ICBA - Publications - Federal Deposit Insurance Reform - The Battle is Joined

Federal Deposit Insurance Reform - The Battle is Joined

FEBRUARY 15, 2002



At 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:

  1. Increasing bank failures, including some very expensive bank failures that are nicking the FDIC-BIF reserve.
  2. The continued inflow of funds from the free riders. For example, Salomon Smith Barney is offering $1,000,000 in individual coverage. Their Web site proclaims that "there are currently ten Citigroup affiliated banks in the bank deposit program. … When your total cash balances in the ten participating banks exceed $1,000,000, additional deposits will be swept into the money market fund of your choice, and will then be protected by SIPC and excess SIPC-like insurance provided by Salomon Smith Barney." Tens of billions of dollars in such free rider accounts have flooded into the FDIC, driving down the FDIC-BIF ratio.
  3. A year ago, interest rates were significantly higher than they are today. The interest earned on the FDIC-BIF reserve has fallen significantly.
  4. Cyclical deposit inflows.
These four factors put pressure on the designated reserve ratio and underscore that the FDIC is not crying wolf. Under existing law, once the 1.25 percent designated reserve ratio is breached, bankers would face legislatively mandated premiums.

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.