FDIC RELEASES DEPOSIT INSURANCE REFORM RECOMMENDATIONS
FDIC Chairman Donna Tanoue this week released the FDIC’s eagerly anticipated comprehensive recommendations for deposit insurance reform. The report fills out details of the recommendations Chairman Tanoue outlined before community bankers at the ICBA convention.
The key recommendations are:
- merge the BIF and SAIF;
- charge risk-based premiums to all institutions, regardless of the fund’s size;
- allow the insurance fund to build or shrink gradually around a target or range;
- establish rebates to shrink the fund when its gets too big;
- base rebates on past contributions to the fund; and
- index insurance coverage to the Consumer Price Index to maintain its real value.
At a press conference, Chairman Tanoue stressed that the recommendations are designed to strengthen the deposit insurance system, enhance the safety and soundness of the banking industry, make quality improvements now—when the industry is healthy and the insurance funds are strong—and ensure that deposit insurance remains the anchor of public confidence in the banking system.
According to the FDIC report, “Keeping the Promise: Recommendations for Deposit Insurance Reform,” four weaknesses in the current system must be remedied: deposit insurance is provided by two insurance funds at potentially different prices; economic incentives are distorted because deposit insurance cannot be priced effectively to reflect risk; banks are forced to pay the highest premiums during the worst economic times; and the current system fails to maintain the value of insurance coverage for depositors with smooth and predictable adjustments for inflation.
The report emphasizes that the recommendations are not intended to significantly alter costs for insured institutions; instead they are designed to spread out the costs more evenly over time and more fairly across banks. The report also emphasizes that the recommendations are interrelated and should be implemented as a package. Piecemeal implementation could introduce new distortions and aggravate the problems the recommendations are designed to address, the report states.
The upcoming two-week congressional Easter recess, when your senators and representative will be in their home districts, is an opportune time for you to weigh in with your views on deposit insurance reform. Let them know how important deposit insurance coverage increases are to community banks. And ask them to support S.128, the Johnson-Hagel bill, and H.R. 746, the Hefley bill, that would index coverage for inflation since 1980, bringing it to about $200,000. Tell them reforms are needed to reduce premium volatility and to ensure that rapidly-growing institutions like the Merrill Lynch banks pay their fair share.
This week’s Special Supplement provides more detail on the specifics of the FDIC’s recommendations. Copies of the report are available on the FDIC’s Web site at www.fdic.gov.