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1999 Annual Report
Report has a new look. In the past, it was a publication of record for events the previous
year. Beginning this year, it will also include an essay on a banking, financial or
economic issue of current importance. This essay is not intended to provide a roadmap for
legislative or regulatory actions. Rather, it seeks to provide perspectives.
The 1999 Annual Report examines a seemingly straightforward but, in fact, very complex topic: deposit insurance.
As of the end of 1999, the Bank Insurance Fund (BIF) stood at almost $30 billion and its reserve ratio at 1.36 percent. The Savings Association Insurance Fund (SAIF) stood at more than $10 billion and its reserve ratio at 1.45 percent higher than the BIF ratio. Given these benign conditions and the current strong economy, there is no better time than now to look at how we can strengthen our deposit insurance system. Consequently, the FDIC is undertaking a comprehensive review of the deposit insurance system we are taking a fresh look.
A review is necessary for a number of reasons.
First, premiums are based on risks, and we need to measure those risks more effectively and we need premiums that reflect the risks more accurately. Under our current premium system, more than 9,500 insured institutions are grouped into the same risk category the zero premium category. We believe there are some discernible differences among the risk profiles of these institutions, and we are going to look for straightforward and compelling ways of making appropriate distinctions and charging premiums accordingly.
The supervisory process makes distinctions among these 9,500 banks, and we should be able to develop a consistent approach to pricing that reflects those differences. The market may help us to price risks from the large complex banks.
Second, a review is necessary because our current system is raising issues of fairness. Deposit growth is currently free for most institutions, and some are growing rapidly. A recent announcement by a Wall Street investment firm that it plans to sweep uninvested funds into insured deposit accounts is particularly significant for the future of the funds.
Some institutions have never paid anything into the deposit insurance funds; meanwhile, there are many other institutions that are losing core deposits and have paid substantial premiums in the past to recapitalize the funds. We need to consider alternative pricing arrangements that might distribute the costs of the deposit insurance system more fairly.
There are other areas where we need to consider reforming the system. One involves the rules for maintaining our insurance funds at appropriate levels. The current system resembles a "pay-as-you-go" approach, where the FDIC is forced to charge institutions the most during bad times, when they can least afford to pay. Arguably, this is not how an insurance system is supposed to work.
Finally, there have been calls to reevaluate deposit insurance coverage limits. The $100,000 limit has been in place for 20 years the longest period in the history of the FDIC without an increase in the coverage limit. We must be cautious, however, when it comes to expanding the federal safety net.
The banking and thrift crisis a decade ago demonstrated that the stakes could be enormous for the U.S. taxpayers, and we must be mindful that the reforms enacted in the wake of that crisis have not been tested by an economic downturn.
We intend to study the potential consequences of higher coverage very carefully before drawing any final conclusions.
There is a danger that in its relative simplicity the coverage issue could overshadow other deposit insurance issues that the public debate on deposit insurance could boil down to the question of how high coverage should be. That would be a mistake. It would address one issue with the current system, but coverage is just one issue among many. Increasing coverage raises many related considerations. In fact, expanding coverage alone would increase the fairness problem because new and higher growth institutions wouldnt be asked to contribute more. And increasing coverage without fine-tuning the risk-based pricing system could reduce market discipline.
Reform will not be quick or easy. It will require a lot of thoughtful work, but we are building a foundation for action. The FDIC has held one roundtable discussion in Washington where we heard from the American Bankers Association, the Independent Community Bankers of America, Americas Community Bankers, the American Association of Retired Persons, Consumer Action, the National Bankers Association, and two noted academics. We held outreach sessions in Minneapolis, Kansas City and Dallas, where we listened to the views of bank CEOs on a wide range of deposit insurance issues. We are doing research, and are commissioning independent analysts to examine specific topics in deposit insurance reform, as well.
After careful review, the FDIC will prepare a set of policy recommendations. With the exception of our long-standing position that the BIF and SAIF should be merged, we have not endorsed anything, but we are looking at the key issues presented by our current deposit insurance system.
The FDIC has served the public well over the years by providing certainty and stability.
By refining our deposit insurance system by eliminating inequities and addressing unintended consequences we can improve the service we provide the public.