On the road to financial reform, Federal Deposit Insurance Corp. Chairman Donna A. Tanoue is carving her own path.
Like other federal banking regulators, Ms. Tanoue advocates dismantling the decades-old barriers among banking, insurance, and securities underwriting. Three bills before Congress would attempt this.
"Modernization of the financial system is not only desirable but necessary," she told the Senate Banking Committee Wednesday.
But Ms. Tanoue's support for reform stems less from a philosophical preference for freer markets than from her agency's commitment to protect the deposit insurance funds. She says that letting U.S. banks affiliate with other financial services companies will make them more competitive internationally and less likely to fail.
Though the bank and thrift funds are flush today-they hold a combined $39 billion-the bank fund was insolvent not long ago. The red ink led to larger insurance premiums for banks, higher costs for customers, and substantial taxpayer subsidies.
Ms. Tanoue only joined the FDIC in May, but she is clearly mindful of the funds' history.
Item No. 1 on her financial reform agenda is to merge the funds. Because thrifts are not well spread out geographically, she says, a regional economic slump could threaten the Savings Association Insurance Fund's solvency. Combining it with the bank fund would provide a cushion.
Another reason for merging the funds is the growing concentration of the institutions insured. From 1990 to 1998, Ms. Tanoue says, the share of thrift deposits held by the three largest companies grew to 13.3%, from 8.7%. For the bank fund, the deposit share of the three biggest companies doubled in this period, to 10.1%. The failure of just a few of these giants could cause trouble, she says.
Ms. Tanoue advocates repeal of a congressionally mandated reserve that siphoned about $1 billion from the thrift insurance fund on Jan. 1. She says the special reserve serves no public policy purpose yet could, if continued, lead to premature or unnecessary increases in insurance premiums for thrifts.
The former Hawaii bank commissioner opposes an item in the Senate bill that would make thrifts continue to pay more interest than banks on bonds issued to pay for the S&L cleanup.
In addition, she warns against proposed legal changes that could increase the authority of state regulators and nonbank federal regulators- such as the Securities and Exchange Commission-over banks.
Ms. Tanoue also says that Congress should continue to let unitary thrift holding companies engage in real estate development and other nonbank activities.
But she is not entirely predictable.
On the controversial question of how a diverse financial services company should be organized, Ms. Tanoue sides with Treasury Secretary Robert E. Rubin, who says companies should be allowed to conduct nonbank activities in either a holding company affiliate or bank subsidiary, as they see fit.
She holds this position despite believing that the subsidiary approach offers better protection if a bank is financially troubled. In such a case, for example, a healthy subsidiary could be sold and the revenue used to prop up the bank.
"Not all decisions should be dictated by savings to the deposit insurance fund at the time of bank failure," she testified. "We believe it is important that banks have a choice."
Ms. Tanoue's almost singular focus on the insurance funds makes her unique in the financial modernization debate. But it is not clear how many items on her wish list will be fulfilled if a law is enacted.
Her top agenda item, merging the insurance funds, is a deal-killer for bankers, who say they will oppose it unless the thrift charter is eliminated. Likewise, her desire to let companies choose their corporate structure freely runs headfirst into the Alan Greenspan wall.
And her affection for unitary thrifts clashes with House Banking Chairman Jim Leach's antipathy toward them.
Ms. Tanoue might be lucky to escape financial reform with a repeal of the thrift fund reserve. But politics and turf battles might kill even that goal.