Comment: With Banks in the Pink, Congress Should Cut FDIC Staff in Half

that "work expands to fill the time allotted to it." Nowhere is that more true than in federal government agencies. The classic case of Parkinson's law is the Department of Agriculture. Over the past 50 years the number of farmers has fallen 70%, but the number of USDA employees has risen 50%. Ross Perot often told the story of visiting a USDA field office and finding one of the workers weeping at his desk. When asked why, the inconsolable bureaucrat responded: "My farmer died." Now we are witnessing an even more preposterous case of Parkinson's law in action: this time at the Federal Deposit Insurance Corp. It is a case study in the failure of Congress to aggressively cut the government work force - even in agencies whose primary mission no longer exists and whose workers have little left to do. Worse yet, when it comes to regulatory agencies like the FDIC, idle hands often prove to be the devil's workshop. Here's the story in a nutshell: Since the banking crisis reached its zenith in the late '80s and early '90s, there has been a vast reduction in the number of failed banks and the assets of those banks acquired by the federal government. In 1989, the number of bank failures peaked at 206. In 1992, the FDIC had $43 billion in assets in liquidation of failed banks. This year, there will be no more than 20 bank failures, and assets in liquidation will be no more than $12 billion. In other words, bank failures are down 90%; assets in liquidation are down more than 70%. Yet neither the FDIC budget nor the size of its work force reflects these changed conditions. Testifying before the Senate Banking Committee in June, FDIC Chairman Ricki Helfer insisted that the agency is "downsizing substantially." To justify this assessment, Ms. Helfer noted that "the FDIC has reduced its staffing from a peak of about 15,600 staffers in 1993 to fewer than 11,000 this year." On Nov. 9, Ms. Helfer announced a buyout program intended to cut 500 more jobs, and said the FDIC's goal is to slim down to 7,000 employees in two years. But that means two more years of being overstaffed even by FDIC standards, and the 7,000 figure still towers over the 4,000 of 12 years ago, when there were about the same number of bank failures as today. Moreover, clearly the vast financial improvement in the industry has shrunk the work load by far more than 30%. The case for radical downsizing of the FDIC is even stronger when we consider other changes in the banking industry. Not only are banks much healthier today than five years ago, there are far fewer of them. Federal Reserve Board data indicate that, as a result of major bank mergers and consolidations, the number of commercial banks in the United States has fallen from 13,415 in 1988 to 10,168 at June 30. That number could easily dip below 10,000 this year, given the continued merger frenzy. Industry consolidation should contribute even further to a substantial reduction in the work load at the FDIC. A bloated payroll contributes to a bloated budget. This year the FDIC plans to spend $975 million in liquidation costs for some $20 billion of failed bank assets. The standard private-industry cost to manage such assets is 25 basis points for maintenance and 1% for collections - which would equal a total price tag of about $250 million. The government's costs are almost four times this high. One might make the case that an FDIC staffed to the hilt with zealous regulators could prevent another banking crisis requiring another multibillion-dollar taxpayer bailout. But in the 1980s, a near doubling of FDIC staff didn't prevent the banking or S&L crisis at the end of that decade. And most experts agree that the banking crisis was a function of nonsensical deposit insurance rules, not too few regulators. So why hasn't Congress swung its budget ax at the FDIC? After all this Congress has already trimmed the expensive and intrusive bureaucratic empires at other meddlesome federal agencies such as the Environmental Protection Agency and the Occupational Safety and Health Administration. The answer seems to be that the FDIC is self-supported. Its costs do not come out of general tax revenues. Rather, the FDIC has its own source of revenue from the deposit insurance premiums (read: taxes) paid by banks. This tax is unnecessary. At the FDIC's current reserve level, interest income alone is sufficient to cover all reasonable liquidation expenses and FDIC administrative costs. The FDIC thus was right to cut insurance premiums to almost zero for most banks, as it did on Nov. 14. Congress is also on the right track with its plan to require the agency to keep premiums near zero when reserves are at or above 1.25% of insured deposits. But the FDIC can do more to ensure that premiums stay low by cutting spending and staff - and Congress must make sure it does. Republicans should recognize that when independent regulatory agencies evolve into bloated and arrogant fiefdoms, they begin to injure the very consumers they are allegedly designed to protect. Congress can ensure a financially sound banking industry with an FDIC half its current size - and cost. Mr. Moore is director of fiscal policy studies at the Cato Institute, a libertarian think tank in Washington.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER