We urge that reform legislation be based on the following principles to 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, provide for a range of required reserves, and exempt well-managed and well-capitalized banks from assessments when the BIF reserve is funded at required levels.
- Assess special premiums on "free-riders."
- 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.
- Merge the bank (BIF) and thrift (SAIF) insurance funds.
- Assess only insured balances. This approach eliminates the inequity of paying premiums for uninsured balances.
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. But 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 an appropriate public policy position. 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 to an economic measurement 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.
If deemed unavoidable however, any indexing scheme should be effective on a prospective basis, triggered on a five-year cycle and rounded to the nearest thousand-dollar level.
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.
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.
Credits 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 full 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.
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. We should also expect that a merger of the funds would reduce duplicative administrative expenses.
Assessments for Uninsured Balances Constitute an Unfair Methodology
Assessing only insured balances is fundamental to fair reform of the deposit insurance system. It is important to note that our members believe that their organizations are the dominant funders of the BIF because banks pass through the deposit insurance costs to corporate customers on the basis of balance size. Importantly, our members pay these assessments based on full balances which customarily are well in excess of the insured $100,000 limit. As a result, many businesses must both self-insure their deposits in excess of $100,000, AND pay insurance premiums for uninsured balances over $100,000. In effect large corporate depositors subsidize the BIF through premium costs for deposits which are not insured by the fund.
The rationale for assessing premiums on full deposit balances would appear to be based on a need to build reserves for a "too-big-to-fail" possibility. However, this assumption belies the fact that the FDICIA legislation provides for special assessments on large depository institutions in the event that federal regulators determine that systemic failure action needs to be implemented.
For these reasons, AFP urges that now is the appropriate time to redefine the deposit insurance assessment base and modernize an outdated and unfair premium methodology by assessing only insured balances.
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.
The Association for Financial Professionals (AFP) represents approximately 14,000 finance and treasury professionals who on behalf of over 5,000 corporations and other organizations are significant participants in the nation's payments system. Organizations represented by our members are drawn generally from the Fortune 1000 and the largest of the middle market companies and they have an active interest and a sizable stake in any proposed changes to the deposit insurance system. Our members are responsible for the banking relations of their organizations and in that role monitor and approve for payment all charges from their banks, including charges passed-through by banks for deposit insurance assessments paid to the Bank Insurance Fund (BIF).
We appreciate the opportunity to present the views of the Association for Financial Professionals on deposit insurance reform, and would welcome exploring these issues further with you. Please contact Frank Curran of the AFP staff at 301.961.8837 for additional discussion.
Sincerely
Alvin C. Rodack Nolan L. North, CCM
The Ohio State University T. Rowe Price Group, Inc
Chairman Chairman, Financial Markets Task Force
AFP Government Relations Committee AFP Government Relations Committee
CC: Members of the Senate Committee on Banking, Housing and Urban Affairs
Steven Harris, Majority Staff Director and Chief Counsel
Wayne Abernathy, Minority Staff Director
