To the Editor:

On April 30 American Banker reported [“Rebates Could Outweigh Fees: FDIC,” page 1] the Federal Deposit Insurance Corp.’s response to my analysis that the FDIC seeks to charge America’s largest banking companies dearly for deposit insurance that banks already paid for through deposit insurance assessments in the early 1990s.

Those assessments built the Bank Insurance Fund and Savings Association Insurance Fund to 1.25% reserve ratios. However, the FDIC table accompanying the article presented a very incomplete picture regarding premiums and potential rebates.

First, the FDIC did not estimate how much banks would have to pay in premiums before rebates might exceed premiums. My analysis of the FDIC’s deposit insurance reform proposals suggests that over a 10-year period the banking industry, and presumably most banks and thrifts, would have a net premium cost even after deducting the proposed rebates.

Second, the FDIC cannot guarantee that Congress will authorize simply higher premiums but no rebates.

The FDIC’s response suffers from three more fundamental failings. First, the FDIC has provided no defense of the 1.25% reserve ratio, which is driving its campaign to reimpose premiums on healthy banks and thrifts.

Second, despite years of work on risk-sensitive premiums, the FDIC has yet to present its pricing formula for charging large banks, nor has it specified where it will draw the line between large banks subject to one formula and small banks subject to another. Drawing that line could become a political hot potato.

Third, the FDIC has not released the financial model upon which its numbers are based; I sent the FDIC my model. The FDIC’s model, like mine, must present its numbers on a year-by-year basis and must reveal every assumption on which the model is based. Nothing should be taken on blind faith.

Until the FDIC publishes its model, bankers and Congress cannot adequately evaluate the FDIC’s deposit insurance reform proposals.

Bert Ely, Ely & Co.
Alexandria, Va.

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