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.
Annual Report examines a seemingly straightforward but, in fact, very complex topic:
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
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
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
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
By refining our deposit insurance system by eliminating inequities and
addressing unintended consequences we can improve the service we provide the