. It seems you agree that you
don't like the statutory restrictions on premiums imposed in
1996. You're not interested in increasing the deposit coverage,
and you want to merge the BIF and the SAIF. But I think, if I
may say so, you're not very explicit about giving us a good
rationale for doing those things.
I also had the view that ``free rider'' is an interesting,
and sort of negative, term to use, which might not be
altogether appropriate.
Governor Meyer, may I start with you and talk about your
opposition to the 1996 statutory restrictions on premiums? As
you know, in that legislation, which Congressman Vento and I
had something to do with that limitation, you indicate the two
variables--capital strength and examiner overall rating--do not
capture all the risks that banks and thrifts could create for
the insurer. The Board believes that FDIC should be free to
establish risk categories based on well-researched economic
variables and to impose premiums commensurate.
But ``well-researched economic variables'' is a very vague
term. I'm very hesitant to extract very large amounts of money
out of the economy that is available for lending in our
institutions. And I'm very concerned about keeping our
commercial banks competitive with other kinds of financial
institutions. Can you be a little more explicit in your
opposition to the current 1996 Act's limitation on premiums?
Mr. Meyer. Maybe the way to think about this is to make a
contrast with what Congress did in 1991, when it passed the
Federal Deposit Insurance Corporation Improvement Act (FDICIA),
and what it did in 1996, because in 1991, Congress passed a
bill that mandated that the FDIC implement a risk-based
structure of premiums.
Now what's valuable about such a system is, it's more
equitable, because then, safer banks are not subsidizing
riskier banks as they are when everybody pays the same premium,
and it avoids the problem with the zero premium giving away the
Government guarantee. Everybody should pay an appropriate
amount related to their risk for the insurance coverage.
Mr. Bereuter. Why should every bank pay some? The least
risky, why should they?
Mr. Meyer. Because every bank, no matter what their risk
is, imposes some risk to the fund, and therefore should pay
some premium. It should pay a lower premium when it imposes
very little risk, and it should pay a higher premium when it
imposes more risk, and it should pay a considerably higher
premium when it imposes a considerably higher risk. That's the
view.
Now I understand the intent of the 1996 Act. The problem
with FDICIA was that it set a designated reserve ratio, but
then the question is, what happens if the fund rises above that
reserve ratio? Should there be any limit to the fund?
Mr. Bereuter. We made the assessment, Mr. Governor, that
when you have capital strength and you have examiner overall
ratings that are very good, that these banks therefore do not
impose a high risk on the insurance fund. And we're just
basically saying this is a category. Yes, we can believe in
risk assessment and properly adjusted premiums, but by these
two measures, the risk is so small that these banks ought not
be assessed a premium at all.
Mr. Meyer. That would be the view that there is no
difference in the risk across those banks. We believe there is
a difference in the risks across those banks. We believe even
the safest banks impose some risk, and that's really what the
issues are, I believe.
Mr. Bereuter. I'll move to Secretary Bair and ask with
respect to deposit insurance coverage, you say: ``It is not
surprising, therefore, that we found no evidence of consumers
expressing concerns about the existing deposit insurance
limits.'' And I would just suggest that's not the relevant
factor. Consumers can find other places to take their deposits.
What the concern is that we see, because of the limits which
have not been adjusted for quite some period of time, can go
back to one of two dates, appropriately, that they are finding
other places for their money, typically outside the community
where the deposits are generated. At least that's the
experience in my own State.
And whether consumers can find a place or not is not really
the relevant question. The relevant question is, is it
inappropriate to adjust the levels so that these commercial
banks can be competitive with other financial services
institutions and whether or not you are in the process by not
adjusting the limit, forcing money out of those communities
that should be available for lending in those communities?
And relatedly, I would ask you your views on whether or not
there should be some change in requirements with respect to
municipal or other political subdivision deposits, because that
is particularly sensitive to small communities when they see
that those funds are necessarily leaving the community when
there is perhaps only one or two commercial banks in that
particular community or region.
Ms. Bair. There are many components to your question. One
consistent theme in your question is the thought that funds are
flowing out of community banks, because of the coverage limit,
and I guess that's where we'll have to agree to disagree. We
don't see evidence that that's the case that the coverage limit
has anything to do with it. To the extent that it's happening,
higher yields may be driving that dynamic.
Number two is, as the Fed points out in its testimony and
Governor Meyer in his oral statement as well, small banks are
highly competitive right now. They are getting insured deposits
and uninsured deposits. The number of uninsured depositors is
only 2 percent of the universe of depositors, so presumably
it's only those 2 percent that would benefit immediately from a
rise in the coverage limit. Those people--they are higher
income folks, there is no evidence that they are concerned that
some measure of their deposits in federally-regulated banks is
uninsured. To the extent we're dealing with those 2 percent,
you're dealing with the higher income levels. The income level
for that 2 percent is double the median income for those whose
deposits are completely insured by the $100,000 limit.
Again, to the extent people are uncomfortable with having
uninsured deposits, there are so many ways to address this. You
can go to multiple banks. You can open up multiple accounts in
different legal capacities at the same bank.
For all those reasons, Congressman, we just don't see a
clear case has presented that this is going to help. I will say
our door is open. We are happy to discuss this. I'm happy to
discuss this further with you. Any additional data you may
have, I'm happy to take a look at. But based on what has been
presented to us at this point, we just don't see a convincing
case has been made.
Mr. Bereuter. Mr. Chairman, I know my time has expired. But
I would just say the experience I have in visiting with the
bankers in my district and to consumers and to depositors is
not the same that you suggest. These consumers, these
depositors are very smart, and they're taking their money out,
and they're very risk-averse. And so if it's not covered beyond
$100,000, they're taking it outside the area.
Chairman Bachus. We appreciate that, Mr. Bereuter.
Mrs. Maloney.
Mrs. Maloney. I thank you, Mr. Chairman, and thank all of
the panelists for joining the subcommittee today. I
particularly want to mention Ellen Seidman's fine service to
the country. This will probably be our last opportunity to hear
your testimony. Personally, I regret that you are not allowed
to fulfill your entire term. But believe me, we all appreciate
your fine service.
I believe ensuring the future safety and soundness of the
banking system and the health of the insurance funds is the
most important responsibility of this subcommittee. And I
deeply believe that we all owe outgoing FDIC Chairwoman Tanoue
a debt for beginning the debate on deposit insurance reform.
I am, however, concerned that the FDIC proposal would lead
to additional premiums on banks. Any additional premium, we all
know, would have a direct impact on the amount of loans that
institutions can make in all of our communities. Given the
relative health of the banking industry and the prospect of a
strengthened merged insurance fund, why should Congress
consider raising deposit insurance premiums? I'd just like to
ask all the panelists.
Mr. Meyer. I think we have indicated that we think that
insurance should not be priced at zero. Every bank poses a
risk, riskier banks pose more risks. Every bank should pay for
its insurance in relationship to the amount of risk that it
implies for the fund.
Now I think all industries would appreciate being
subsidized, and all industries would be larger if they're
subsidized. But we think that it is more equitable and it is
more efficient that banks pay for insurance according to risk
and that that behavior is a factor that helps to control the
risk-taking of those institutions. If you support and want a
safe and sound banking system, a risk-based structure of the
premiums is a very important component of a program that
supports that safety and soundness.
Mrs. Maloney. Would you like to comment? Go right ahead.
Ms. Bair. I would just say, to me the question is not so
much whether, but when, they will have to pay. I think now you
have a situation where 92 percent of all banks pay no premiums.
But, as the Chairman pointed out in his opening remarks and his
later follow-up questions, if we fall below that 1.25 percent,
and it looks like we're going to be there beyond a year,
there's going to be a 23 basis point cliff that's going to hit
all banks square in the face, and at that point, they are going
to be paying. You're going to be taking significant amounts of
capital out of those banks and sending it to Washington to
replenish the fund.
We believe that system should be replaced with a system
where you have a wide range as opposed to a DRR, small basis
point premiums for all banks, gradually build up the fund to
whatever that higher range should be with a system of rebates
once you pass that higher range. And through that you will ease
out the potential volatilities that you have with the current
system where you go from paying no premiums to paying a really
whopping sum.
So I don't think it's a question of whether. I would like
to say the fund is never going to fall below 1.25, but we all
realistically know that we're running a danger here, and I
think the question is whether we want a system where you have a
cliff or whether you have a smoothing out of premiums over
time.
Mrs. Maloney. Thank you.
Mr. Hawke, in your testimony you have this report on
reforming the funding of bank supervision. And you've mentioned
in your testimony, and you've mentioned to me and others, your
concern about the disparity in the cost of bank regulation
between the State and national banks. Could you comment on the
impact this has had on the State and national charters and on
deposit insurance reform?
And I must say that a number of colleagues and
professionals in the industry have mentioned that reforming the
funding of bank supervision should not be part of this debate
or this particular bill. And if you believe it should be part
of this debate and this particular bill, why do you believe it
should be part of it?
Mr. Hawke. Thank you, Congresswoman Maloney, for allowing
me to address that issue.
First of all, the basic problem is that there is a very
significant disparity in what State and national banks pay
today. The average $500-million national bank will pay about
$113,000 in assessments, while a comparably sized State-
chartered bank in an average State that has strong supervision
would pay only $43,000. That presents a constant incentive for
national banks to consider converting to a State charter, and
we see it all the time.
We calculate that over the last year-and-a-half or two
years, about $60 billion in assets have left the national
banking system for State charters, motivated solely, or
virtually entirely, by that cost saving. And that cost saving
is attributable only to the fact that the FDIC and the Federal
Reserve absorbed the cost of their supervision of State-
chartered banks while national banks have to pay the entire
cost. Only a fraction of the cost of State bank supervision is
recovered from State banks, whereas virtually the entire cost
of national bank supervision is recovered directly from
national banks.
We think this is an issue that's integrally related to
deposit insurance reform for a couple of reasons. First, it
relates to what the optimum size of the fund should be. You
can't, it seems to me, consider what the size of the fund
should be without taking into account the fact that, at the
present time, the FDIC takes about $600 million a year out of
the fund to cover the cost of its supervision of State-
chartered banks. That has a direct relationship to what the
size of the fund is or should be.
Second, it relates to rebates. Today, national banks, in
effect, pay 55 cents of every dollar that the FDIC spends on
State bank supervision. If there are going to be refunds or
rebates from the fund, we think that the inequity of national
banks contributing to the cost of State bank supervision should
be addressed; national banks should get rebates that make them
whole, in effect, for their contribution to the subsidization
of State-chartered banks, before rebates are paid to other
banks.
So I think these are issues that are integrally related to
deposit insurance reform. One of the general principles
underlying deposit insurance reform is eliminating some of the
cross subsidies that exist today in the deposit insurance
system, and this inequity in funding is clearly in that
category.
Mrs. Maloney. My time is up. Thank you, Mr. Chairman.
Chairman Bachus. Ms. Hart.
Ms. Hart. Thank you, Mr. Chairman.
My first question actually is for the Assistant Secretary,
Ms. Bair. In the testimony that you gave, you questioned
whether or not the Federal Home Loan Bank advances should have
priority over other bank liabilities in the event of a failure
of a bank. Do you recommend that the subcommittee should change
this? And if so, in what way? Should we prioritize differently
or do something else that you might suggest?
Ms. Bair. I don't think we suggest that the priorities
should be eliminated. What we suggest is that those advances
should be included in the assessment base so that they're
reflected in the premiums that are charged the depository
institution.
Ms. Hart. So the current priorities, as far as you're
concerned----
Ms. Bair. Well, as you know, the fact that the Federal Home
Loan Banks have a priority claim over a bank's assets over the
FDIC, then to the extent a bank increasingly relies on advances
from the Federal Home Loan Bank in lieu of insured deposits, it
is increasing risk to the fund.
So we think some consideration should be made as to whether
you include those advances in the assessment base that's used
to calculate premiums, whereas now it's just insured deposits.
Ms. Hart. OK. And this is just for the panel in general,
actually especially probably for Treasury and maybe the Fed. We
had an earlier hearing on the issue of Gramm-Leach-Bliley's
opening up the financial services market and perhaps allowing
banks to be involved in real estate brokerages. In light of
that change, if you would see that as it seemed that day of the
hearing, which is basically it should be wide open, would you
think that there should be some change regarding FDIC and
coverages or any other thing in the market that would change,
because of that pretty significant, as I would see it, change
in the responsibilities of those institutions?
Mr. Meyer. I wouldn't see any necessary change there. We
are talking about an agency activity, which in our view would
be a relatively low-risk activity. So I wouldn't see that that
would have any implications for Federal deposit reform.
Ms. Bair. I have nothing to add to that other than I was
just sworn in as the new Assistant Secretary for Financial
Institutions at six o'clock last night in my new office, where
there are stacks of boxes containing 32,000 letters on that
particular rule proposal. So assuming it's going to take me a
while to filter through those, obviously I can't comment on the
rule, because it's pending, but certainly it's an agency
activity, so at least on that particular issue, I wouldn't see
that it would impose excess risks.
Ms. Hart. One more just sort of to clarify a little bit. I
understand it's not necessarily just an agency activity,
however. It goes beyond that. Would it not give them also the
power of management and other powers that I know some of them
are currently involved in and would be actually responsible for
in the liability arena?
Mr. Meyer. Well, management, but not the ownership of the
assets. And the real risks come when you own assets whose value
is variable and where you're subject to loss. So, again, I
don't think that either of those activities would involve the
kinds of risks that would make a material difference in the
assessment of what the overall size of the fund should be or
what the risk-based premium should be.
Ms. Hart. Does anybody else on the panel have an opinion on
that one? Sure.
Mr. Hawke. I would just add that one of the objectives of
bank supervision today is to try to help banks diversify the
sources of their revenue. Banks have traditionally been very
heavily dependent on net interest spreads as their source of
revenue. One of the motivating features behind Gramm-Leach-
Bliley was to help diversify revenue streams within the area of
financial and financially-related activities, to the extent
that that can be done in a safe and sound way. We think an
agency activity that doesn't present risk to the bank, but
helps diversify the bank's income stream works toward the
reduction of overall risk.
Ms. Hart. Anybody else? OK. Thank you. I yield back my
time, Mr. Chairman.
Chairman Bachus. Thank you.
Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman.
Chairman Bachus. You get an extra 20 seconds of her time.
Mr. Watt. I appreciate that very much. There seems to be a
substantial amount of agreement in your testimony, and I want
to go to one area where there, I guess, potentially is some
disagreement, and that's this question of how you fund
supervision. I know Mr. Hawke's opinion on that. I have not
heard Mr. Meyer express any opinion on it. And I'm wondering
whether you have an opinion on it and if you would care to
share it?
Mr. Meyer. Thank you. I think that Comptroller Hawke has
made a very good case that there are problems associated with
the current funding arrangements for bank supervision
specifically affecting the OCC and the OTS. And I think there
are two elements here. The first is the funding arrangements
where the funds depend upon examination fees that come from
your assessment base. That funding is potentially unstable,
because it depends upon charter choice decisions. And second,
there's a disparity across the various banking agencies in
terms of how supervision is funded.
Having said that, our view would be that, notwithstanding
the fact that there's some relation to the FDIC fund, it would
be a mistake to try to tackle this issue as part of deposit
reform. And the reason for that is that we have reservations
about the specific solution. We agree that there is a problem.
We agree that we ought to work to resolve that problem, but we
have reservations about the particular solution that the
Comptroller has suggested.
Mr. Watt. OK. I got that. Let me put a slightly different
spin on this since we're at the very beginning stage of
starting to talk about a solution to this disparity and maybe
make a slightly different view about this.
It seems to me that one can make the argument that the
deposit insurance fund is about premiums for insuring the
$100,000 of deposits that we are, in fact, insuring. The
question of supervision of banks is a separate issue which--and
it seems to me, if we are taking the general supervision cost
out of the fund, the insurance fund, which is designed to pay
for losses up to $100,000, basically you have lower income,
lower amount depositors paying the full cost of supervision for
banks and higher income people and other activities that really
have nothing to do with the insurance fund.
So one approach to this might be to take all of the
supervision out, both your supervision and the national banks'
supervision, and to create a separate supervision fund so that
lower-level depositors, people who are depositing $100,000 or
less, are not really paying the cost of the overall supervision
of everything that the bank is doing.
Now maybe I could get your preliminary reaction. I know
this is kind of a radical theory. But maybe you could give me
your preliminary reactions to that. And then I'd like to hear
from Mr. Hawke on the same question and Ms. Seidman on the same
question.
Mr. Meyer. First of all, our supervision costs are not paid
out of the FDIC fund. They're paid from our earnings on our
portfolio of securities.
But second, that approach still encounters the following
problem: You have to come up with a mechanism for funding. If
that mechanism is Federal funding----
Mr. Watt. But it's not on the backs of $100,000-or-less
depositors.
Mr. Meyer. Right. That's fair. But you have to come up with
a mechanism, and you have to deal with--if it is going to be
Federal financing--can you maintain the viability of the dual
banking system and have Federal financing of State
examinations?
Mr. Watt. Mr. Hawke.
Mr. Hawke. Mr. Watt, the most straightforward way of
dealing with this problem would, of course, be for the Federal
Reserve and the FDIC to impose assessments for the cost of
their supervision, just as we do with national banks. National
banks pay us the entire cost of their supervision. State-
chartered banks only pay assessments to their State regulators,
which really accounts for only a small portion of the cost of
their supervision. The predominant component of the supervision
of State-chartered banks comes from the FDIC and the Fed.
So the problem is created by the fact that State-chartered
banks are not charged by their Federal supervisors. Year after
year, OMB has sent to the Hill a proposal to require the Fed
and the FDIC to charge assessments for their supervision, but
that's basically been dead on arrival.
Mr. Watt. So what you're saying is actually consistent with
what I'm saying?
Mr. Hawke. Yes. The most desirable way to do it doesn't
seem to be politically feasible.
Mr. Watt. Ms. Seidman.
Ms. Seidman. It is an intriguing proposal. I would like to
point out that currently, $600 million a year is taken out of
the insurance funds to supervise State non-member banks. So
currently, we have exactly the situation that you're talking
about. It's just that we only have it with respect to one kind
of charter.
Mr. Watt. Mr. Meyer said that wasn't the case, though.
Ms. Seidman. It isn't for the Fed. It is for the FDIC. The
Fed just takes it out of, in essence, general revenues. Now the
issue of whether supervision is related to insurance is one
that, I think, is critical.
Mr. Watt. I acknowledge that there is some relation--don't
get me wrong. I know there is some relation--supervision of the
insurance costs something, but it doesn't cost the whole
insurance package is the point I'm making.
Ms. Seidman. And that's why I think that as long as we're
putting alternatives on the table, you'll notice that in my
testimony there's another alternative, which is, in essence,
that as soon as we get banks that get into trouble, 3-rated
banks and lower, that at that point, all the supervisory costs
should come out of the insurance fund. Because there you can
say we are really running a risk here. We're running an
insurance risk that is really immediately quantifiable in a
much bigger way than the risk of 1- and 2-rated banks, as to
which the risk is more attenuated. I support the notion that
insurance should not be free. But we're talking about 1 basis
point premium ideas for top-rated banks. When you get to 3- and
4- and 5-rated institutions, you're talking about a much more
immediate kind of risk.
And I will tell you as a bank supervisor, our job is to
keep those banks out of the insurance fund.
Mr. Watt. Thank you, Mr. Chairman.
Chairman Bachus. Mr. Tiberi.
Mr. Tiberi. A quick question for the Assistant Secretary.
On page 4 of your testimony, you suggest that we examine the
assessment base for the payment of deposit insurance premiums.
Could you explain what you mean and give us suggestions?
Ms. Bair. That was mainly a reference to Congresswoman
Hart's earlier question about the increasing reliance that some
banks are placing on secured liabilities and also, because
Gramm-Leach-Bliley gave community banks the ability to get
advances from the Federal Home Loan Banks, regardless of
whether they're using the money for any activity, not just home
mortgage financing. Because the secured liabilities take
precedence, take priority over the FDIC's claims in the case of
a bank failure, they're posing additional risk to the fund.
So the question is whether the secured liability should be
included in the assessment base, which would, by broadening the
assessment base, also increase the premium for the particular
institution.
[The following information was provided at a later time by
Hon. Sheila Bair:
[As a matter of clarification, a broader assessment base may
be accompanied by lower premium rates to achieve the desired
revenue for FDIC. Thus, a bank's premium may or may not rise
with a change in the base.]
Chairman Bachus. All right. Thank you. Let me ask this
question. We're just going to keep going and hope that people
come back. You had a lot of questions about the small community
banks. And the concern is that they will be able to generate
deposits. One source of funding has been the Federal Home Loan
Bank. Assistant Secretary Bair, you mentioned that funding from
that source may create a special risk or reliance on that
funding they have a preference in case of a failure. At the
same time, where do they go to generate deposits or funding?
And that is one of the places they're going. But where do they
go for growth?
And I would like you to--maybe all of you ought to
consider--and the small banks are telling us in this equation
that they want an increase in deposit insurance. That is where
they feel like the growth can be.
Two other areas that they've suggested to us are municipal
deposits and IRA or retirement accounts. Now let me say on
municipal deposits that I don't think that's just speculation
on their part. What we're talking about, and Governor Meyer,
you talked about the whole universe of smaller or newer
institutions, some of these institutions are in big cities. But
when we talk about the institutions in the small towns, I doubt
if you took those out of the universe that you came up with the
growth of 12 or 13 percent, I'm not sure that that would be
true. Because I think when you have a rural county with one
hometown bank or one bank in the county, or in the county seat,
that those banks are not tending to grow.
This is a long question, but you can have a long answer.
One possible suggestion concerns municipal deposits, because of
the collateral requirement. And I can tell you that school
boards, county school boards, city governments are saying we
would like to do business with our only hometown bank, but we
really are limited by insurance coverage. The State of
Massachusetts, particularly, has a State program where they can
buy additional insurance to cover municipal deposits. And I
don't know whether it's just to increase their coverage. I'd
just like your comments on what we could do to benefit these
banks.
Mr. Meyer. I think the first thing to do is let's not try
to solve a problem that doesn't exist. You focus on an
important area that many people are talking about of whether
small banks are under competitive pressure and they can't fund
their assets. So let's look at some of the facts: 1995 to 2000,
insured deposit growth, how fast was it? 9.6 percent a year.
Let's compare that to the largest banks. These are the small
banks, 1,000 and below, OK? These are relatively small
institutions. The 100 largest banks had average deposit growth
of less than one-half a percentage point.
Chairman Bachus. Let me interrupt you and just ask you, did
you break that out into rural banks?
Mr. Meyer. I didn't. These are small banks. We could look
further at that. But if you say that there's a problem, what's
the problem? Their insured deposits were growing at 9.6
percent, but their assets were growing at 13 percent, OK?
That's more than twice as fast, or about twice as fast, as
larger banks were growing adjusted for mergers.
So the problem--and we don't think this is a problem--is
that small banks are growing very rapidly, and they're not able
to fund all of that rapid growth from insured deposits. So what
are they doing? That's the legitimate question. Well, they're
funding a lot of it from uninsured deposits. How fast were they
growing? At a 20.5 percent annual rate, again, twice as fast as
they were growing at large banks.
So now, the final analysis is that these small banks were
funding almost 85 percent of their assets from their deposits,
insured and uninsured deposits. But their amount of funding
from total deposits did go down a little bit, 2 percentage
points over this period, and that was made up by Federal Home
Loan Bank advances. That's what filled the gap.
Chairman Bachus. All right.
Mr. Meyer. But, we just don't see that there's a problem to
be solved here.
Chairman Bachus. All right. I understand. Now you would be
willing maybe to revisit that and see whether we're talking
about urban institutions or----
Mr. Meyer. It's a very good question, and I'll see what we
can do to come up with some data there.
Chairman Bachus. Madam Assistant Secretary.
Ms. Bair. Well, we consider our primary role in this debate
is the advocate of the taxpayer and I guess the concomitant to
that is, you know, we want to minimize the risk exposure of the
fund, because ultimately, that is the best way to represent the
taxpayers' interest on this issue.
So we go into the question of whether you should raise
coverage limits with deep skepticism. However, if there's
additional evidence to be presented that would show that there
would be a competitive benefit, or a benefit to consumers
pointing to the various proposals that have been on the table,
we're willing to look at it.
On the specific question of whether to provide 100 percent
insurance for municipal deposits, I think that also raises some
other policy issues that need to be considered. One is, I
think, it kind of goes to what's the core purpose of deposit
insurance? Is it to protect small depositors, or are we going
to broaden that to specified categories that go beyond the
traditional small depositors which the system was designed to
protect?
Second of all, I think there's an issue as to if you
provide 100 percent coverage, do you decrease incentives on the
part of municipal officials to make sure that the institution
where they're putting the taxpayers' money is a safe
institution? So I think those are two things that need to be
considered.
That said, we are deeply skeptical, but if there's data or
evidence, we'd be interested to know what the rural bank
breakout on the statistics is that this would help consumers or
improve competition. But we're open to hearing those arguments.
But right now, we just have not heard them.
Chairman Bachus. Yes. And let me say this. When we're
talking about municipal deposits or governmental deposits, what
in my mind we're also talking about, at least I can't express
the sense of the Congress, but public policy behind a county
government or a city government being able to keep more than
$100,000 worth of their deposits in a local-based financial
institution. I think there is a certain public policy argument
that that option ought to be open to them. If we can create--
and I'm not talking about unlimited. Obviously I understand
moral hazard. I'm not talking about uninsured. But if we can
create an insurance fund for municipal deposits of some amount,
and whether we're talking about half-a-million, or a million,
but I would at least like us to look at that, particularly in
that the small banks--and what you've proposed also is that we
look at part of the risk basis, how much they rely on the
Federal Home Loan Bank, and obviously, we're going to probably
find that the small banks may be impacted by that, although I
don't know.
But I would approach it from a public policy standpoint and
see what remedy could be fashioned.
Ms. Bair. That suggestion extends to all secured
liabilities. Federal Home Loan Bank advances were given as an
example because it is a recent change. But we're talking about
all secured liabilities.
Chairman Bachus. OK.
Mr. Hawke. Mr. Chairman, we regulate more than 2,200
community banks, so we have a very strong interest in the
welfare of community banks. And I must say that as our
community bankers come through and visit with us, for every
community banker who thinks he or she would be advantaged by
raising deposit insurance limits, there's another one who
thinks that it might be disadvantageous. I don't think anybody
really knows with certainty what the consequences would be for
community banks of a significant increase in deposit insurance
limits. It may simply result in a very disruptive shuffling of
deposits among banks with no net winners or losers.
One of the facts that affects my thinking about this is
that today there are more than $2 trillion invested in money
market mutual funds, and over $1 trillion in uninsured deposits
in banks. That suggests that people who have liquidity and
wealth to put out in reasonably safe investments are not being
highly motivated by deposit insurance. Today, with a minimum of
inconvenience, anybody who wants to maximize deposit insurance
coverage can do so by going to multiple institutions or
multiplying accounts within a single institution.
But there's so much uninsured liquidity outside the banking
system today that I think one has to be skeptical about what
the consequences would be of increasing coverage limits in
terms of bringing new deposits into the system.
Chairman Bachus. Even your proposal that we balance the
examination fee, I think, will result in more smaller banks or
State-chartered in these communities. So we're again talking
about a thing----
Mr. Hawke. Our proposal would be a significant benefit for
State-chartered banks. It would relieve them of the burden of
having to pay assessments to their State supervisor. Today,
State-chartered banks pay roughly $160 million in assessments
to their State supervisors throughout the country. Our proposal
would shift that expense to the FDIC fund. So it would result
in significant benefits to State-chartered banks, as well as
relieving the inequity for national banks.
Chairman Bachus. And that would probably be the smaller
banks you think would benefit?
Mr. Hawke. Any State-chartered bank that's paying
assessments today--and they all pay assessments to their
States--would be relieved of that burden.
Chairman Bachus. Let me ask you one final question. Is
there any policy prescription that you could offer the
subcommittee that might address--and I know, Governor Meyer,
you're saying there aren't any liquidity problems with the
small banks--but with the smaller banks? Can you offer any
possible solutions or proposals which might help them raise
deposits?
Mr. Hawke. I think, Mr. Chairman, that there's room for the
market to work here. Today, the $2 trillion in money market
mutual funds suggests that people who have wealth to put out to
work don't see a significant difference in the risk
characteristics between banks and money market mutual funds and
are willing to take whatever that risk differential is to get
the higher yield. So, I think, as Assistant Secretary Bair
suggested, this may really be a question of yield.
Ms. Seidman. May I also suggest something else? Your
questions have been focused on the liability side of the
balance sheet--on deposits and Federal Home Loan Bank advances.
The bigger question, I think, that all small institutions, and
particularly small institutions in relatively small communities
face, how to fund loans in general. I go out there and see this
happening with respect to home loans for some of the smaller
rural thrifts. That is the big question. How do I fund these
loans? And so I think to some extent one of the issues that we
all ought to be working on is whether there are techniques that
some of these very traditional smaller institutions can begin
to use that some of the bigger ones have been using to make it
possible to fund more lending activity with less on the
liability side.
Now I'm not suggesting that all of them should get into
massive asset securitization, or should all go into commercial
and industrial loan syndications. But we work a lot putting
together consortia of small institutions to participate in
larger multifamily lending, or even in some of the riskier
kinds of single-family lending. There are opportunities to do
things like that.
That's not as quick and widespread a solution as raising
the deposit insurance level seems to be, but I will say that
one of my real concerns about whether raising the deposit
insurance level could possibly be as effective as some of the
institutions think it is--and certainly some of the
institutions we regulate have said this to me--if you don't fix
the problem of multiple accounts in multiple banks, there's no
particular reason to believe that raising the level will
benefit the community banks more than it will benefit the
larger banks. And in fact, it might lead to some further
consolidation away from the smaller banks.
Chairman Bachus. Governor Meyer.
Mr. Meyer. Mr. Chairman, I think there is one thing that
the Congress could do that would benefit small banks, and that
is to allow the payment of interest on demand deposits. As you
know, this is an issue that affects small banks relative to the
larger banks, because the larger banks have found a way to in
effect pay interest on demand deposits through sweeps. Allowing
small banks to pay interest on demand deposits would make them
more competitive not only with larger banks, but also with non-
bank financial institutions.
So as you think about this problem and keep in mind the
health of our small banks in this country, I think that's very
much something that would be a benefit to the broader economy,
but also would accrue specifically and especially to smaller
banks.
Chairman Bachus. And, that measure has passed the House and
is awaiting action in the Senate.
Mr. Meyer. I appreciate that.
Chairman Bachus. I would----
Ms. Bair. Mr. Chairman, if you don't mind, if I could add
one thing? I would come full circle to where you started this
hearing, which is the 23 basis point cliff. I think getting rid
of that--I think that, in particular, is a tremendous threat to
smaller banks, and replacing that with some type of system
where you have a smoothed out system of premiums would be
tremendously helpful.
I also want to clarify, after going back and reading the
written testimony on this Federal Home Loan Bank advance
question, I don't want anyone to think that the Treasury is
suggesting that we don't think a bank should have Federal Home
Loan Bank advances as a source of capital. We do. We just note
it in context of other secured liabilities.
Chairman Bachus. I didn't see any suggestion that you did.
Ms. Bair. OK, good. Treasury has long had the position--the
previous Administration had urged Congress in the context of
insurance reform to take a look at the whole question of what
should be in the assessment base and how you treat secured
liabilities in the assessment base.
Chairman Bachus. One comment I would add to your comment.
And I think all of you have more or less said that raising the
insured amount of deposits might not help small banks. But the
small banks are telling the Members of Congress where those
banks reside that it would help them. So we have the regulators
saying it wouldn't help them, but we have the people that own
the banks and operating them telling us that it would help
them.
Mr. Meyer. Mr. Chairman, if you price insurance at zero, I
think banks are going to want the most that they can get, and I
don't blame them.
[Laughter.]
Chairman Bachus. Thank you. Maybe we ought to quit on that.
[Laughter.]
Chairman Bachus. I'm not sure that I want to adjourn the
hearing. I was hoping Members might come back.
[Pause.]
We very much appreciate your testimony today. I would ask
that this be a continuing process, that we continue to meet
informally, continue to try to build a consensus.
One thing that we all agree is that the Federal deposit
insurance system needs to be reformed, and there is a consensus
around certain measures. My caution would be--and sometimes
there are Members of Congress that are saying to you, ``address
this limited issue''--but let me give you some inconsistent
advice with that.
We don't want to overcomplicate any regulatory scheme,
because no bank or no institution is going to benefit from a
complicated formula, one that's hard to interpret and has
tremendous discretion, which they will all assume works to
their disfavor.
Mr. Hawke. Mr. Chairman, wait until you see the Basel
proposal.
[Laughter.]
Chairman Bachus. I think that is why we ought to keep it as
simple as we can. Keep it as workable as we can without
additional paperwork and requesting all sorts of information
that we don't presently request and actually end up stepping up
the regulation above what needs to be done.
We will leave the record open for 30 days to allow Members
to submit questions for the record and appreciate your
testimony. The hearing is adjourned.
[Whereupon, at 11:50 a.m., the hearing was adjourned.]
A P P E N D I X
July 26, 2001
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