FDIC Federal Register Citations

From: Bert Ely [mailto:bert@ely-co.com]
Sent: Saturday, March 10, 2007 6:24 PM
To: Comments
Subject: Large-Bank Deposit Insurance Determination Modernization Proposal RIN 3064-AC98

To whom it may concern:

I am writing to submit as a comment on the FDIC's Advanced Notice of Proposed Rulemaking for its Large-Bank Deposit Insurance Determination Modernization Proposal (RIN 3064-AC98) the following article of mine on this ANPR that the American Banker newspaper published on March 2, 2007.

Bert Ely
Ely & Company, Inc.
Alexandria, Virginia
________________________

Viewpoint: Market Does Not Need FDIC's Help With Big Banks
American Banker Friday, March 2, 2007
By Bert Ely

A year ago the Federal Deposit Insurance Corp. proposed that large banks and thrifts aggregate or link accounts by depositor.

In the extremely unlikely event that a large bank failed, the FDIC could then act, on a few hours' notice, to protect just the insured deposits of each depositor.

Bankers hoped this proposal would die after the FDIC received nearly unanimous negative comments on it. Unwilling to surrender, in December the FDIC issued a slightly revised Advance Notice of Proposed Rulemaking with the same title as before: "Large-Bank Deposit Insurance Determination Modernization Proposal." Comments on this notice are due March 13.

This proposal makes absolutely no economic sense. It will be costly yet provide absolutely no benefit to the FDIC or taxpayers.

The essence of the proposal: Each large bank or thrift would link all deposit accounts of a depositor electronically so as to "determine the insurance status of each depositor in the event of a depository institution failure."

This many-flawed proposal is built on a false premise ¬ that large banks fail so quickly that the FDIC must be prepared to act on a day's notice to resolve the failure. Nothing could be further from the truth, especially since the banking reforms of the early 1990s.

Only small banks fail suddenly, often when fraud is uncovered which renders the bank insolvent. This appears to be what happened in the sudden failure last month of Metropolitan Savings Bank, a $16 million thrift.

The post-reform failures "have been of modest size," as the FDIC admitted in the notice. The largest was the closely held Superior Bank FSB, which had $1.7 billion of deposits in 90,000 accounts, less than half the number of accounts the FDIC considers to be a "large bank." Not only was Superior not a large bank, but it also had been failing for years.

With few exceptions, today's large banks have broad stock ownership, which creates effective market discipline. If a large bank slides into trouble investor pressures force management changes, recapitalizations, or even the bank's sale to a stronger bank.

The FDIC rationalizes its focus on large banks by asserting that they "are more likely to fail due to liquidity reasons," and that they are "more susceptible to a liquidity insolvency." Leaving aside the fact that there is no such event as a liquidity insolvency, large banks routinely access more varied sources of liquidity than small banks.

Despite the clear evidence that failures are a small-bank problem, the FDIC proposes to impose substantial costs on the nation's largest banks without any measurable benefit to anyone, except to software vendors who claim it will not cost banks much to aggregate deposit data by depositors. Not surprisingly, the FDIC still cannot provide a cost-benefit analysis to justify this "modernization."

Going beyond its initial proposal, the FDIC now proposes to divide large banks into two categories ¬ Tier 1 banks "would include the largest, most complex institutions," while Tier 2 banks would include those "of lesser complexity."

The Tier 1 banks "would be required to have systems in place that could provide a unique depositor identification for each depositor," and meet five other requirements. Tier 2 Covered Institutions would not have to have a unique identifier for their depositors.

In effect, the larger the bank, the more costly this proposed regulation, even though the largest banks are least likely to fail overnight.

Interestingly, the notice does not state how Tier 1 banks would be differentiated from Tier 2 ones. The absence of this differentiation is just one reason this "modernization" proposal should be buried, for good.

Instead of worrying incessantly about healthy banks subject to market forces, the FDIC should focus on ferreting out frauds in small banks and on resolving obviously weak banks. It should apply its proposed deposit-linking scheme only when a large bank's Camels rating drops below 2.

If the FDIC succeeds in applying this proposal to large banks, it will not be long before it applies to all banks. For that reason, all bankers should strongly recommend to the FDIC that it abandon this wasteful, unnecessary proposal.

Mr. Ely, the principal at Ely & Co. Inc., is a financial institutions and monetary policy consultant in Alexandria, Va. He has consulted on deposit insurance-related issues for trade associations and individual companies, but the views expressed above are his own.