To the Editor:

This is in rebuttal to the March 2 Viewpoints article “Congress Should Dump Ratio for Deposit Insurance Funds,” by Bert Ely.

Your newspaper should seriously consider retiring Mr. Ely as a guest columnist. Over the last 20 years, your paper has afforded Mr. Ely a public forum to promote himself and his company by numerous grandstanding articles that are usually irresponsible and extremist. He has made a career out of predicting bank failures and/or promoting excess regulatory criticism. I think we are all tired of his negative views.

The U.S. deposit insurance systems are the envy of the world. Their strength, sound management, and professional staff are excellent examples for other countries.

There is at least one rational reason why deposit growth should trigger deposit insurance premiums, which Mr. Ely did not mention or seem to consider in his article. There have been a number of new bank charters and, with the passage of Gramm-Leach-Bliley, continued activity in new bank charters has been noted. Insurance companies, brokerage firms, mutual funds, and other large corporations have established bank or thrift subsidiaries. The deposit growth in many of these new entities has been quite extensive and, in many cases, these new entities are enjoying federal deposit insurance coverage without having paid any deposit insurance premium. Chairman Tanoue of the FDIC quickly realized this inequity and has suggested that the risk-based formula for deposit insurance premium be adjusted to include the high deposit growth factor. This modification would be fair and deserves consideration.

The concept of an insurance coverage ratio is universal to insurance companies, including deposit corporations. To suggest dropping the ratio requirement for a specific dollar amount is irresponsible, poor public policy, and certainly not a monetary policy recommendation that we should consider from any consulting firm.

While Mr. Ely’s article discusses deposit growth, he seems to have completely ignored the inflationary impact that growth over time causes to any specific dollar amount. Legislatively established amounts may further fall behind the concept of real purchasing power with the passage of time and reluctance on the part of future sessions of Congress to increase or otherwise make adjustment to said fixed amounts.

The current 1.25% is a very reasonable insurance coverage ratio. Some modification, rather than completely dropping this ratio, would certainly be more practical, rational, and responsible. I would suggest that a flexible target of 1.25% be considered with rebates paid to banks when the ratio exceeded 1.50% and additional premiums assessed when the coverage ratio fell below 1. Between 1% and 1.5%, the FDIC ought to have the discretion to rebate or assess premiums as it deems prudent and necessary. This premium range would provide the flexibility under the risk-based assessment formula (current risk-based with high deposit growth element added) to safely and soundly manage the deposit insurance funds over the next millennium.

The increased dependence on alternative funds, including borrowings from the Federal Home Loan Bank System, may also need to be considered. The collateralization of these borrowings does impact the deposit insurance funds when a failure occurs. Assessment on total assets, rather then total deposits, should be considered, or possibly total deposits plus collateralized borrowings.

Mr. Ely also failed to recognize that Ms. Tanoue has already taken action at the FDIC in an effort to have “no more Keystones.”

Mr. Ely’s call to have the Congress lean upon the FDIC appears to be unwarranted. The Congress might want to modify the statutory ratio to provide more flexibility for the FDIC to administer its deposit insurance funds. The function of the FDIC has served us well in the past century and should be preserved and supported for further service in the many centuries to follow.

William F. Casey,
Co-Operative Central Bank Boston

Bert Ely responds:

In his response to my article, Mr. Casey ignores the fact that in FDICIA, Congress clearly intended that bank and thrift profits and capital, and not the FDIC’s fund balances below 1.25%, be the first, last, and only source of funds to absorb bank and thrift insolvency losses.

Banking profits quadrupled during the 1990s while depository institution capital, the ultimate loss cushion, grew faster than insured deposits, rising from 11% of insured deposits at the end of 1991 to 20.8% on Sept. 30, 2000.

Taxpayer protection from deposit insurance losses is stronger than ever because of capital strength in the banking industry, not because of growth in deposit insurance fund balances below the 1.25% reserve ratio.

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