“Perils of Pauline” Management of the Deposit Insurance Funds

From The Nader Letter

May 1996

The Clinton Administration and the Congress are in a mad scramble to come up with a solution to the problems created by an undercapitalized Savings Association Insurance Fund (SAIF) and a growing competitive disadvantage for the thrift industry vis a vis the nation’s commercial banks.

The problems could have been avoided with just a modicum of foresight on the part of the Congress and the Federal Deposit Insurance Corporation a year ago.

But, in a rush to reward the banking industry, President Clinton’s appointee as Chair of the Federal Deposit Insurance Corporation (FDIC) — Ricki Tigert Helfer — capped the Bank Insurance Fund (BIF) at its statutory minimum of 1.25 percent of insured deposits. Before the year was out, premiums for banks were eliminated except for a handful of risk-prone institutions.

Meanwhile, the reserves in the SAIF fund were far short of their statutory minimum and this left the thrifts paying 23 cents per $100 of deposits. On top of that, about $800 million of the thrifts’ premiums are diverted from the SAIF fund annually to pay off the Financing Corporation (FICO) bonds voted by the Congress in 1987 in a failed attempt to bail out the savings and loans.

Suddenly, it dawned on the Clinton Administration and the Congress that the equation didn’t work with one class of depository institutions paying the maximum for insurance and another class riding high on free government insurance.

After wringing their hands for months over the dilemma, the House and Senate Banking Committees decided to cram an insurance “fix” into last year’s Budget Reconciliation resolution. The plan involved a one-time payment of about $6 billion by the thrifts to bring their insurance fund up to the statutory minimum of 1.25 percent of deposits — with the banking industry picking up most of the $800 million annual bill for the old FICO bonds. The cost to the banks would have been roughly 2.5 cents per $100 of insured deposits. The plan would have allowed insurance premiums paid by thrifts to drop to a level more competitive with the banks.

As predicted, the Budget Reconciliation measure was vetoed by the President on other grounds and the insurance fix went down the tubes.

This sent Congress back to the drawing board. House Banking Committee Chairman Jim Leach — stung by the banks’ criticism of the SAIF plan — decided that he would tap the bulging bank accounts of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Bank Corporation (Freddie Mac) to help pay for the FICO bonds. But, a quick lobbying campaign by Fannie and Freddie killed that idea before it got out of the word processors.

Congress and the Clinton Administration have returned to the idea of the banking industry sharing the cost of the FICO bonds as a means of closing the premium disparity between the two industry groups.

But, the banks aren’t buying. Lobbyists — from both the Independent Bankers Association and the American Bankers Association — are battling hard against being part of any plan that requires a bank contribution. Despite a plea from President Clinton, the banks were successful in stripping the deposit insurance plan from the last short-term funding measure. Now, Congressional proponents of the plan are talking about tacking the measure on a “must” piece of legislation such as the possible gas tax repeal or a budget bill should one emerge.

A year ago, before the FDIC decided to cut bank premiums from 23 cents per $100 of deposits to zero, the attitude of the banks might have been dramatically different. Then, the industry might well have been coaxed to the negotiating table and the Clinton Administration and the Congress likely could have worked out a compromise that would have included a moderate cut in premiums for the banks combined with a deal on the FICO bonds.

Such an approach not only would have solved the thrift problem, but would have allowed the bank insurance fund to continue to grow as a bulwark against a future taxpayer bailout if bank fortunes go sour.

But, now the banks are fat and happy with the feast of free insurance provided by Mrs. Helfer’s FDIC — and in no mood to give any of it back to pay for the FICO bonds — or even to strengthen their own deposit insurance fund.

Likely, some last-minute solution to the SAIF problems will be enacted. The stakes are too great to allow it to flounder indefinitely. Already, thrifts are moving deposits into affiliates that are members of the bank insurance fund, further weakening SAIF. And without a solution, the FICO bonds may face default, an event that would mean a taxpayer bailout.

But, the current management of the deposit insurance funds is absurd — and the blame rests equally with the Executive and Legislative Branches.

When Congress awoke form its deep slumber in the late 1980s., there was genuine bi-partisan alarm over the careless manner in which the deposit insurance funds had been managed. President Bush and leaders from both parties in the Congress vowed “never again” would the taxpayers be subjected to a “Perils of Pauline” style of management of the insurance funds. But, for the past year, the FDIC and the Congress seem to have gone back to business as usual.