March 10, 2003
Hon. Michael G. Oxley
House Financial Services Committee
2129 Rayburn House Office Building
Washington, D.C. 20515
I am writing to express ICBA's strongest opposition to any amendment to H.R. 522, the carefully crafted and balanced deposit insurance reform bill, that would roll back FDIC coverage levels. We understand an amendment will be offered by Reps. Maloney (NY), Ose (CA), and/or Royce (CA) to roll back basic coverage levels from the $130,000 level in the bill to the $100,000 level in current law. This is unacceptable to our nation's community bankers and the millions of customers and thousands of communities they serve.
- The $130,000 level already represents a considerable compromise. FDIC coverage levels have not been adjusted since 1980, a period of more than 20 years. If coverage levels were adjusted for inflation since 1980, they would be more than $200,000 today. Put another way, FDIC Chairman Don Powell stated: "It's important to recognize today that the coverage is not really $100,000. Coverage is $47,000. And if we don't do something about it, it's going to continue to deteriorate."
- Federal deposit insurance was not responsible for the failure of thousands of savings and loans in the 1980s. Federal Reserve interest rate policies were. These policies, which did break the back of inflation, moved the prime rate over 20 percent at a time when savings and loans were locked into fixed-rate, long-term mortgages. And it was the Federal Reserve that proposed in testimony before the House Banking Committee in 1980 that coverage levels be increased to $100,000. Instead of causing S&L failures, perhaps this action helped maintain consumer confidence in the banking industry during a time of crisis.
- Raising core deposits is a serious challenge for most community banks. In the 1990s, loan demand grew twice as fast as deposit growth for community banks. Left unchecked, this could cost jobs and inhibit economic growth. A Kansas City Federal Reserve study found that community bank funding challenges will "eventually force them to curtail lending to small business, farmers and other local customers - many of whom may have few other places to turn to for their borrowing needs."
- Depositors want higher coverage levels and will keep more money in local banks if coverage levels are increased. An ABA study found that half of small business owners think the current level of deposit insurance coverage is too low. When asked what actions they would take if coverage were doubled, 42 percent said they would consolidate accounts now held in more than one bank; 25 percent would move money to smaller banks; and 27 percent would move money from other investments into banks.
- Higher coverage levels will help less affluent Americans who make their own investment decisions. Raising coverage levels is less for "high net worth" individuals whose accountants and investment advisors can always find ways to spread their money around. A Gallup survey conducted on behalf of the FDIC found that deposit insurance is a "significant factor" in investment decisions, especially to more risk-averse consumers and those in older and less affluent households. Sixty percent of respondents said they would put more money in local banks if coverage levels were raised, and nearly 80% thought deposit insurance should keep pace with inflation.
- A deposit insurance increase will not cost taxpayers a penny. FDIC insurance is paid for by banks through premiums assessed by the FDIC. Community bankers say they are willing to pay for increased coverage because even with new premiums, core deposits are preferable to alternative funding sources.
The legislation that will be marked up on Thursday is a thoughtfully crafted and well balanced approach to comprehensive deposit insurance reform, and we strongly support it. We commend Chairman Oxley and Financial Institutions Subcommittee Chairman Bachus, for their hard work in crafting a bill that strikes the proper industry balance and ensures the integrity of the insurance fund for many years to come. However, reducing basic coverage levels back to the $100,000 level would be a serious blow to consumers, small business, churches, and municipalities served by our nation's community bankers.
We urge you to maintain the important balance in H.R. 522 by opposing any amendment that would reduce basic FDIC coverage levels provided for in the bill.
Kenneth A. Guenther
President and CEO