The capitalization scheme for the Savings Association Insurance Fund included in last year's failed budget has since had a couple of close calls. It was almost in the continuing resolution that funded the government past the April 24 shutdown date.
Now it's being proposed as the way to pay for the Republican initiative to repeal the gas tax. But that plan's got problems of its own, and it may die too. Next, we'll probably see the SAIF plan stuck into a bill to fund the space station.
Although they will undoubtedly continue to press their political campaign, SAIF-insured institutions now also face a serious business problem. Responsible management cannot sit still and wait for Congress to lower the lifeboats.
Here, then, are a few strategies SAIF institutions should consider, unless and until Congress deals with the larger problem of the deposit insurance fund.
Deposit Tradeoffs
Without any charter reorganization or acquisitions, most SAIF institutions can redesign their liability structure to minimize their reliance on insured deposits. Repurchase agreements and Federal Home Loan Bank advances are the two principal alternatives to deposits, but several other funding options are also available.
Of course, simply closing down the "in" window on the teller line is hardly cost-free. Most thrifts have established customer relationships that include long-standing deposit accounts that cannot simply be turned off. While deposit growth can be minimized by eliminating campaigns for high- balance CDs and similar instruments, most thrifts will still find it hard to make a significant dent in their base of domestic deposits quickly.
For small savings associations, the costs in both monetary and management terms of a redesigned liability portfolio can also be high. Accessing the capital markets directly for funds can be expensive, and the nondeposit liabilities available can pose new risks for small institutions. Home Loan Bank advances are, of course, familiar, but their cost can vary widely. On any given day, other funding sources - even regular old insured deposits - can be cheaper.
Reliance on alternative funding sources is, therefore, a meaningful option only for larger institutions. For Oakar banks, it may be particularly attractive, since many are affiliated with large bank holding companies, which can replace deposits with alternative liabilities at relatively low cost.
Migratory Patterns
A not-inconsiderable number of thrifts have Bank Insurance Fund-insured affiliates. Most were acquired without any covenant with regulators relating to deposit migration between the SAIF and BIF institutions. Of course, where such covenants exist, the institution must strictly honor them.
The laws governing deposit migration between SAIF and BIF institutions in a common holding company are both clear and complex. What is clear is that there is nothing in current law or rule that prohibits a thrift from acting as an agent for an affiliated bank, or from having branches of an affiliated bank on its premises. What is complex is the manner in which this agency power is exercised and by which branches are opened.
There is no cookie-cutter plan for all SAIF institutions interested in deposit migration to BIF affiliates. Details of the plan depend, for example, on whether the institution has a large number of high-balance CDs that could be relatively easily moved, or if the bulk of the deposit liability is in passbook savings accounts or similar deposits.
In the first case, a hands-on marketing campaign can be closely coordinated with compliance specialists to ensure that BIF-insured accounts are "opened" in accordance with agency powers rules and that other regulatory requirements are met. In the latter case, an in-branch facility may be necessary to explain what consumers may see as a complex transaction.
Another layer of complexity is introduced when a BIF affiliate is in one state and the SAIF institution in another. Since it is the BIF "branch" that must be moved into a SAIF institution to accomplish deposit migration, the move can only occur when there are no state or federal barriers to interstate branching by the BIF institution. Some of the BIF affiliates of savings associations are savings banks, and thus exempt from interstate branching restrictions. Nevertheless, the branching transaction must be carefully handled.
Any deposit migration plan must take care not to endanger the stability of the thrift from which SAIF deposits are being transferred. Any action that could undercapitalize a thrift or leave it illiquid is subject to regulatory sanctions, and these sanctions will be applied quickly because of the sensitivity of the entire deposit migration issue.
Despite these caveats, deposit migration is a real option for multi-bank companies. It may not be quick, it may not be easy, but it will end up moving significant amounts of money, and thus reduce premium costs.
Charter versus Charter
The battle over the SAIF rescue has transfixed both commercial bankers and thrift executives alike. Bankers may well find that the energies they have devoted to this crusade have diverted them from dealing with, first, the inevitable collapse of the Financing Corp., and then, with the way Congress will deal with that in the absence of a healthy SAIF. In contrast, thrifts have focused so intently on the deposit insurance problem that they have failed to realize much of the value in their very powerful charters.
Bankers have been struggling for decades with the insurance and securities powers restrictions that block their institutions from lucrative lines of fee-based income. Savings associations, of course, are not bound by any of these rules. They can affiliate themselves with a broad range of financial providers.
As the financial services industry goes electronic, the ideal charter for a telecommunications or software giant to pick up is a thrift. Such a charter is necessary not only because of its affiliation with a nonbank parent but because of some of the products it entitles the institution to offer.
Nothing could enhance the value of a thrift charter as much as widespread market understanding of its power. Even now, potential nonbank acquirers of savings institutions, intrigued by the unitary savings and loan holding company structure, are thoroughly put off by the thought of owning something as "disreputable" as a thrift. The more the thrift industry complains about its SAIF burden and as long as it fails to make its charter understood, industry price-to-earnings ratios will languish and mergers and acquisitions will be for bargain-hunters.
As the Pendulum Swings
Each of the strategies sketched out here is a stopgap solution to a serious long-term problem. The structure of the financial services industry is full of anachronisms, anomalies, and asymmetries. There is no reason for a thrift to have a better charter than a bank, or for a bank to pay less for its deposit insurance. Each fact, though, is the result of a long and often sorry history of overreaction and underreform.
Last year's legislation to create a single charter for all insured depositories was one attempt to address this broader problem. Unfortunately, it headed the charter the wrong way. It would have dumbed down the thrift charter to bank restrictions, rather than allowing banks to enjoy thrift powers, long acknowledged as critical for commercial banks facing aggressive nonbank competitors.
Of course, the inability of all interested parties to agree on a long- term plan is hardly a new phenomenon. Odds are Congress will continue to debate alternative deposit insurance and charter structures for at least another two years.
That is a very long time when measured in quarterly 10-K's and annual reports. Thrifts that care about their profitability will need to execute a strategy that both reduces their deposit insurance liability and maximizes their franchise value - even as the political struggle and policy debate marches on.
Ms. Shaw Petrou is president of ISD/Shaw Inc., a banking consulting firm in Washington.
