WASHINGTON The conventional wisdom not long ago was that the Senate would avoid deposit insurance reform this year, but Sen. Tim Johnson has quickly emerged as its champion and forced observers to rethink their forecasts.
The South Dakota Democrat took the reins of the Senate Banking financial institutions subcommittee after his party took control of the chamber a few weeks ago, and promised to put together comprehensive legislation after the Fourth of July.
Its a little bit like patching the roof its better to do it when the sun is shining than when it is raining, Sen. Johnson said in an interview Wednesday, echoing recent testimony by outgoing Federal Deposit Insurance Chairman Donna Tanoue. If you are going to make changes in the FDIC, the better time to do it is when the banks are healthy than when the economy is deteriorating. I think we need to examine very carefully whether it is due for an overhaul.
Sen. Johnson said deposit insurance reform would be his subcommittees top priority, that he plans to hold hearings, and that he has started working with his colleagues on both sides of the aisle to find a consensus on the many issues involved.
He said that other senators shared a concern with the way the system is structured in which 92% of banks currently pay nothing in deposit insurance premiums, but could be assessed steep fees if the ratio of federal reserves to insured deposits falls below the statutory minimum of 1.25%. If the fund is not recapitalized within a year, the FDIC would be forced to charge banks 23 cents for every $100 in insured deposits.
There is a recognition that the current FDIC approach is really pro-cyclical rather than countercyclical, and I think that does create a certain level of unease about the way we deal with these issues, Sen. Johnson said.
He said that Congress would likely use the FDIC recommendations issued in April as a guideline for reform, but acknowledged that the agencys suggestion that it adopt more refined risk-based premiums that would allow it to assess small fees on all institutions would be a tough sell to some in the industry.
While, intellectually, a more countercyclical approach makes sense, when you have 92% of institutions not paying premiums right now, there is always going to be a built-in disinclination to change that, even though people recognize that kind of approach might not be the best long-term way to go, Sen. Johnson said.
But I think a lot of our banking friends agree that potentially to be on the hook for 23-basis-point premiums, if the designated ratio were to drop below 1.25%, could be extremely damaging during a down economic time. So one of the points I think of holding hearings and trying to put together a bill is to see if we can generate some consensus in the industry itself on risk-based pricing of premiums.
Sen. Johnson has already weighed in on one of the most controversial aspects of reform significantly increasing the $100,000 coverage level per account. Though alluding to his earlier legislation that would double the limit, he said a consensus bill may not go that far.
The level of coverage ought to be consistent with the original buying power of coverage, but Im not wedded to a specific dollar number, he said. I am sensitive that weve got to be mindful of moral-hazard concerns that could come with higher limits. I think its important that we look at different proposals on indexing the limit, including some ideas focusing on separate higher limits for retirement and municipal deposits.
Sen. Johnson said he thought higher limits for individual retirement accounts and municipal deposits may have more of a chance of passing Congress than raising the overall limit.
He added that he thought reform should be addressed comprehensively differing from statements made this week by FDIC Chairman-designate Donald E. Powell, who said that the issues did not have to be linked.
I dont particularly want to invite that at this time, Sen. Johnson said. It certainly is a possibility, and anybody who has been around the legislative process for long understands that its a mistake to make the perfect the enemy of the good. But I would like to see us get as broad an agreement as we possibly can, and I dont want to throw in the towel on anything necessarily.
But reform is far from the only issue Sen. Johnson said he cares about. He has already raised concerns about subprime guidelines issued by regulators this year, saying he worried that the guidelines would define subprime too broadly and endanger access to credit for low- and moderate-income borrowers.
Im not looking at legislation on this at this point, but there is a concern that Ive expressed to the regulators and I think we need to monitor this and see what in fact does occur, he said. I want to work with the FDIC and other agencies to ensure that its implementation of these guidelines doesnt choke off desirable subprime lending because of a misunderstanding, and I want to make sure there is no confusion between subprime lending and predatory lending.
He said he was also sympathetic to consumer complaints that privacy notices issued by financial institutions were too confusing, and may need to be reworked. But he agreed with the industry that the notices are so puzzling because of the way Congress wrote the law.
The problem here lies not with the financial institutions but with Congress and the way it crafted these notifications, Sen. Johnson said. Its hard to test whether the existing privacy standards are adequate if in fact the implementation, because of poor congressional guidelines, is confusing.
Sen. Johnson added that he did not plan to support tougher legislation this year until there was a sense of how well the privacy regulations of the Gramm-Leach-Bliley Act of 1999 worked.
My own view is that additional legislation this year may be premature, he said. Among the things we ought to look at is what are we doing now and is there a way to make the existing law work better. I think that ought to be at the front end of anything Congress does next.
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