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The Future of Federal Deposit Insurance

OCTOBER 19, 2001



FDIC Chairman Donald E. Powell finally had his day in court before the House Financial Services Committee. The topic was deposit insurance reform.

This Update addresses four key sentences in his testimony on coverage increases that go to the very heart of the debate.

Chairman Powell stated: "There has been some opposition to the FDIC's indexing proposal on the grounds it would increase the federal safety net. Frankly, I am puzzled by this. The FDIC is not recommending that the safety net be increased. It is simply recommending that the safety net not be scaled back inadvertently because of inflation." As all community bankers, small businesspersons, farmers, ranchers and retirement savers well know, the FDIC deposit insurance safety net has been scaled back considerably by inflation since 1980.

But what opposition is Chairman Powell referring to? Could it be the Board of Governors of the Federal Reserve System?

Fed Governor Larry Meyer testified before the same committee on July 26. The Fed strongly opposes indexing coverage levels. Speaking for the Board, Governor Meyer concluded his testimony with the following stirring ideological words: "But today, in our judgment, neither financial stability, nor depositors, nor depositories are being disadvantaged by the current ceiling. Raising the ceiling now would extend the safety net, increase the government subsidy to banking, expand moral hazard, and reduce the incentive for market discipline, without providing any real public benefits. With no clear public benefit to increased deposit insurance, the Board sees no reason to increase the scope of the safety net. Indeed, the Board believes the time has come to draw the line on expanding government guarantees."

These words were spoken before September 11. Our nation can indeed be thankful that the existing high level of consumer confidence in our banking system anchored by federal deposit insurance assured that there were no major runs on banks. We can be thankful that the Federal Reserve flooded markets with liquidity-a Federal Reserve power that most certainly is an essential government guarantee.

It can be argued that appropriate government guarantees are a key component of a civilized society and a smoothly functioning financial system. We sincerely hope the Federal Reserve re-thinks its position.