The Federal Deposit Insurance Corp. has released its recommendations for reforming the nation’s deposit insurance system, and the subcommittee on financial institutions of the House Financial Services Committee is holding hearings on FDIC reform.

However, neither the FDIC recommendation nor the proposed House bills take into account the needs of large depositors in banks like those represented by members of the Association for Financial Professionals.

Let’s be clear that the FDIC is not insurance for banks; it is insurance for bank depositors. Yet the voice of bank depositors is not being heard in this debate. In the same vein, when FDIC insurance assessments are to be paid, it is generally the bank deposit customer who actually pays. Large bank depositors pay these assessments as a direct pass-through based on the total deposit insurance premiums for business accounts. In this process the bank simply acts as an insurance agent, collecting premiums and sending them on to the insurer.

The Association for Financial Professionals is very much opposed to the FDIC’s giving rebates to banks from the Bank Insurance Fund. The reason is simply that there is no good way for such rebates to get to the correct party.

Since depositors with large balances paid the vast majority of the assessments, they should get any rebate. Few banks or customers keep the records to support doing that a decade after the assessments were paid. Even if one takes the wrong-headed view that banks should get the rebate, many of the banks through which the bulk of the assessments passed no longer exist in the same form today. Either they failed, were absorbed (in some cases, absorbed several times), and/or have absorbed others.

We association members favor legislation that has been proposed to give the FDIC latitude to manage BIF reserves within a range, rather than the 1.25% of insured deposits that is currently fixed by law. Such flexibility, for instance, would negate the need for rebates.

The legislative proposal also addresses the so-called problem of banks with rapidly growing deposits. The deposits of these banks, typically brokerage-related banks, do not pose risk to the BIF. Why? Because deposits, per se, do not create risk. (If one wants to question how the deposits are invested, that is a different debate.) The only problem these rapidly growing deposits cause is an arithmetic problem; they tend to decrease the surplus over the 1.25% fixed reserve floor. Repealing the fixed reserve level would resolve this.

The issue of raising the coverage level, either by simply doubling it or by indexing it, has drawn much news coverage and prompted many opinion pieces. From our association’s viewpoint, it does not much matter whether the coverage ceiling is $100,000, $200,000, or indexed; our members’ balances are typically multiples of those possible ceilings.

Since the deposit level of our typical member is far beyond the FDIC coverage level, these depositors do their own credit reviews of their banks and decide how much deposit exposure to tolerate — in effect, self-insuring. However, considering several important public policy issues, we do not agree with the proposals to increase the coverage level.

The coverage level increase to $100,000 in the 1980s proved the potency of “moral hazard.” We should not do that again. Studies recently quoted show that the most likely result of an increase in coverage would be for money to move from one bank to another. It is not good public policy to use deposit insurance to try to create a competitive advantage for some banks.

The FDIC’s current recommendations and the proposed legislation do not, unfortunately, address an issue crucial to those with large deposits in banks. There is no attempt to resolve the disparity between the balances covered by insurance and the balances on which assessments are based.

Regardless of what per-account level turns out to be covered, the current proposals still call for assessments to be based on total ledger deposits — regardless of how large they are. This is grossly unfair to banks and their customers.

Consider two hypothetical banks. Bank A has two customers each with $100,000 in deposits, and Bank B has one customer with a deposit of $400,000. Bank A causes two times as much exposure for the BIF than Bank B, but the latter pays two times as much for deposit insurance. The depositor in Bank B would pay an assessment based on $400,000 and get $100,000 of coverage. Out in the real world, insurance premiums are based on what is insured. Why shouldn’t FDIC assessments and coverage do likewise?

Mr. North is chairman of the financial markets task force of the Association for Financial Professionals in Bethesda, Md.

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