WASHINGTON Deposit insurance reform gained momentum Wednesday as a key senator announced plans to sponsor broad legislation that is expected to include significantly increasing the current $100,000 cap on coverage.
Sen. Tim Johnson, the new chairman of Senate Bankings financial institutions subcommittee, called the reform effort critically important. I believe we should be able to have a comprehensive deposit insurance bill put together in a bipartisan and consensus fashion hopefully after the July 4 recess, the South Dakota Democrat said.
He made his comments at a Senate Banking Committee hearing on the condition of the industry that featured the four banking and thrift agency chiefs.
Committee Chairman Paul Sarbanes said he intends to ask Donald E. Powell, the Texas community banker nominated by President Bush as Federal Deposit Insurance Corp. chairman, for his opinions on the reform effort at his June 26 confirmation hearing. The Maryland Democrat added that once Mr. Powell had some time in the new job, Sen. Johnsons subcommittee would likely call him back for a further hearing on the subject.
The discussion of deposit insurance reform and the announcement of new hearings marked a dramatic change from just a month ago, when then-Banking Chairman Phil Gramm said he did not expect to take the issue up this year. But with the Democrats taking control of the Senate, interest in the FDICs recommendations has gathered steam.
Sen. Johnson introduced legislation in January that would double the coverage level to $200,000 per account, but he now appears ready to broaden the bill to tackle other changes recommended by the FDIC in April.
It is very difficult to argue with the FDIC observation that the system is in fact pro-cyclical, he said. In good times, most institutions pay nothing for insurance coverage, and in bad times, when they can least afford it, they can be potentially hit with big premiums.
While only FDIC Chairman Donna Tanoue mentioned the reform effort in her testimony, Sen. Johnson asked Federal Reserve Board Chairman Alan Greenspan for his opinion. The Fed chief, who last summer strongly opposed doubling insurance coverage, declined to weigh in and said he preferred to wait until the entire Fed board adopted a position.
When the issue is on the table as potential legislation, it should be the opinion not of the chairman, but the opinion of the Board of Governors, Mr. Greenspan said.
Both Comptroller of the Currency John D. Hawke Jr. and Office of Thrift Supervision director Ellen Seidman voiced support for the FDICs reform proposals, though they differed on some details.
Ms. Tanoue attempted to fuel interest by noting that the Bank Insurance Funds reserves had slipped to 1.32% of insured deposits at March 31 a significant 3-basis-point drop from three months earlier. This is the reserve ratios lowest point since early 1996.
The bank funds continuing decline has caused many to worry that it could soon fall below the statutory minimum of $1.25 of reserves for every $100 of insured deposits. If that happens and the fund is not recapitalized within a year, all banks would be hit with a 23-basis-point premium.
The fund is being diluted by an influx of deposits. During the 12 months that ended March 31, BIF insured deposits rose by $180 billion, a third of which came from two organizations that have been sweeping brokerage-originated cash management funds into insured-deposit accounts at BIF-member bank affiliates, Ms. Tanoue said. Those two companies are Merrill Lynch & Co. and Citigroup Inc.s Salomon Smith Barney unit.
The insured deposit growth at these two organizations without additional contributions to the insurance fund has been enough to account for a 3-basis-point decline in the BIF reserve ratio, Ms. Tanoue testified.
The Savings Insurance Association Fund remained unchanged at 1.43% in the first quarter, she said.
Deposit insurance reform was one of a myriad of topics discussed at the oversight hearing, which Sen. Sarbanes said he plans to hold regularly.
One topic not tackled was too big to fail, the controversial practice of rescuing large institutions whose failure could damage the economy. Sen. Sarbanes said last week that he intended to raise the issue with the regulators, but he did not mention it during the hearing. When asked why after the hearing, he said: It is a topic which could take a whole hearing by itself.
Designed to brief senators on the condition of the industry, the hearing gave the four agency chiefs an opportunity to reiterate their beliefs that solid capital and loan-loss reserves are insulating banks from the economic slowdown.
We are fortunate that our banking system entered this period of weak economic performance in a strong position, Mr. Greenspan told the lawmakers.
Still, the regulators sounded their usual warnings about credit quality. Bank corporate asset quality is also likely to deteriorate further before it improves, according to an appendix to Mr. Greenspans testimony.