Deposit insurance does not give banks a significant competitive advantage over their uninsured rivals, according to a study by the Office of the Comptroller of the Currency.
The agency is quietly circulating an eight-page report asserting that any edge banks gain from deposit insurance is canceled out by compliance costs.
"The weight of the evidence suggests that the preponderance of banks have not enjoyed a large gross subsidy in the past two decades," wrote agency economist Gary W. Whalen, the study's author.
The OCC is trying to counter the argument raised by some critics of expanded bank powers that commercial banks possess an unfair funding advantage because of deposit insurance.
The implied government safety net lets banks raise money more cheaply than other financial companies. Some experts have estimated that bank funding costs are up to 40 basis points less than those of similarly rated but uninsured rivals.
Banks, the critics have said, pass along this subsidy to affiliates or direct subsidiaries engaged in activities not traditional to banking, such as selling insurance or securities. In effect, they have said, bank units that engage in these businesses enjoy an implied government-sponsored advantage over their uninsured competitors.
"This concept has been around for years, but it's heating back up," said industry consultant Bert Ely. "It is going to be a big issue in the battle that will emerge next year as banks move into the nonbanks' business."
The OCC is also circulating a report asserting that securities underwriting done directly by a bank subsidiary is no more risky than underwriting accomplished through a unit of a bank holding company. The paper, also written by Mr. Whalen, is essentially the same as one circulated in May 1995.
In the deposit insurance report, Mr. Whalen cited a 1992 study by the Federal Financial Institutions Examination Council that found depository institutions' regulatory costs totaled at least 6% of operating expenses.
In 1995 dollars, supervision cost roughly $9 billion, or 35 basis points when expressed as a percentage of total bank deposits, Mr. Whalen said.
James H. Chessen, chief economist for the American Bankers Association, agreed with Mr. Whalen's findings.
"It makes perfect sense to look at the huge regulatory and compliance costs that go along with deposit insurance," he said. "There is no question in my mind you get a huge bill that cancels out the subsidy."
If a significant net advantage did exist, some have argued that it could "leak" to a bank's subsidiary or affiliate if the market views the unit as an integral part of the insured parent, Mr. Whalen wrote.
To derive full benefit from the name association, however, it would behoove the parent to conduct such activities within the bank whenever possible, Mr. Whalen said.
Of nine bank holding companies included in the study, four do mortgage banking through direct subsidiaries; four more do so through bank affiliates. The ninth does its mortgage lending through partnerships. "When banks have flexibility regarding organizational form, no clear pattern emerges," Mr. Whalen wrote.
