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Federal Deposit Insurance Reform Act of 2003 Advances

MARCH 14, 2003


Federal Deposit Insurance Reform Act of 2003 Advances

Today, the full House Financial Services Committee, capably led by Chairman Mike Oxley (R-OH), passed comprehensive and balanced deposit insurance reform legislation (H.R. 522). The action was taken by voice vote.

The bill increased individual coverage levels to $130,000 with indexation provisions. Retirement account and municipal deposit coverages also were substantially increased.

Committee members Carolyn Maloney (D-NY), Doug Ose (R-CA) and Ed Royce (R-CA) were on point in offering amendments to cut back the increased coverage levels. These amendments were supported by the Federal Reserve and the Treasury Department. They were opposed by committee chairman Oxley, Financial Services subcommittee chairman Spencer Bachus (R-AL) and ranking minority member Barney Frank (D-MA).

The ICBA was the only national trade association that lobbied for increased coverage levels. The key provision in the bill that held Democratic votes was the Waters amendment, which authorized a premium reduction for financial institutions offering lifeline accounts.

The legislation authorizes the merger of the BIF and the SAIF. It accords the FDIC the discretion and flexibility to charge regular risk-based premiums over a much wider range of circumstances, insuring that the so-called free riders pay premiums. Moving from current law that established the 1.25% fixed target ratio and abruptly changing premiums, the bill establishes a broad target range for the designated reserve ratio. The bill makes provision for assessment credits that take into account past contributions.

The FDIC has emphasized that "the point of the reforms is neither to increase assessment revenue from the industry nor to relieve the industry of its obligation to fund the deposit insurance system; rather it is to distribute the assessment burden more evenly over time and more fairly across insured institutions."

The decisive House Financial Services Committee bipartisan action and Speaker of the House Dennis Hastert's support for the bill should result in prompt House floor consideration.

Interest on Business Checking Advances. The committee also approved legislation to allow banks to pay interest on business checking accounts, authorize the Federal Reserve to pay interest on sterile reserves, and increase the allowable number of MMDA transactions to 24 per month, up from 6. The latter provision will allow banks to sweep funds into and out of interest bearing accounts during the transition period.

The committee approved a Barney Frank amendment that made the transition period two years, up from one year. This is important for institutions that need to unravel existing relationships with their commercial customers.

The committee also approved an Edward Royce amendment to allow Industrial Loan Companies (ILCs) to pay interest on business NOW accounts. Amendments offered by Jim Leach (R-IA) to bring such ILCs under the Bank Holding Company Act were defeated. These Leach amendments were strongly supported by the chairman of the Federal Reserve System and the ICBA.

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