Federal Deposit Insurance Corporation
Subcommittee on Financial Institutions and Consumer Credit
Committee on Banking and Financial Services
U.S. House of Representatives
September 21, 1995
Madam Chairwoman, Congressman Vento, Chairman Leach, and members of the
Subcommittee, thank you for the opportunity to testify on proposed
legislation to resolve the difficulties facing the Savings Association
Insurance Fund (SAIF). I strongly commend you for the interest you have
shown in resolving these difficulties and applaud you for your efforts to
I have appeared before the subcommittee twice this year to discuss why
the SAIF's difficulties significantly threaten the federal deposit insurance
system and the nation's financial system. My written statement today --
which I submit for the record -- summarizes my earlier testimony. All the
agencies represented here today have testified that the SAIF's difficulties
call for timely Congressional action. Without such action, the continued
undercapitalization of the insurance fund is virtually ensured and its
insolvency is clearly possible.
Proposed legislation -- the Thrift Charter Conversion Act of 1995 --
would address the SAIF's difficulties. This morning I want to make three
important points regarding the legislation.
First, the FDIC supports the bill's efforts to resolve the SAIF's
difficulties, a resolution that is imperative. The FDIC has some concerns,
however, related to the proposed legislation. These concerns are discussed
in detail in my written statement.
Second, the need to shore up the financial position of the SAIF is
pressing. We may need to attend to the weak position of the SAIF before
completing related actions. In particular, one issue the proposed
legislation raises is the merger of the bank and the thrift charters. The
FDIC supports such a merger in principle, but recognizes that consideration
of the merger issue could delay prompt action on resolving the SAIF's
difficulties. If that delay occurs, we recommend that the resolution of the
SAIF's financial difficulties be separated for more expeditious action. We
support a specific time frame for addressing the remaining issues.
Third, the FDIC should continue to be allowed to set the insurance
premiums of individual institutions to reflect the risks they present to the
deposit insurance fund. Those banks in an unsafe or unsound condition and
those banks involved in strategies likely to lead to losses to the insurance
fund are charged higher premiums reflecting the risks they present. This risk-
based insurance system -- which was mandated by Congress in 1991 under your
leadership, Madam Chairwoman -- discourages banking operations that could
result in losses to deposit insurance funds.
The bill could change the FDIC's authority to set, collect, and retain
deposit insurance assessments. The proposal could be interpreted as
permitting the FDIC to set premiums only to the extent necessary to maintain
the reserve ratio at the designated reserve ratio of $1.25 for every $100 of
insured deposits. In effect, the bill may require the FDIC to set premiums
at zero for all insured institutions -- regardless of the risk an institution
presents to the fund -- when the reserve ratio is at 1.25 percent.
The risk-based insurance system represents a significant innovation in
banking supervision. It encourages a healthy and stable banking industry.
By placing a price tag on operating a bank that is not well-capitalized and
not well-managed, it affects bank behavior. A premium that is tied to the
risk that an insured institution poses to its insurance fund provides
incentive to control risk-taking. The FDIC urges the Subcommittee to retain
the current law with respect to its premium setting authority.
In addition, we are concerned that limitations in the bill on the FDIC's
authority to make assessments above 1.25 percent could prevent the FDIC from
collecting assessment income to meet debt service obligations on the bonds
issued by the Financing Corporation (FICO). As one of the purposes of the
legislation is to assure that the FICO obligation is met, we will be happy to
work with the Subcommittee to resolve this issue.
In conclusion, the FDIC urges Congress to act quickly to resolve the
problems of the SAIF, while addressing the issues I have outlined today and
in my written statement. Again, I applaud you, Madam Chairwoman, Congressman
Vento, Chairman Leach and the other members of the Subcommittee for the
serious consideration you have given this critical issue. I look forward to
your questions. Thank you.