The recent debate about doubling the deposit insurance limit from its current $100,000 level ignores a very important question: How did we get to that level in the first place?
The short answer is that it was a mistake, actually one of the costliest ever.
The longer answer can be traced to the late-night handiwork of two savings and loan industry lobbyists 20 years ago, at a congressional conference committee meeting on the Depository Institution Deregulation and Monetary Control Act of 1980.
The first proposal, from Sen. Alan Cranston of S&L-dominated California, was to increase the $40,000 limit, which had been in effect since 1974, to $50,000 to help thrifts draw in deposits. FDIC Chairman Irving Sprague testified at the time that an accurate inflation adjustment of the $40,000 level would take it to $60,000. The $50,000 proposal remained in the bill until the infamous late-night conference.
According to "Inside Job: The Looting of America's Savings & Loans" by Stephen Pizzo, Mary Fricker, and Paul Muolo:
"While legislators were hammering out the details of the [1980 law] in a late-night session on Capitol Hill, Glen Troop, chief Washington lobbyist for the powerful U.S. League of Savings Institutions, and an associate convinced members of Congress to make the increase [to $100,000. 'It was almost an afterthought,' a House staff member later told a reporter."
The result: "Regulators later said this may have been the most costly mistake made in deregulating the thrift industry."
Former FDIC and Resolution Trust Corp. Chairman L. William Seidman, in his book "Full Faith and Credit: The Great S&L Debacle and Other Washington Sagas," said this provision "gave the S&Ls practically unlimited access to funds through a $100,000 'credit card' issued by Uncle Sam."
Mr. Seidman went on to say, "The thanks for this unfortunate piece of legislation goes principally, but not entirely, to [the House and Senate Banking Committee chairmen at the time] at the behest, it is said, of Sen. Cranston and the S&L industry's lobbyists at a late-night conference committee meeting."
The most disturbing aspect of the 150% increase in the insurance limit in 1980 is that there was no public interest in or need for it. Rather, the increase was driven by the powerful S&L lobby which, along with money brokers, later benefited from the flood of new deposits.
The public did not realize the monster Congress had created until taxpayers got the roughly $500 billion bill for bailing out the thrift industry.
Today, as in 1980 there is no public outcry for a doubling of the insurance limit, as wealthy depositors have numerous alternatives to arrange for FDIC insurance beyond $100,000 (for instance, opening accounts at multiple banks). The only outcry, as was the case 20 years ago, is coming from the industry covered by deposit insurance. And deposit brokers, as was the case in the early 1980s, are anxiously waiting in the wings to get their piece of the action.
The only convincing argument by proponents of the $200,000 proposal is the fact that $100,000 coverage in 1980 approximates $200,000 in current dollars. The argument that the current deposit insurance limit should be doubled for this reason does not follow, as it assumes that the $100,000 number was the "correct" one in 1980.
To adjust a 1980 number for inflation when, in fact, it was the "wrong" number to begin with, merely rubs salt in a still open S&L bailout wound. Had there been no such deregulation change in the limit in 1980 or perhaps even an increase to the then "correct" level of $50,000 (or even $60,000), the current inflation-adjusted value would be about $100,000, where we are today. Thus, there is no need for any change in the current limit. Period.
There are many more arguments against the $200,000 proposal, and they are summarized in my testimony before the April 25, 2000, FDIC Roundtable (see www.FDIC.gov), which represented the beginning of a comprehensive review of deposit insurance reform options by the FDIC.
But FDIC Chairman Donna Tanoue must be commended for her push to modernize our insurance funds and regulatory apparatus to keep pace with financial modernization. I have recommended a number of deposit insurance reforms, including:
- The bank and thrift insurance funds should be merged ASAP without any strings attached.
- There should be no cap on the size of the merged fund and no rebates should be paid.
- All banks should pay insurance premiums, with special deposit assessments for de novo banks, very rapidly growing ones, and others posing special risks to the insurance fund. Also, there should be an explicit recognition of the additional risk of "too big to fail" banks in the form of a special deposit assessment.
- The Office of Thrift Supervision should be merged into the Office of the Comptroller of the Currency as part of a longer-term consolidation of bank regulators.
- Market discipline should be significantly expanded, beginning with public disclosure of information on the safety and soundness of banks and thrifts.
- Bank regulatory and supervisory discipline should be improved, including increased training of examiners at large, complex banking organizations that have nontraditional business lines.
- Disclosure of non-FDIC-insured bank products, especially those sold in bank lobbies, should be expanded.
Mr. Thomas is a lecturer in finance at the University of Pennsylvania's Wharton School and the author of "The CRA Handbook."
