WASHINGTON - Uniting on deposit insurance reform, key regulators and Bush administration officials on Thursday strongly endorsed many of the recommendations made by the Federal Deposit Insurance Corp. in April.
Speaking before a House Financial Services subcommittee, Federal Reserve Board Governor Laurence H. Meyer and Assistant Treasury Secretary for Financial Institutions Sheila C. Bair agreed that the bank and thrift funds should be merged, all institutions should be charged premiums, and banks and thrifts should get rebates based on past contributions.
But the two also voiced some key differences with the FDIC and each other.
Chief among their targets was an FDIC proposal to raise the $100,000 coverage limit per account by indexing it to inflation, which both the Fed and Treasury officials knocked. Ms. Bair also said that proposed refinements to risk-based premiums - a critical component of the FDIC's recommendations - would be too complicated and volatile.
"Banks and thrifts benefit every day from deposit insurance, and they should compensate the FDIC for that benefit, preferably through relatively small, steady premiums," she said.
"Although the idea of risk-based premiums has conceptual appeal, we would give priority to reforms that would charge every institution a premium on current deposits that is relatively stable over time, and we would prefer not to extend the complexity of the risk-based premium structure at this stage. We would recommend that any further adjustments to risk-based premium categories and rates be pursued at a later stage."
Though those differences could prove significant, many observers noted that the panel, which also included Comptroller of the Currency John D. Hawke Jr. and departing Office of Thrift Supervision Director Ellen Seidman, largely agreed on the main issues. For example, all four said that Congress should replace the statutory threshold that requires the FDIC to keep $1.25 in reserves for every $100 in insured deposits with a more flexible range.
The financial institutions subcommittee hearing was the first time that Bush administration officials and the Fed had made detailed responses to the FDIC recommendations. Industry representatives saw good and bad in Mr. Meyer's and Ms. Bair's comments.
"I think the result is a mixed bag for the chances of deposit insurance reform," said Edward L. Yingling, chief lobbyist for the American Bankers Association. "On the one hand, you do have everyone saying this is the time to do it, and talking about the same list of issues. On the other hand, particularly from the community bank point of view, their opposition to even indexing the coverage limit and their emphasis on charging premiums is not good for the prospects of the bill."
In their testimony, both Mr. Meyer and Ms. Bair outlined the current system's many flaws, including the fact that 92% of institutions pay nothing in premiums because they are in the best-rated risk category and the reserve ratio is above 1.25%.
In particular, Mr. Meyer cited problems caused by the "free riders" - a term that includes two brokerage houses that have moved billions of dollars to insured accounts without paying new premiums and hundreds of other new institutions that have never paid for deposit insurance.
"Included in this group were banks that have never paid any premium for their, in some cases, substantial coverage and fast-growing entities whose past premiums were extraordinarily small relative to their current coverage," he said in his written testimony. "We believe that these anomalies were never intended by the framers of the Deposit Insurance Fund Act of 1996 and should be addressed by the Congress."
The regulators also agreed that the current system is pro-cyclical because no premiums are collected during relatively good economic times but banks are charged steep fees in worse economic periods. For example, if the fund falls below 1.25% and is not recapitalized within a year, banks must be assessed a 23-basis-point premium.
Regulators said that the current hard reserve ratio of 1.25% should be scrapped and the FDIC given more flexibility. Mr. Meyer and Ms. Bair said the agency should have more discretion about when to impose surcharges and how large they should be.
"The FDIC board should have some discretion to adjust the range within which the reserve ratio may fluctuate in response to changes in industry risks and conditions," Ms. Bair said in written testimony.
By contrast with Ms. Bair, Mr. Meyer spoke favorably of the FDIC plan for instituting more refined risk-based premiums.
"The FDIC has pointed us in the right direction," he said in response to a question about the plan. "They have a very reasonable methodology - a challenging one - that can be refined over time, but it is a good direction to go in."
But Mr. Meyer and Ms. Bair both threw cold water on one FDIC recommendation - tying the coverage level per account to inflation. Each argued that depositors are not asking for an increase and that proof is lacking that the current limit is helping cause a funding shortage at community banks. While several lawmakers continued to show support for the idea, the regulators pulled no punches.
"One consistent theme in these questions is that funds are flowing out of community banks because of the coverage limit - and we just don't see evidence that coverage limits have anything to do with it," Ms. Bair said.
Related Content Online
Testimony of Governor Laurence H. Meyer on Federal Deposit Insurance Reform, before a committee of the U.S. House of Representatives
Deposit Insurance Reform Testimony of Sheila C. Bair Assistant Secretary for Financial Institutions (Source: U.S. Dept. of Treasury)
