On Tuesday, the Federal Deposit Insurance Corp. proposed cutting bank premiums 83% to an average of 4.5 cents for every $100 of domestic deposits. The Bank Insurance Fund will shortly reach its recapitalization level of $1.25 in reserves for every $100 of insured deposits.
The agency also recommended leaving thrift rates at the current level of 23 cents to 31 cents because the Savings Association Insurance Fund is not expected to hit the 1.25% target until 2002. Below are excerpts from the FDIC's proposal to retain current thrift rates, which addresses the effect that higher rates may have on the thrift industry.
SAIF-member assessment revenue began flowing into the SAIF on Jan. 1, 1993. However, the Financing Corp. (FICO) has a priority claim on SAIF- member assessments in order to service FICO bond obligations. Under existing statutory provisions, FICO has assessment authority through 2019, the maturity year of its last bond issuance. At approximately $779 million per year, the FICO draw is substantial, representing nearly 45% of estimated assessment revenue for 1995, or 11 basis points of the average assessment rate of 24 basis points.
The SAIF had a balance of $2.01 billion at the end of September 1994. With primary resolution responsibility residing with the Resolution Trust Corp., there have been few demands on the SAIF, but the authority of the RTC to place failed thrifts in conservatorship or establish receiverships expires June 30, 1995.
There may soon be a substantial differential between BIF and SAIF premiums. The BIF is expected to be recapitalized during 1995, at which time BIF premiums can be reduced far below current levels. Largely due to the FICO obligation, the SAIF is not likely to be recapitalized until 2002.
A premium differential may have adverse consequences for SAIF members, including reduced earnings and an impaired ability to raise funds in the capital markets, although it appears that those consequences will not increase the level of SAIF-member failures more than a relatively small amount.
A premium differential would also create a powerful incentive for SAIF- insured institutions to minimize premium costs by shrinking the base against which assessments are levied. This can be accomplished, despite the moratorium on conversions of SAIF-insured deposits to BIF-insured deposits at these institutions, by substituting nondeposit liabilities for SAIF- insured deposits.
The net result could be an acceleration of the shrinkage of the assessment base, reducing assessment revenue and ultimately frustrating attempts to recapitalize the SAIF. (The assessment base has fallen 26% to $710.5 billion in September from yearend 1989.)
At the end of September 1994, BIF member institutions held 23.4% of the SAIF assessment base. The FDIC's legal division has opined that SAIF assessment revenues from BIF-member Oakar banks are not subject to the FICO obligation.
This has the potential result of SAIF's having insufficient income to cover the FICO obligation.
Relatively weak economic conditions still confront a large segment of the thrift industry. Twenty-three percent of all SAIF member's total assets are concentrated in the nation's seven largest thrift institutions, all of which are headquartered in California.
Additionally, a few large institutions have raised supervisory concerns due to low earnings and relatively high levels of risk in their loan portfolios. Consequently, despite the improving health of the thrift industry, the SAIF still faces significant risk relative to the fund's current reserve level.
