What do commercial banks and savings institutions have in common? One major similarity is deposit insurance. Although frequently overlooked, it is perhaps the most important of all the banking industry's links.
As more nonbank competitors emerge, providing almost identical credit and deposit-like services, we seem to be moving rapidly toward a reality in which deposit insurance and an excessive regulatory burden are banking's only distinguishing characteristics. Surely, we can all do without the regulatory burden. However, deposit insurance has value to banking customers; it is an asset on which our lifeblood depends.
Over the past several years, the different segments of the banking industry hav become increasingly intertwined with the two insurance funds, the Savings Association Insurance Fund (SAIF) and the Bank Insurance Fund (BIF). Currently, 25% of savings institutions are insured by BIF, and 23% of SAIF-insured deposit are in commercial banks and their subsidiaries. Many banks now have a large, direct self-interest in the insurance fund not traditionally associated with their sub-group.
At present, both BIF- and SAIF-insured institutions pay deposit insurance premiums averaging about 25 basis points of insured deposits. This assessment rate is four times the historical norm, as the insurance funds recapitalize following the losses and structural changes of the late 1980s and early 1990s. These premiums, along with the regulatory burden, are partly responsible for recent market share declines of depository institutions relative to nonbanks.
Today's healthy savings institution industry is strongly positioned to provide vital community banking and housing finance services. The industry enjoyed record profits of $7 billion in 1993, which are continuing in 1994. Similarly, commercial banks that have acquired SAIF-insured deposits are growing profitabl franchises. However, in the longer term, these institutions are threatened by the likelihood of an 18-basis-point premium differential for SAIF-insured deposits.
By 1996, SAIF will levy a significantly higher deposit insurance premium than BIF. Why? First, Congress failed to appropriate additional funds for the Resolution Trust Corp. until 1993, diverting funds from SAIF and delaying attainment of the statutorily required reserve ratio of 1.25%. Second, SAIF mus service obligations of the Financing Corporation, established in 1987 to financ earlier thrift insurance losses. Because BIF faces neither burden, it will reac the required reserve ratio in 1996 or earlier, at which time the FDIC can be expected to reduce insurance premiums by 75%.
Such a large differential will place holders of SAIF-insured deposits at a distinct disadvantage. This likely will jeopardize public availability to necessary credit services, unfairly punish SAIF-insured depositors and, in a worst-case scenario, create a new liability for BIF and the taxpayer.
Competitive Impact
The premium differential will lower net returns on assets funded with SAIF-insured deposits, resulting in a significantly weaker market position for prolonged period. In the best case, the premium differential will cause much of the industry to stagnate; at worst, a rapid deterioration could occur, precipitating a banking crisis that weakens the public confidence on which all banks and savings institutions depend.
As we work toward a solution, it is important that we not get caught up in rhetoric and the polarization that often accompanies it. SCBA believes that a merger of the two funds is the most practical vehicle to deal with this problem The ingredients of such a merger must be seen both as workable and fair. A variety of elements--such as RTC spillover funds--must be assessed and debated.
It is not surprising that banking institutions express different intensities of concern about the looming deposit insurance problem. However, every banking institution shares a common interest in resolving the dilemma facing the FDIC and SAIF, since all banks depend on the integrity of the deposit insurance system and the public's confidence.
