ICBA - Publications - Comprehensive Deposit Insurance Reform Package Unveiled

Comprehensive Deposit Insurance Reform Package Unveiled

FEBRUARY 8, 2002



Spencer Bachus of Alabama is the chairman of the Financial Institutions subcommittee of the powerful House Financial Services Committee. Like Senator Tim Johnson (D-SD) of the Senate Banking Committee, Chairman Bachus has been on point in developing comprehensive deposit insurance reform legislation. In a news conference on Thursday morning, Chairman Bachus-with the full support of the full committee's chairman, Mike Oxley (R-OH)-put down his marker.

And it is very good indeed. His proposal provides for balanced, comprehensive deposit insurance reform. The bill will be introduced in the next two weeks. Subcommittee markup is scheduled for March, with full committee markup in April. Chairman Oxley is according this bill his highest priority.

A quick review of some facts before describing the bill's outline. Deposit insurance levels have not been increased since 1980, with inflation eroding the value of this product that is key to ongoing consumer confidence in our financial system. Existing law is rigid and pro-cyclical. If an arbitrary 1.25% reserve ratio is breached, premiums are automatically triggered that, under the worst of times, could lead to premiums of $.23 per $100 in deposits and further exacerbate a downturn in the industry and the economy.

The failure of federal deposit coverage levels to keep pace with inflation over the last 20 years has adversely affected core deposits at community banks, impacting their liquidity and funding positions and making it more difficult for them to meet loan demand. The market share of too-big-to-fail banks offering de facto 100% coverage has continued apace, and the biggest of the bigs has exploited the current system by offering $1,000,000 in coverage to Salomon Smith Barney account holders. The free riders haven't paid a nickel in premiums.

The Bachus proposals will be controversial. Chairman Greenspan, for one, has put his marker in the sand, saying that federal deposit insurance levels should not be increased or indexed-that the FDIC "subsidy" should not be increased, thus allowing FDIC coverage to continue to erode.

The Bachus Bill

The bill increases the basic amount of coverage to $130,000-slightly below the level it would be if the 1974 coverage level of $40,000 had been indexed for inflation. The $130,000 would be indexed for inflation going forward. Again, this amount (we had been pushing for $200,000) tries to accommodate opposition to any increase.

Coverage for IRA, Keogh and 401(k) plan deposits would be double the basic coverage, or $260,000. The bill increases municipal deposit insurance protection for each bank in an aggregate amount up to the bank's total equity capital.

The 1.25% reserve ratio is changed to a range of 1.00-1.50% and the possible trigger of $.23 premiums is eliminated. There will be small, steady premiums that will be offset for many banks by assessment credits and rebates.

The bill is on a very fast track in this key House committee. Deposit insurance reform isn't a partisan issue. The administration's position is very close to the Greenspan position, and we commend Chairman Bachus and Chairman Oxley for their decision to recognize the needs of savers and consumers by strengthening the FDIC and its crucial federal deposit insurance product.

Chairman Bachus, in speaking about the regulators' negative position, indicated that yes, they have their points of view, but this is the people's House and this compromise proposal is good for the people and consumers.