BANKER UPDATE: FEDERAL DEPOSIT INSURANCE REFORM - THE BATTLE IS JOINEDAt a recent meeting, a banker asked a key member of the House Financial Services staff the following: I am not paying anything for deposit insurance coverage at this time and, with the stock market weakness, deposits are readily available. Why should I support deposit insurance reform legislation containing an FDIC assessment? The staffer's answer was, Pay a little on a steady basis now-or pay a lot more later. We would add that the just-introduced legislation proposes the first increase in deposit insurance coverage levels since 1980.
A related theme prevalent among some bankers is that if coverage levels aren't increased, premiums will remain at zero for 1A banks.
FDIC press statements support the answer given by the House Financial Institutions Committee staffer, and have put a bit of a kibosh on the prospects of zero premiums continuing for 1A banks under present law.
What is the basis for the FDIC press statements that the 1.25 percent designated reserve ratio for the BIF is facing increased pressure? Based on our conversations with the FDIC, four factors are in play:
The deposit insurance reform bill that has been introduced smooths out the potential cyclical nature of future premiums, while increasing deposit insurance levels significantly given the existing political climate in Washington. Chairman Greenspan, joined by the Treasury Department, opposes any increase in deposit insurance levels, including indexation. Large banks similarly oppose deposit insurance increases. Fortunately, Chairmen Bachus (R-AL) and Oxley (R-OH) of the House Financial Services Committee and Chairman Johnson (D-SD) and Senators Hagel (R-NE), Enzi (R-WY) and Reed (D-RI) see the world differently and are willing to take them on. They deserve full community bank support.