ICBA - Publications - An Errant Philosophy - Existing FDIC Coverage Levels Should Wither Away

An Errant Philosophy - Existing FDIC Coverage Levels Should Wither Away

FEBRUARY 21, 2003


Banker Update
An Errant Philosophy - Existing FDIC Coverage Levels Should Wither Away

As we are putting this weekly report to bed, Washington is still digging out from an unusual onslaught of winter weather that dumped record amounts of snow. The Congress is still enjoying its scheduled Presidents Week recess.

Members of Congress will be back next week to grapple with issues new and old of interest to community bankers. A few are covered in the newsletter. On the Senate side, the new chairman of the Senate Banking Committee, Richard Shelby (R-AL) will be off to an unexpectedly fast start on deposit insurance reform. Among the roaring cannons (witnesses) opposing any increase in existing coverage levels, including indexation, will be Fed Chairman Alan Greenspan and Treasury Undersecretary Peter Fisher.

We continue to be puzzled and amazed that Chairman Greenspan is willing to go to the mat behind the philosophical stance that federal deposit insurance should continue to wither away. Chairman Shelby, according to his top staff, shares a similar position, while also contending that increasing deposit insurance to $100,000 in 1980 caused the S&L crisis. We believe this is at odds with the historical record.

Federal Reserve interest rate policies, in the climate of interest rate deregulation in the early 1980s, brought thousands of thrifts to their knees. In early 1980, the Federal Reserve recommended that individual coverage levels be increased to $100,000-a suggestion that the Congress adopted in the historic 1980 banking legislation that also lifted Reg Q. But even if levels had been increased to only $50,000, hot money brokered funds would have gravitated to the dying S&Ls.

Frontline Focusing on Glass Steagall Repeal. PBS' Frontline is preparing a major piece that addresses the repeal of the Glass Steagall Act in 1999. Apparently one of the producer's premises-which we feel is correct-is that the Federal Reserve by earlier regulatory action had fatally undermined the legislation, first in December of 1996 when it permitted commercial banks to own investment banks and then with the approval of Travelers acquisition of Citicorp on September 23, 1998.

In its ongoing, new century concern over expanding deposit insurance coverage, did the Federal Reserve ever caution Citigroup's Sandy Weill not to leverage Citicorp's ownership of ten banks so that Citigroup's investment arm, Salomon Smith Barney, could offer its customers $1million in individual coverage levels? And thus the free rider problem was born. Chairman Shelby has already warned of the risks to the FDIC of the mega-banks (and their investment banking arms).

Meanwhile, top policy officials tut-tut about the evils of community banks seeking modest coverage increases and indexation.

On the afternoon of March 4, FDIC Chairman Don Powell will be the sole witness before the House Financial Services Committee testifying on deposit insurance reform legislation. Again, an excellent bipartisan bill has been introduced by subcommittee chairman Spencer Bachus (R-AL). Yes, the negative cannon shots coming out of Senate Banking will be heard in the House. But the House last year established some important high ground by passing comprehensive and balanced legislation by a 410-18 vote. Let's hope it holds this high ground when the HFSC marks up the bill on March 13.