Reducing or privatizing deposit insurance coverage would undermine consumer confidence in the banking system, Federal Deposit Insurance Corp. Chairman Ricki Helfer warned Friday.
"In bad times and in good, FDIC deposit insurance has been one of the few certainties in an uncertain financial world," Ms. Helfer said at the Independent Bankers Association of America's annual convention here. "Deposit insurance assures confidence because it is a certainty."
She added that private deposit insurance could never inspire as much confidence in the banking system as one backed by the full faith and credit of the federal government.
"Private insurance plans may be able to handle isolated failures successfully, but our experience ... is that limited plans ... are not good at stemming panic or contagion and cannot assure stability," Ms. Helfer said.
Community bankers greeted Ms. Helfer's comments with enthusiastic applause.
"I deal with fairly unsophisticated elderly depositors regularly, and I can tell you that government deposit insurance coverage has built up a real sense of confidence among them," said Mike Steinhauser, a director at Flatonia (Tex.) State Bank.
Comptroller of the Currency Eugene A. Ludwig, in prepared remarks scheduled to be delivered to IBAA members Saturday, said credit risk is rising at a growing number of community banks.
"Now, when the economy is healthy and bank earnings are strong, is precisely the time when we must be on our guard against actions that could sow the seeds of future banking problems-problems that will only become apparent when the economic cycle turns," Mr. Ludwig said.
Examiners from the Office of the Comptroller of the Currency found high levels of credit risk at 3% of the 2,300 community national banks that they reviewed last year, he said.
More alarming, he said, examiners found credit risk increased in 18% of community banks last year.
While noting that credit risk was low to start with in most community banks, Mr. Ludwig said some of the increase "is a result of a weakening in underwriting standards, where banks feel pressure to continue booking loans in an increasingly competitive market.
"Now is not the time for any bank to cut corners on its underwriting standards or its internal controls," Mr. Ludwig said. "Now is the time, however, to make sure you have the necessary controls in place to recognize credit problems early and to take appropriate action to manage these problems."
Examiners also found high interest rate risk at 2.2% of community banks and increasing risk at another 2%, Mr. Ludwig said. About 43% of community banks reported moderate levels of risk.
The OCC collected risk data on community banks last year for the first time and will use the information as a benchmark to monitor the industry, Mr. Ludwig said.