ICBA - Publications - Presentation of Ken Guenther before Staff Members of the House Financial Services Committee

Presentation of Ken Guenther before Staff Members of the House Financial Services Committee

APRIL 27, 2001


APRIL 24, 2001

Thank you for this invitation. And we thank Chairman Oxley and Subcommittee Chairman Bachus for according the issue of deposit insurance reform priority attention. We feel that the evolution of the financial services industry and the FDIC since 1991—the last systematic congressional review of the working of deposit insurance and overall bank and thrift regulation—warrants this priority review. The time is now.

What is on the table is of enormous importance to community banking and its customers—and to future community bank funding. But it is more than that. Federal deposit insurance has been a highly successful program enhancing financial stability and macroeconomic stability. It has cut back on bank failures—and, when banks and thrifts were failing, has stopped bank runs. Since its passage, there have been no bank panics—and even at the height of the very nasty S & L crisis that included the takedown of every large bank holding company in Texas—there was no panic or loss of confidence in our financial system. The financial system and our economy are stronger and less volatile because of federal deposit insurance.

The former House Banking Committee began to wrestle earnestly with the S & L crisis in 1982. It was still consuming the Committee in 1991 when FDICIA passed. Chairman Oxley and his staff are wise to review the system at a time not characterized by crisis—the system needs reform—and these reforms can be carried out in a welcomed, non-crisis atmosphere.

As this important process moves forward with these informal sessions, you hold, in your hands, the future of consumer confidence in our financial system—the future stability of our nation’s financial system—and yes, the future of community banks.

Our financial system is concentrating. Our financial system is bifurcating into a handful of very, very large too-big-to-fail players and thousands of small financial institutions. The value of deposit insurance coverage, in turn, is eroding at community institutions at the very time when large diversified institutions that happen to own more than one bank can offer coverage levels beyond the reach of community banks.

In turn, the emergency determination of systemic risk in FDICIA will never be applied to a failing community bank. In the future, conceivably, it could be applied to a failing Wells Fargo, B of A, Citigroup or Merrill Lynch—and among the remedies given to the FDIC to prevent systemic risk is making all depositors whole. Long Term Capital Management reminds us that when systemic risk is at play, outright failure may not be a permissible option. In a future weakening economy and financial system, haircutting uninsured depositors at very large failing banks may not be a permissible or politically saleable option.

We are prepared to talk about this a bit more during the discussion.

Chairman Oxley has indicated that the Ney bill will be the focus of future hearings of this Committee. After the release of the FDIC deposit insurance reform recommendations, Chairman Oxley’s spokesperson also stated that the issues raised by the FDIC merit consideration. We agree.

We do feel that the Ney bill falls short by not including, among other issues, indexation of deposit insurance from a new and higher base level. Community banks will be gravely disappointed in any reform package that does not address increased and indexed coverage levels.

We are gratified that so many members of the House and Senate have signed on to the Hefley and Johnson-Hagel bills, which would set the new base level at approximately $200,000, indexing the 1980 $100,000 coverage level for inflation. We agree with the FDIC report that while it is for the Congress to decide the initial coverage level, that level should be indexed to the consumer price index in order to maintain its real value.

Again, thank you for this opportunity.

I would like to call on ICBA’s director of regulatory affairs, Karen Thomas, to make additional remarks on increased coverage levels, pricing issues and the free rider problem.