ICBA - Publications - Take Ideology Out of Deposit Insurance Reform

Take Ideology Out of Deposit Insurance Reform

MAY 3, 2002



The Federal Reserve and the Treasury are actively encouraging the further withering away of federal deposit insurance coverage. They think existing levels are too high. Many of the nation's largest banks that enjoy too-big-to-fail status agree with them. One of these companies is offering $1million in coverage through ten affiliated banks.

These bureaucratic bastions of free market ideology who, ironically, are also regulators, suffered a defeat when the House Financial Services Committee voted out deposit insurance reform legislation by a 52-2 vote. The political dynamics in play are laid out in the authoritative Wall Street Journal article reprinted as a supplement in this week's WWR. Please use it in your ongoing lobbying efforts.

Are the Federal Reserve and the Treasury accepting that they are badly out of step with the House Financial Services Committee, Main Street America, AARP and a growing bipartisan group of senators? No. They are working the House leadership hard against any deposit insurance increases.

Have evolving real-world happenings made a dent in their position, which also serves to weaken a sister regulatory agency? No. As bankers are aware, the regulatory wars between the Federal Reserve and the Treasury-controlled OCC and OTS and the FDIC are ongoing and costly.

The major news of the week was another Wall Street Journal article that outlined the spread of the "free rider" disease to banks owned by TD Waterhouse and Lehman Brothers. The article states that "with the help of cash from its huge brokerage-client base, Merrill says its two banks chartered in Utah and New Jersey held $70 billion in deposits at the end of the first quarter, up from $55 billion at the end of 2000." The Journal further notes that $50 billion of these funds, drawn away from many Main Street communities, has been reinvested in mortgage and other asset-based securities. Referencing Citigroup's Salomon Smith Barney's sweep accounts, which are providing $1 million in coverage, the Journal points out that more than $20 billion of money market funds have been moved into bank deposits. No premiums have been paid. And Chairman Greenspan's testimony is that $100,000 in coverage for community banks is too high and that further erosion of coverage limits is "good."

The Journal reports that Lehman Brothers will be sweeping excess cash from the firm's brokerage accounts into deposit accounts of its unitary thrift. And the Journal further highlights that Prudential Financial's Prudential Securities Inc. and Charles Schwab (which owns six banks and a thrift) will soon follow. Charles Schwab could offer $700,000 in coverage levels.

On Tuesday, May 7, the FDIC board will convene to decide whether to assess premiums on insured deposits for the second half of this year-whether to assess premiums on banks to help pay for major Wall Street firms offering higher coverage than you can offer.

What a pity that fairness and equity don't loom larger in the Greenspan-Treasury ideology concerning this issue. The editor of U.S. Banker magazine said it better in his May 2002 editorial. Bob Bennett writes, "In the midst of today's scandals involving huge corporations and financial institutions, it should be clearer than ever that community banks are a national treasure. … It is community banks that keep the country moving, and that are intimately in touch with the thousands of small companies that are the backbone of the American economy. … The deposit guarantee should be raised, not merely to $130,000, but to $200,000." Pity that another national treasure so strongly disagrees.