WASHINGTON — Senate Banking Committee Chairman Paul Sarbanes called Thursday for a prompt investigation into the failure of $2.3 billion-asset Superior Bank FSB and said that he was “very much concerned” about the looming cost to the deposit insurance system.

The Maryland Democrat appeared to be laying the groundwork for hearings on the subject by ordering a General Accounting Office probe and urging the inspector generals of the Treasury Department and the Federal Deposit Insurance Corp. to publicize the results of their planned examinations.

“The magnitude of the loss in this case raises questions about the effectiveness and the implementation of the Federal Deposit Insurance Corp. Improvement Act by the financial regulators and warrants an examination by your agency,” Sen. Sarbanes wrote in letters to the three agencies.

In his letter to the GAO’s comptroller general, Sen. Sarbanes asked for specifics on the fall of Superior as well as other cases “to see whether similar issues have been raised in other institutions, and whether and how the regulatory early warning system is working.”

Speaking at a subcommittee hearing on deposit insurance reform, he added that he thought Superior’s failure was “a timely reminder of the role of the insurance fund … and the potential exposure” if a crisis similar to the S&L failures of the 1980s develops.

After the failure of a large financial institution, the inspector general of its primary regulator is required to conduct an investigation, but it generally discloses the results only at the request of Congress.

Superior’s failure, which is expected to be the costliest to the thrift insurance fund in more than five years, was discussed several times at the insurance reform hearing as a reason for comprehensive reform and for institutions to begin paying premiums into their funds again.

Currently 92% of institutions pay nothing in premiums, but they would be assessed a steep fee if the ratio of federal reserves to insured deposits drops below 1.25% in either fund and is not recapitalized within a year. Banks generally oppose the idea of steady premiums for all.

“Any movement in the funds down toward 1.25% increases the anxiety level of bankers and regulators alike, whether that movement comes from fast growth of certain institutions, or from institution failures like we saw last Friday in the case of Superior Bank,” said Sen. Tim Johnson, chairman of the financial institutions subcommittee.

“The numbers are still preliminary, but cost estimates on the failure start at $500 million, and could reduce the [Savings Association Insurance Fund] ratio by 7 basis points,” the South Dakota Democrat said. “I would urge caution against becoming complacent in good times, and resisting changes that simply make sense over the long term and have the potential to enhance the stability of our system.”

During the Senate hearing, members of the committee showed that they are very interested in reform, and several appeared to challenge the industry representatives on their views.

Though the industry presented a largely united front on their stance, senators seemed more divided. Sen. Phil Gramm of Texas, the committee’s ranking Republican, and Sen. Jim Bunning, R-Ky., said they supported reform but were opposed to any increase in the current coverage limit of $100,000 per account. Their comments echoed testimony by Federal Reserve Board and Treasury Department officials at a House panel’s hearing last week.

The two GOP senators rejected the argument put forward by Robert I. Gulledge, the chairman, president, and chief executive officer of Citizens Bank in Robersdale, Ala., and the chairman of the Independent Community Bankers of America, that deposits were leaving community banks because customers wanted higher coverage limits.

“I have concerns about raising the deposit insurance levels,” Sen. Bunning said. “I’m very leery for putting the taxpayer on the hook for higher levels of coverage. I believe the deposits have shrunk in community banks because depositors are going to higher returning vehicles other than savings accounts.”

Though Sen. Johnson acknowledged finding a consensus on coverage levels may be the lawmakers’ biggest challenge, he said he did not want to abandon proposals to index and raise the limit.

“I’m not prepared to throw that out,” he said in an interview after the hearing. “I want to take a look and see if there is a middle-ground option, like less of an increase in a dollar figure, or look at raising the limits for retirement accounts and municipal deposits.”

But he said inaction on that issue was like “saying that the minimum wage of 1974 should be the same minimum wage as 2001.”

Both Sen. Sarbanes and Sen. Johnson, as well as several other subcommittee members, appeared to endorse the FDIC’s recommendation to revise the risk-based premium system to begin charging all institutions small, steady fees for the first time in five years.

“I’m interested in the fact that 92% of institutions are well capitalized,” Sen. Sarbanes said. “If you heard about a teacher that gives 92% of students in class an A, you would say ‘I don’t know about that system — she needs to make more differentiation.’ That is presumably what the FDIC is trying to do.”

Both Curtis Hage, the chairman, president, and CEO of Home Federal Bank in Sioux Falls, S.D., and the first vice chairman of America’s Community Bankers, and Jeff L. Plagge, the president and CEO of First National Bank of Waverly in Iowa, who testified on behalf of the American Bankers Association, said they were vehemently opposed to any such proposal.

Sen. Johnson said that he expects to hold another hearing in September or October, and that he has met with Rep. Spencer Bachus, the House’s leading reform proponent, to craft similar legislation.

The senator said he hopes to introduce a “bipartisan, bicameral” bill in the fall.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.