Thanks to one of the biggest corporate giveaways during the Clinton Administration, most of the nation’s commercial banks have been enjoying the benefits of free federal deposit insurance since 1995. Now the decision to let banks drop premium payments when the bank insurance fund’s reserves reached the statutory minimum of 1.25 percent of insured deposits is coming back to haunt Federal Deposit Insurance Corporation and the banking industry.
New bank failures, a growing number of problem banks and an unanticipated surge in deposits are about to drop the reserves below the required minimum of 1.25 percent-an event which overnight could trigger a requirement for the banks to start paying premiums of 23 cents per $100 of deposits to build the insurance fund back to the 1.25 percent level. The number of problem banks rose to 95 in the fourth quarter of last year, an increase of 28 percent-the largest in a decade.
This is a huge shock to an industry which has been paying zero premiums. Only the most risk-prone-about eight percent of the banks-have been required to pay premiums of any kind to support the fund since 1995. This has meant a bonanza of between five and six billion dollars annually for the industry. For a $100 million bank the elimination of the 23 cent premium means about $230,000 savings annually, according to the FDIC.
When the free insurance went into effect in 1995, the bank lobbyists tried to quiet the controversy with suggestions that the savings would be passed along to the consumers of banking services. Another empty promise. In fact, bank fees have increased each year while the industry enjoyed free government insurance. Today, banks rake in an estimated $20 billion annually in fees on everything from charges for telephone inquiries to the use of deposit slips.
Last year, FDIC drafted a “reform” plan which would remove the restrictions on the FDIC’s ability to charge risk-based premiums to all depository institutions regardless of the level of the fund. Donald Powell, the new chairman of the FDIC, urges that any reforms adopted by Congress allow flexibility for the FDIC to set insurance fund targets based on economic and banking conditions. This would remove the “boom to bust” cycles of the current policy which allows wild swings from zero premiums to 23 cents per $100 of deposits.
Typically, Congress is employing that overused and often misused word “reform” to hide new risks for the taxpayers. Representative Spencer Bachus, chairman of the Financial Institutions Subcommittee of the House Financial Services Committee, has succeeded in advancing his proposal for a hike in the insurance limit from $100,000 per depositor to $130,000. Others are pushing for the level of the insurance coverage to be increased by tying it to the consumer price index.
Using the current $100,000 insurance limit as a benchmark is ludicrous. The figure (raising the limit from $40,000 to $100,000) was slipped quietly into a House-Senate conference report in 1980 without hearings and minus any meaningful analysis. Its only purpose was to meet the demands of the lobbyists for a savings and loan industry desperate to compete with the big money center banks for the deposits needed to fuel speculative investments.
Former FDIC Chairman William Seidman charged that the 1980 increase in insurance coverage gave the savings and loans “a $100,000 credit card issued by Uncle Sam and made the government a full partner in a nationwide casino….”
Congress needs to find ways to limit the liability of the insurance funds and the risks to the taxpayers, not increase them. There is no justification for an increase in the insurance coverage which many experts feel is already excessive and a negative influence on the safe and sound operation of depository institutions.
But if the proposals for increases in the coverage seem dangerous, the banking lobby has another even more self-serving and lucrative proposal it would like to attach to that all purpose word “reform.” This involves “rebates” (refunds) paid out of the deposit insurance fund when the reserves grow beyond current needs. No “reform” could be sweeter (or more lucrative) from the viewpoint of the banks.
The proposal provides an insight into the banking industry’s attitude about the insurance funds. Bankers regard the deposit insurance funds’ reserves as their money, not the government’s. As Fordham University professor and former Assistant Secretary of the Treasury Richard Carnell says, “for bankers to call the bank insurance fund reserves our money is no more true than for persons insured by AIG, Chubb or Travelers to call those companies’ reserves our money.”
The value of the insurance fund in building confidence in the banking industry is priceless. It is the glue that holds the banking system together. The premiums paid by the banks now or in the future pale beside the role that the federal government and the taxpayers play in providing confidence in the system. The industry couldn’t afford the premiums that would actually compensate for this backing. Nor could the industry afford-or even find-the private insurance that could match the stability created by the federal government’s deposit insurance system. So, for the industry to suggest that it is owed a “rebate”-a refund-is the ultimate reach for corporate welfare.
Behind the idea of refunds is also the banking industry’s belief that there should be a “cap” on the size of the insurance funds. That is the same concept that led the present unworkable cap of 1.25 percent of insured deposits. There is sentiment at FDIC and in the Congress to replace that with a new “range” of caps between which the insurance funds could fluctuate. The fund should be allowed to continue to grow with the FDIC retaining the flexibility to adjust premiums according to banking conditions and risk. The idea of free insurance should be off the table for all time.
“Reform” is always a tricky word in Congressional rhetoric. Especially so in the arcane world of banking. Don’t be surprised if this latest banking reform deteriorates into little more than another version of the savings and loan deposit insurance reforms of 1980 which helped fuel that industry’s demise and lightened taxpayers’ pockets by several hundred billions of dollars.