Ricki Tigert Helfer
Federal Deposit Insurance Corporation
Government Affairs Conference
America's Community Bankers
March 14, 1995
I grew up in Smyrna, Tennessee -- southeast of Nashville -- and
down the road a piece from Murfreesboro -- home of Middle
Tennessee State University -- a town of about 50,000 people now,
but one that was smaller when I was growing up. If you were
among my neighbors back then and you wanted a home mortgage, you
went to Murfreesboro Federal Savings and Loan -- one of hundreds
of Federal S&L's created in the mid-1930s after Congress passed
the Home Owners Loan Act. In fact, from the beginning of 1934 to
mid-1935 -- hardly a boom time for any other business -- nearly
450 new federal savings and loan associations were chartered --
and more than 300 state-chartered institutions were converted.
At that time, the newly created Federal Home Loan Bank Board
actively promoted the formation of new federal S&Ls by having its
employees go from town to town to persuade local businesspeople
to organize new institutions.
Murfreesboro Federal grew along with the town. Reflecting some
of the changes your industry has gone through, it is now known as
Cavalry Banking -- A Federal Savings Bank. Ed Loughry, Cavalry
Banking's President and CEO, is here today. I have it on good
information that Cavalry Banking is still working to build
When I think of the Savings Association Insurance Fund, I think
of institutions like Cavalry Banking.
Of course, I also think of institutions like Great Western and
Home Savings, too, and after the last two weeks or so, I must say
I am thinking about them a lot -- as I have told Jim Montgomery
and Charlie Rinehart.
As I have said on a number of earlier occasions, the thrift
industry has a problem capitalizing SAIF and a SAIF problem is a
problem for the Federal Deposit Insurance Corporation. In other
words, it is not your problem, it is our problem.
No one understands that problem better than you do.
Put simply, the past still haunts the savings and loan industry
like the family curse haunts the characters in a Southern gothic
novel -- part of my literary heritage. Forty-five cents out of
every dollar that flows into the SAIF flows out to service bonds
that paid for thrift failures in the mid-1980s before the
creation of the Resolution Trust Corporation.
As I have said before -- and will say again -- if you have ever
tried to fill a bucket with a big hole in its side, you know what
I am talking about.
This drain from the SAIF -- to continue the metaphor -- to meet
payments on Financing Corporation or "FICO" bonds -- totals $779
million a year. The FICO obligation is the major current
obstacle to the capitalization of SAIF.
There were two other obstacles in the past as well. From 1989
through 1992, the Federal Savings and Loan Insurance Corporation
Resolution Fund and the Resolution Funding Corporation drained
SAIF revenues. Together, the three obligations -- FICO, REFCORP
and FRF -- absorbed 95 percent of total SAIF assessment revenue
in those years -- about $5.7 billion.
Without those three diversions syphoning-off revenues, the SAIF
would have fully capitalized last year. Without FICO alone, it
would have fully capitalized in 1997, based on the latest
numbers, including data from the fourth quarter. Instead, today
it is grossly undercapitalized.
The SAIF -- as of year-end 1994 -- had $1.9 billion in reserves.
It needs approximately $6.7 billion to be fully capitalized at
$8.6 billion -- the level of $1.25 for every $100 in insured
deposits set by law. In setting a $1.25 reserve target, Congress
implicitly recognized that $1.9 billion is not enough to ensure a
While the thrift industry is now relatively healthy -- as
Jonathan Fiechter, acting director of the Office of Thrift
Supervision, pointed out just last week -- the law requires
thrift resolutions after July 1st to be borne by the SAIF. One
large thrift failure -- or a significant downturn in the economy
leading to higher than anticipated losses -- could render the
SAIF insolvent. The safety cushion is simply too thin. The FDIC
must be concerned when one of its insurance funds is
Add to the problem the fact that a third of the income flowing
into SAIF cannot be used to service the FICO obligation. The law
created two types of institutions whose SAIF assessments cannot
be used to meet FICO interest payments -- so-called Oakar and
Sasser institutions. Because neither is both a savings
association and a SAIF member, the law says their SAIF premiums
cannot go toward the FICO obligation.
If things remain much as they have been in recent years, the SAIF
has been projected to capitalize in 2002. You know and I know,
however, that the assumptions under which that projection was
made are not now likely to come to pass -- and, in fact, these
assumptions were a baseline analysis against which alternative
assumptions could be measured, not predictions of certainty.
One thing is certain, however: the FICO obligation will run into
debt service problems. It is a question of when, not a question
of whether. This is true regardless of whether the entire SAIF
assessment base were available to meet the FICO obligation or
only part of the base. Debt service problem on FICO bonds will
come much sooner without assessments from Oakar and Sasser
institutions. In fact, we have just now analyzed the fourth
quarter 1994 numbers, and they show that during all of 1994 Oakar
deposits jumped from $139.8 billion to 180.2 billion. While at
the end of the third quarter, 1994, Oakar institutions held 23
percent of the SAIF assessment base, at the end of the fourth
quarter, they held 25.2 percent. Sasser institutions continued
to represent 7.4 percent of the base.
With 33 percent -- a third -- of the SAIF-insured deposit base
unavailable to meet FICO obligations and with the deposit base
shrinking at 2 percent annually -- the average rate in recent
years -- there are likely to be debt service problems as early as
2005. If the base shrinks at 4 percent, the problems hit in
2001. At 6 percent, they hit in 1999. At 8 percent, they hit in
Like the crack in the radiator that triggers the recall of a make
and model of automobile, the FICO problem is a structural flaw.
It is embedded in the SAIF system. It will not go away by itself
-- and the FDIC has no legal authority to fix it. SAIF can be
fixed now -- or it can be fixed later -- but it must be fixed.
Let me suggest, however, that there is a certain urgency in the
We may soon see Bank Insurance Fund-insured institutions created
to receive deposits from savings institutions so that the
insurance coverage of those deposits could shift from SAIF to the
BIF. The motive behind creating these institutions, of course,
is to enjoy the lower insurance premiums that may apply to BIF
institutions later this year, if the FDIC Board votes a lower
premium rate for BIF-insured institutions. As you know, if
current conditions continue, we expect BIF to recapitalize at the
1.25 target ratio sometime around mid-summer. When that happens
-- for reasons I will discuss briefly -- the FDIC believes that
it is compelled by law to lower BIF premiums.
First, by law, we must set BIF and SAIF premiums "independently."
While the SAIF has a long way to go to capitalize -- BIF is
almost recapitalized at the level mandated by Congress. SAIF has
a draw from FICO obligations -- BIF is free from those types of
problems. SAIF's assessment base has shrunk; BIF's generally has
remained more stable. By law, however, none of these differences
can be taken into account when we set BIF premiums. Second -- by
law -- we are required to manage BIF so that we maintain the fund
at the 1.25 target ratio or we are required to identify
explicitly the conditions in BIF institutions or the banking
industry that require us to reserve at a materially higher level.
This is likely to create a premium differential -- and everyone
has recognized that for some time -- certainly since last year.
Without question, a differential creates difficulties for SAIF-
Both the law and common sense argue against keeping BIF-insured
institutions paying current premium rates -- which add up to
about $6 billion a year for the BIF-insured -- until SAIF is
capitalized simply to avoid a differential.
So what happens if the idea of transferring SAIF-insured deposits
to BIF-insured institutions really takes off?
Those of you left in SAIF would still have to meet the FICO
obligation and you would still have the responsibility of
replenishing the fund.
I note that in the General Accounting Office report on the
deposit insurance funds that was issued just over a week ago, the
GAO states: "At December 31, 1994, SAIF's assessment base
available to pay FICO bond interest was about $500 billion.
Given the current assessment rate of 24 basis points, that base
could shrink to about $325 billion before premium rates would
need to be raised to meet the FICO obligation."
Some of you, I am sure, know my Deputy for Policy, Leslie
Woolley. Leslie is from Oklahoma. She recently reminded me of a
story concerning another Oklahoman, Will Rogers. The cause of
U.S. entry into World War One -- they used to tell us in high
school -- was German submarines sinking U.S. ships. Just before
the U.S. declared war, a newspaper reporter asked Will Rogers
how he would handle the problem.
"It's simple," he replied, "I'd drain the water from the oceans
and send the U.S. cavalry out to round-up the submarine crews."
"Great," said the reporter, "and how would you drain the oceans?"
Rogers replied: "Don't ask me, I'm in policy, not operations."
It is easy to develop policy in the abstract and in a vacuum --
we can always come up with simple and compelling answers that
will not work. It is coming up with an answer in the messy real
world -- the world in which Cavalry Banking does business -- that
Further, the SAIF/FICO problem illustrates the difficulties that
arise when you premise a solution on assumptions and the
assumptions later go awry. Of course, when facing an uncertain
future, the best we can do is make assumptions that are logical
A number of policy prescriptions have been proposed to deal with
the SAIF/FICO problem. On the surface, some may appear feasible,
but they all carry with them disadvantages as well as advantages
-- and all would require legislation by Congress.
Basically, they all look to three groups to pay for the problem,
either separately or in combination. Those groups are the
savings associations, the commercial banks, and the taxpayers.
Several proposals require tapping the commercial banking industry
for funds to service the FICO obligation -- including a proposal
that this organization supports. On this point, the GAO report I
mentioned earlier notes: "Arguments have been made that any
option that involves the banking industry contributing to service
the FICO interest obligation is unfair to the industry. These
arguments contend that the FICO obligation was incurred during
the thrift crisis of the 1980s and, as such, is an obligation of
the thrift industry. However, there are also arguments that
those thrift institutions that comprise today's thrift industry
still exist because they are healthy, well-managed institutions
that avoided the mistakes made by many thrifts in the 1970s and
1980s that ultimately led to the thrift debacle. As such, they
argue, they should be no more responsible for the FICO interest
burden than the banking industry."
I agree wholeheartedly with that statement in the GAO report.
The banks and thrifts of today did not cause the S&L crisis. In
fact, we can all agree on this point -- and we are still left
with the question: What do we do about the FICO problem and an
Another proposal is to make Oakar and Sasser assessment revenue
available to meet FICO obligations. That approach would slow
capitalization of the SAIF, however, without solving the
fundamental problem. FICO bonds will run into debt service
The FDIC's goal is for SAIF-insured institutions to have as
strong and as solid an insurance system as banks enjoy as soon as
Another proposal is to use Treasury funds appropriated for the
RTC to remove the FICO obligation.
The RTC could have $9 to 12 billion in unused loss funds after
resolving all institutions for which it is responsible, depending
on its actual recoveries from resolutions and on the quantity of
assets that will be transferred to the FDIC's FSLIC Resolution
Fund. At present, SAIF's use of RTC funding is subject to
significant legal restrictions. The Congress could pass
legislation removing those restrictions and make the funds
available to capitalize SAIF or to resolve future thrift failures
for a period of time after July 1st. There is, however,
significant opposition in the Congress to using taxpayer funds to
address the problem.
There are a number of variations on the proposal I have
described, which raise similar issues.
Another group of proposals would be for Congress to appropriate
new funds to capitalize SAIF, pay the FICO obligation, or both.
According to the GAO, SAIF would require approximately $14.4
billion at the end of 1995 in order to reach its reserve ratio
and fund its future FICO obligation.
Finally, there is the proposal for SAIF members to pay a premium
to capitalize the SAIF quickly -- the special assessment option --
with a number of variations.
In reviewing these options, I remember those times in grammar
school when we would take a multiple choice test and none of the
answers to a problem seemed quite right. If we do not choose the
correct answer, of course the SAIF/FICO problem will just come
back. In fact, it will not even go away, though it may appear to
do so for a while.
I have urged other parties with an interest in this matter to be
a part of the search for a fair and equitable solution.
This Friday -- Saint Patrick's Day -- the FDIC Board of Directors
will have an unprecedented public meeting on these and other
issues related to proposals to set premiums for BIF and SAIF.
America's Community Bankers is scheduled to testify at that
hearing. Tradition tells us that Saint Patrick -- the patron
saint of Ireland -- was not Irish -- he was a Romanized Briton.
The Irish, in fact, kidnapped him as a lad and kept him six years
in slavery. Yet, after he escaped home and grew to adulthood, he
returned to Ireland because he thought it was the right thing to
do. He wanted to help his former captors.
I do not expect your witness on Friday to be entirely
disinterested -- much less a saint -- no offense, Jim Montgomery
-- but my fellow FDIC Board members and I would appreciate it
greatly if you were to give us the benefit of your best thinking
to help us work through this difficult problem -- a problem that
All I can say at this point is that we are analyzing the options
-- costing them out. We do not have a solution -- we have not
made any decisions -- we are leaving the door open. While I do
not have a recommendation at this time, I do expect to come
forward with one, or several.