In proposing to extend the current moratorium on thrift conversions, the drafters of the proposed extension contained in the Housepassed Resolution Trust Corp. refunding bill must feel a little like Lucy as she pulls the football away from Charlie Brown.
Like Lucy, the drafters are trying to change the rules by which the game is played. And they are doing so in a way that violates fundamental principles of fairness.
Fortunately, there is an alternative that will preserve both principles and principal.
Many banks, commonly referred to as "Oakar institutions," have acquired thrift deposits over the past 4 1/2 years, based in large part on the assumption that they would be permitted to convert to the Bank Insurance Fund for the acquired accounts after the moratorium expired.
Business Plans Affected
However, now these banks - the same ones that were vigorously courted to facilitate the resolution of sick thrifts - are being told that they may have to revise their business plans in order to accommodate the Savings Association Insurance Fund's mandate of achieving a reserve ratio of 1.25%.
Section 9 of S 714 (originally HR 1340) would extend the moratorium on conversions to Aug. 19, 1994, or "the date on which the [SAI]] first meets or exceeds the designated reserve ratio for such fund," whichever is later.
The SAIF's reserve ratio stood at 0.17% as of September, and is projected to increase to only 0.33% in the following 12 months. To compound the SAIF's difficulties, the Financing Corp. debt that was incurred to pay for thrift failures in the early 1980s must be repaid from the SAIF.
40% of Revenue Consumed
This debt consumes about 40% of the premium revenue paid to the SAIF, and is projected to create a differential premium rate for the next 25 years when compared with the bank premium.
Thus, the practical effect of the proposed amendment would be to extend the moratorium indefinitely.
In light of this, the question arises whether it is fair to preclude Oakar institutions from converting until some undetermined, but certainly distant, point.
If an institution, after weighing the benefits and burdens associated with a given insurance fund, elects to operate with SAIF insurance, then that institution may reasonably be expected to assist in the revitalization of the fund.
Less Compelling Argument
If, on the other hand, an institution acquires deposits in spite of SAIF insurance and in reliance on a statutory scheme that would allow conversion from SAIF to bank insurance, then the arguments for requiring continued premium payments to the SAIF are less compelling.
Banks have not caused the SAIF's problems. For the most part, banks have not benefited from the SAIF's protections. While thrift deposits acquired pursuant to an Oakar transaction are insured by the SAIF, the election of the SAIF as the insurance fund has been required by law, not dictated by business judgment.
But now, just as banks are seeing the opportunity on the horizon to exercise their judgment, the rules may be changed.
This assault on equity may be avoided by drawing a distinction based on the circumstances surrounding the acquisition of SAIF-insured deposits. At a minimum, Oakar institutions should be allowed to convert to bank insurance for the former thrift deposits once the sun sets on the existing moratorium.
Clearly, the SAIF should not be allowed to be dissipated. However, the proposal offered above is unlikely to result in a significant drain on the SAIF.
First, an Oakar institution might elect not to convert.
Until there is a differential between the SAIF premiums and the Bank Insurance Fund premiums, there is no reason to pay the large exit and entrance fees associated with conversion. The earliest such a differential could arise is 1998, according to the FDIC's calculations.
Second, it is not axiomatic that a differential will result even then.
Many Oakar institutions likely will opt instead to continue with SAIF insurance, assuming that two insurance funds will merge within the next few years. Under this scenario, any economic incentive to convert would be diminished by the exit and entrance fees.
Third, even if every Oakar institution converted, the attendant loss of premiums would represent less than one-sixth of the total SAIF premiums currently assessed.
Finally, by allowing Oakar institutions to convert, Congress would be lowering the liability base from which the SAIF calculates the amount of premiums required, thereby making it easier to achieve the 1.25% reserve ratio.
While the numerator would be reduced by the loss of premiums that converting Oakar institutions otherwise would pay, the denominator similarly would be lowered by the reduction of liabilities that would no longer be SAIF insured.
Thus, the proposed modification to the extension would not create significant problems for the SAIF. If, on the other hand, Congress adopts the extension that is in the House bill, many banks will feel that Congress pulled the ball away just as the banks were about to kick.
While this may make for good cartoons, it doesn't make for good legislation.