Following are excerpts from the speech that FDIC Chairman Ricki Tigert Helfer delivered Feb. 14 in Honolulu at the annual convention of the Independent Bankers Association of America.
As you know, the FDIC board two weeks ago proposed significantly lowering deposit insurance premiums for banks. Sometime around midyear, the Bank Insurance Fund will be recapitalized at the level mandated by Congress. By that point, the banks will have built up a reserve of nearly $25 billion.
Under the FDIC's proposal, premiums would drop significantly for nine out of 10 banks in the country. For the banking industry as a whole, assessments would fall from about $6 billion a year to $1.1 billion.
The Savings Association Insurance Fund is much further away from achieving the target of $1.25 in reserves (for every $100 of domestic deposits) than the BIF (Bank Insurance Fund) is. SAIF stands at about $1.8 billion - more than $6.8 billion short of the $8.6 billion it needs to capitalize fully.
As we all know, the market is highly sensitive to competitive advantages and disadvantages. So how did the market react in the first week after the FDIC proposed the new premium schedules for banks? The value of publicly traded SAIF-insured institutions rose 5.9%, while the value of publicly traded BIF-insured institutions rose 3.3%. The Dow Jones average over that week rose 2.7%.
Having said all that, however, I must note that the thrifts do have a problem in capitalizing the SAIF - and a SAIF problem is an FDIC problem. As insurer, we have to be concerned that the SAIF is undercapitalized. The answer to the problem is not to disadvantage the banking system. The answer is to build an insurance fund for the thrifts that is just as strong and solid as the fund the banks enjoy.
That is not easy.
The past still haunts the savings and loan industry, and particularly the SAIF. Forty-five cents out of every dollar that flows into the SAIF flows out to service bonds that paid for thrift failures before the creation of the Resolution Trust Corp. If you have ever tried to fill a bucket with a big hole in its side, you know what I am talking about. This drain on the SAIF - to meet payments on Financing Corp., or Fico, bonds - totals $779 million a year. This Fico obligation is the major obstacle to the capitalization of SAIF.
If there had never been a Fico obligation, the SAIF would capitalize in 1996. If the Fico obligation were removed today and we maintained today's premiums, the SAIF would recapitalize in 1998. After that, a significant differential would be much less likely between BIF and SAIF assessment rates.
Thrift institution executives have told me that if the Fico obligation were lifted from them, they could live with the premium differential for the three years it would take the SAIF to capitalize.
Simply put, the SAIF problem is a Fico problem.
Keep in mind that the assessment base available to SAIF to meet Fico obligations has been shrinking, although the shrinkage has slowed considerably in the last year.
Why?
The law created two types of institutions whose SAIF assessments cannot be used to meet Fico interest payments - so-called Oakar and Sasser institutions - and over time the number of these institutions has grown. Together, Oakar and Sasser institutions represent 30% of the SAIF assessment base. The remaining 70% of the assessment base is responsible for the Fico obligation.
Over the last two years, the rate of shrinkage in the assessment base available to meet the Fico obligation has slowed. The base shrank by only 1.8% in the first three quarters of 1994, compared with the record high rate of 7.6% in 1990. The current experience explains why FDIC economists project a 2%-per-year shrinkage rate going forward.
The FDIC research division has stress-tested SAIF under a variety of conditions, including the growth or shrinkage of thrift deposits, the percentage of thrift industry deposits held by Oakar and Sasser institutions, and projected thrift failures measured by assets.
Here are some of the economists' findings:
If the deposit base shrinks 2% per year, the Fico bonds can be serviced well into the second decade of the 21st century. If the base shrinks substantially more, then servicing the Fico bonds could be a problem earlier, perhaps before the year 2000.
If the Oakar and Sasser portion of SAIF continues to grow, it will become increasingly difficult to make Fico interest payments from current SAIF assessment revenues. This would be true regardless of a BIF-SAIF premium differential.
In contrast, if thrift deposits were to grow dramatically, it would not significantly change the time it takes for SAIF to capitalize. Changes in troubled assets and interest rates would have far greater effect on the condition of the SAIF than changes in the growth of the deposit base would.
If a 20-basis-point - to use a round number - differential exists between BIF and SAIF assessment rates and we return to the interest rates and asset quality conditions of the early 1990s, it is projected that assets at failed SAIF-member institutions could increase as much as $2 billion over five years.
In setting a $1.25 target, Congress recognized that $1.8 billion is not enough to ensure a sound SAIF - one with a large cushion to absorb the costs of thrift failures. The failure of a single large institution or an economic downturn leading to higher-than-anticipated losses could render the fund insolvent.
This is true regardless of whether there is a BIF-SAIF premium differential. It is clear that the SAIF's problem is not a premium differential between SAIF and BIF.
The SAIF's problem is meeting its Fico obligation - regardless of whether a differential exists. What is to be done? A number of proposals have been advanced. One is to make Oakar and Sasser assessment revenue available to meet Fico obligations. That approach would slow capitalization of the SAIF, however, without solving the fundamental problem. The FDIC's goal is recapitalization of the SAIF as soon as feasible.
Another proposal is to use Treasury funds appropriated for the RTC to remove the Fico obligation. This could be done by changing an interpretation of the Congressional Budget Office and by legislation.
A third proposal is for BIF and SAIF to share the obligation 50-50. Finally, there has been talk of merging the funds.
One does not need a crystal ball to see that bankers have a vital interest in assuring that a reasonable and fair solution emerges to the Fico problem. I urge you to be a part of the dialogue. Some elements of the banking industry believe that if they ignore the problem, it will go away. That mentality is wrong-headed.
