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Coverage Hikes Attacked at Senate Banking Committee Hearing

FEBRUARY 28, 2003


Coverage Hikes Attacked at Senate Banking Committee Hearing

On Wednesday, new Senate Banking Committee Chairman Richard Shelby (R-AL) convened the first substantive hearing of the panel under his stewardship with a session on deposit insurance reform. The witnesses were the federal banking regulators: Federal Reserve Board Chairman Alan Greenspan, Treasury Under Secretary for Domestic Finance Peter Fisher, FDIC Chairman Don Powell, Comptroller of the Currency Jerry Hawke, and OTS Director Jim Gilleran.

All the witnesses expressed agreement with certain basic issues in the deposit insurance reform debate, including: merging the BIF and SAIF into a single fund; giving the FDIC authority to administer the fund within a flexible range; giving the FDIC authority to impose risk-based premiums on all banks and thrifts; and dealing with concerns posed by the influx of funds into the insured deposit system in recent years by "free riders."

The key issue on which the regulators voiced doubt (or, outright opposition, in the cases of Messrs. Greenspan and Fisher) was whether coverage limits should be increased. Greenspan and Fisher repeatedly stated opposition to any form of hiked coverage, including indexation. Chairman Powell did note FDIC support for indexation, as well as higher retirement coverage. Later in the hearing, OTS Director Gilleran said he also opposed indexation, while Comptroller Hawke said he didn't have a particular problem with indexation, but did note that there would be questions (such as what year to start indexation from) and costs (such as changing signage at banks). This led Utah's Robert Bennett, the panel's second ranking Republican, to say that with the regulators opposed to even indexation by 4-to-1 margin, and wide agreement on the issues noted earlier, the panel could take up legislation "without controversy." We thought that Comptroller Hawke continued his nuanced support of indexation, which would make the regulator vote 3-to-2.

Chairman Greenspan reiterated previous statements that Fed survey data show only a very limited number of wealthy depositors would benefit from higher coverage. He said there are "alternative means" of getting more coverage for a "small fee," including structuring multiple accounts at a single bank, spreading deposits among several institutions or even purchasing T-bills. Greenspan added that the Fed understands that opposing even indexation means that the real value of coverage will continue to erode. He said that at some point coverage will erode to a level where it needs to be addressed, but stated that "we are nowhere near that point presently."

Asked if municipal deposit coverage should rise, Under Secretary Fisher said Treasury was worried such a change would produce "perverse incentives" that could lead to bidding wars between banks for these public funds. Comptroller Hawke said he was concerned that big banks would outbid small banks for municipal deposits. Chairman Powell said the FDIC did not support increased municipal deposit coverage, but noted that the agency would be prepared to study the issue as part of a legislative mandate.

Chairman Shelby, who shares the Fed-Treasury opposition to any form of increased coverage, requested that Mr. Fisher lead a combined regulatory effort to draft a bill for the committee's review. Pity he didn't ask the FDIC, as a congressionally established independent agency, to do this. An initial Treasury draft is already circulating on Capitol Hill. With the critical exception that it lacks any coverage provisions whatsoever, the draft is basically the same as the ICBA-supported bill, S. 229, introduced by Sens. Chuck Hagel (R-NE) and Tim Johnson (D-SD). We cannot support legislation without coverage increases.