Letters to the Hill
Financial Services Roundtable
April 16, 2002
Honorable Michael G. Oxley
Dear Chairman Oxley:
In recent days you and members of your committee received various communications from the Financial Services Roundtable on the deposit insurance reform bill pending before you. As you know, the Roundtable has a diverse membership and is presently headed by the CEO of State Farm Insurance Company, a direct and recent competitor to thousands of community financial institutions.
The Roundtable is in opposition to the key elements of deposit insurance reform contained in H.R. 3717. They oppose small and steady pricing for the federal deposit insurance products they offer. They oppose increases in coverage levels-although their members are exploiting the system with Citigroup's Salomon Smith Barney offering individual coverage levels of $1,000,000. They advocate continuing the premium-free ride until bank failures and their deposit inflows have weakened the fund. Salomon Smith Barney and Merrill Lynch alone have brought $77 billion under the FDIC-BIF without premium payment. We urge you to reject the Roundtable's approach as bad public policy.
We feel that the most important question before your committee is whether the FDIC will be strengthened or whether the FDIC federal deposit insurance product will be allowed to continue to wither away, taking consumer confidence in our financial system along with it.
The Financial Services Roundtable has also forwarded material to the committee based on faulty assumptions and questionable analysis designed to mislead and frighten bankers.
Just as President Roosevelt and the big bank lobby were wrong in opposing federal deposit insurance in 1933, the big bank lobby, Chairman Greenspan and Secretary O'Neill are wrong in opposing key elements of H.R. 3717 today. For whatever reasons, they are happy to see the FDIC, a regulatory competitor, continue to wither away.
Thank you for your ongoing support of comprehensive and balanced deposit insurance reform legislation. Our rebuttal of the Financial Services Roundtable's computation of industry premiums costs of H.R. 3717 follows.
Rebuttal of Financial Services Roundtable
1. FSR assumption: The FDIC will set the designated reserve ratio (DRR) at 1.40 percent.
Rebuttal: The reserve ratio can only be set at 1.40 if the FDIC justifies it through a notice and comment rulemaking.1 A much more likely assumption is that the FDIC, if it is accorded the 1.15 - 1.40 % range in HR 3717, will seek to maintain the designated reserve ratio at 1.25 percent. As Chairman Powell noted in a recent speech:
"I know that some banks are very concerned about the costs of the FDIC's reform proposals. I can tell you that in many cases their fears are being generated by unfounded assumptions about how the new system would work. For example, I've heard some bankers say that they believe if the FDIC had greater discretion to manage the funds, it would simply set the target at the highest possible level and peg the fund ratio there. This is ridiculous. Nothing in the FDIC's history suggests we would do that."
The FSR's assumption that the FDIC will set the designated reserve ratio at 1.40% accounts for more than half of the FSR's premium cost estimates.
2. FSR assumption: The FDIC estimate of a 13.6 basis point "cost" of proposed coverage increases equates to 13.6 basis point premium.
Rebuttal: The FDIC's estimate of 13.6 basis points is not a premium cost estimate, it is an estimate of the dilution of the reserve ratio due to coverage increases provided for in the bill (the estimate includes both Day 1 dilution due to the newly insured status of existing deposits, and potential future dilution as a result of new deposits attracted to the system). A 13.6 basis point dilution of the reserve ratio does not equate to a $0.136 premium increase. The reserve ratio is computed based on estimated insured deposits, a lower number than the assessment base, which is total domestic deposits. Thus, every $.01 premium charge results in an increase in the BIF reserve ratio of 1.5 basis points. Accordingly, a 3 basis point drop in the BIF reserve ratio below 1.25% can be made up with a $.02 premium.
3. FSR assumption: The FDIC estimate of 13.6 basis point dilution of the fund would have to be made up by a one-time premium increase.
Rebuttal: The FDIC estimate includes existing deposits that become insured due to the higher coverage levels. It also includes new deposits attracted into the system because of the coverage increase. New deposits attracted into the system will occur over time, not instantaneously. Accordingly, it is erroneous to assume there will be a one-time charge for these new deposits.
In fact, the reserve ratio of the combined BIF/SAIF is 1.29%. The FDIC estimates the immediate dilution of the reserve ratio due to the newly insured status of existing deposits would be 8.4 basis points (4.4 basis points for the general coverage and retirement account increases and 4 basis points for the municipal deposits coverage increase), bringing the reserve ratio down to just below 1.21%. To restore the reserve ratio to 1.25% would require $1.4 billion, or a 3.1 cent ($.031) premium, far lower than FSR estimates. (This assumes the FDIC will set the new designated reserve ratio at 1.25% after the bill's passage. It could be set lower.)
4. FSR assumption: The FDIC will assess a high one-time premium to capitalize the fund at the designated reserve ratio.
Rebuttal: The bill anticipates that the FDIC will set a small, steady premium. The bill specifically anticipates that the reserve ratio will float within a range. And the FDIC is directed to set premiums to avoid wide swings. In fact, the 4/16/02 manager's amendment establishes a rate of 1 basis point (1 cent) for the highest rated banks. Moreover, other factors besides paid-in premiums impact the reserve ratio, so premium income alone is not necessary to maintain the DRR. The fund reserves will earn in excess of $1 billion in investment income each year, which accrue to the benefit of the reserve ratio.
Kenneth A. Guenther
cc: Chairman Bachus
1 Under the bill, when setting the designated reserve ratio, the FDIC must take into account such factors as the risk of loss to the insurance fund, including historic and potential losses; the economic conditions affecting depository institutions to prevent sharp swings in the assessment rates, and any other factors the Board may deem to be appropriate.