The Honorable Michael G. Oxley
Chairman
House Financial Services Committee
2129 Rayburn House Office Building
Washington, DC  20515

Dear Chairman Oxley:

We observed with great interest the hearing on deposit insurance reform recently conducted by the Financial Institutions Subcommittee, under the leadership of Subcommittee Chairman Bachus. The members of the Association for Financial Professionals (AFP) are significant stakeholders in the deposit insurance system, and we would like to share our views on this important issue with you and the members of the Committee.

We support reform legislation based on the following principles, which assure fair participation by all stakeholders in the deposit insurance system:

• Maintain the deposit insurance coverage levels at $100,000.
• Remove the fixed 1.25 percent reserve ratio requirement, and provide for a range of required reserves.
• Assess premiums on "free-riders."
• Merge the Bank Insurance Fund (BIF) and Savings Association Insurance Fund (SAIF) insurance funds.
• Provide credits toward the payment of semiannual assessments based on past contributions to the Fund.
• Oppose additional coverage for any special category of deposits, including public sector and retirement deposits, because a "protected class" of deposits is not good public policy.

Deposit Insurance Coverage Level:

The deposit insurance coverage level should remain unchanged. An August 2000 Economic Commentary by the Federal Reserve Bank of Cleveland reported that over 98 percent of all domestic deposit accounts in commercial banks are under the $100,000 deposit insurance limit, and the average deposit in these accounts is approximately $6,000. Since we believe that the intent for the federal deposit guarantees initiated by the Banking Act of 1933 is to protect the small saver, the current deposit insurance ceiling is appropriate.

Some financial institutions feel that higher coverage limits would solve funding concerns.  With competition from a broad array of non-bank and non-insured competitors for the consumer's discretionary funds, it is not clear to us that a higher coverage limit would address funding concerns at smaller institutions. More importantly, we do not believe that the use of the deposit insurance system for the competitive purpose of trying to help some banks with their funding is appropriate public policy. Deposit insurance coverage is not a competitive issue—coverage is intended to benefit depositors, not banks. 

We believe it is unnecessary to index the deposit insurance coverage limit because the current deposit insurance ceiling is appropriate to the intent of the system—if not already too high. The intent of the system is to protect the small saver whose average deposit balance in these accounts is about $6,000.

Funding Principles and Required Reserves: 

The FDIC should be allowed to mitigate the cyclical affects of deposit insurance pricing by permitting the reserve ratio to fluctuate within a manageable range, within which premiums would not be charged to well managed and highly-capitalized institutions (except ‘free riders').

The deposit insurance system should retain the risk-based variable premium approach, based on meeting a range of required reserves. We believe that it would be appropriate to eliminate the current requirement that premiums rise to a minimum of 23 cents per $100 of insured deposits when the fund is expected to fall short of the 1.25 percent designated reserve ratio for more than a year. The FDIC should be given discretion to set and adjust the range within which the reserve ratio may fluctuate in response to changes in industry risks and business conditions.

The risk-based premium system should allow for more differentiation among the risk profiles of the more than 9,000 institutions currently in the best insurance category.  Well-managed and highly-capitalized institutions should retain their current exemption from assessments when the BIF is funded at required levels. The costs of risk should be allocated to those institutions which cause risk.

Special Premiums for "Free-Riders":

We believe that assessments should be imposed on institutions which contribute high insured deposit growth to the system.  Special premiums should be charged to de novo institutions, and institutions transferring deposit balances into the system from non-insured sources. This is an equitable approach because it limits the ability of some institutions from benefiting from reserves built on past premiums which they did not pay.

Merging the Bank and Thrift Insurance Funds:

We support a merger of the bank (BIF) and thrift (SAIF) insurance funds. Separate funds do not reflect the current structure of the financial industry.  Charters and operations of banks and thrifts have become similar. The BIF and SAIF are already hybrid funds in that each one insures the deposits of commercial banks and thrift institutions. Commercial banks now account for over forty percent of all SAIF-insured deposits through ownership of thrifts. A merger would recognize the commingling of the funds that has already taken place. Also, a merger of the funds would reduce duplicative administrative expenses.

Credit Based on Past Contributions to the Fund:

We believe that excess payments to the Fund should be credited toward the payment of subsequent assessments until the credit is depleted. We oppose rebates on the basis that an equitable rebate method cannot be constructed. The entity bearing the premium cost—the bank customer—is unlikely to receive the value of any rebate. A fair rebate solution would require payment to the bank customer of pass-through costs previously paid by the depositor. We doubt this process would be undertaken by most banks on behalf of their customers.  Since most banks would not pass on rebates, we prefer a system in which excess funds trigger credits toward future assessments.

Additional Deposit Insurance Coverage for Special Deposit Categories:

We oppose additional coverage for any special category of deposits, including public sector and retirement deposits, because a "protected class" of deposits is not good public policy. Additional coverage for certain types of deposits reopens the ‘moral hazard' question concerning excessive risk taken by institutions because deposits are protected. Also, a practical effect of this approach may be to chase away other types of depositors. After the FDIC uses the assets of a failed bank to cover possible loss by accounts with additional deposit coverage, there may be insufficient assets remaining to cover the uninsured deposits of others.

Finally, the stake of corporate America in deposit insurance is based on the premise that deposit insurance coverage is intended for depositors, not banks. Yet the voice of bank depositors is not often heard in this debate. When Federal Deposit Insurance Corporation (FDIC) insurance assessments are to be paid, it is generally the bank deposit customer who actually pays the assessment. In the case of depositors with large balances, those assessments are paid as a direct pass-through from the bank to the depositor, based on the total deposits of the customer. Indeed, in a study done for our Association, it was determined that 93 percent of deposit insurance premiums for business accounts are passed through to the business customers. As such, the bank acts as an insurance agent, collecting insurance premiums and sending them on to the insurer.

Sincerely,

CC: Members of the House Committee on Financial Services