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Speeches and Testimony
Federal Deposit Insurance Corporation
Before the U.S. Representatives
March 24, 1995
On Friday, March 17, the FDIC Board of Directors held an unprecedented public hearing on the agency's proposals to reduce deposit insurance premiums for most banks while keeping insurance rates unchanged for savings associations. These proposals were issued for public comment on January 31, and although written comments are not due until April 17, more than 600 comment letters already have been received.
The FDIC Board decided that a public hearing would provide a unique opportunity to explore all of the issues relevant to its consideration of the proposed assessment rates, the problems facing the SAIF, and the need for Congressional action. The format consisted of an open dialogue with representatives of both BIF-insured and SAIF-insured institutions and other interested parties. We heard not only from the major financial institution trade associations, but also from private citizens and individual bank and thrift executives from both large and small institutions.
I think I speak for the entire FDIC Board, as well as our witnesses and many observers, when I characterize these discussions as enlightening, thought-provoking, and extremely beneficial. In general there was agreement that while there is no easy solution, there is a very real problem. A problem that needs to be addressed sooner, rather than later.
There was not unanimous agreement on the timing of problems for the SAIF and the FICO bonds. The majority of the participants, however, conceded that a very real crisis looms on the horizon. One of our witnesses characterized himself as an historian and urged us not to repeat mistakes of the past "where policymakers have avoided decisions and waited for crises to occur." In a similar vein, others cautioned against temporizing.
I will not attempt to summarize the positions of all parties who spoke at the hearing.The FDIC has a transcript of the hearing available to distribute to all who are interested. A variety of alternatives were presented and discussed. These ranged from the purchase of FDIC-issued interest-bearing obligations by SAIF-member institutions to recapitalize the SAIF, to a one-time special assessment on SAIF-member institutions, to use of interest on RTC funds remaining at year-end to pay interest on the FICO bonds, to using the excess RTC funds in some form to meet future losses to the SAIF, to merging the two insurance funds. We intend to consider the views of all of the witnesses, as well as the many comment letters received, as we continue our analysis of the proposed assessment rates.
One area in which I would like to believe that a consensus was reached is a willingness by bank and thrift executives alike "to come to the table and talk." To be sure, there was a hesitancy on the part of many commercial bankers about bringing their wallets with them, and also a suggestion that the table be enlarged to include a broader range of financial institutions. In fact, I think our witnesses were quite candid in expressing that competitive inter-industry rivalries continue to exist, that there is a strong feeling among many banks that the SAIF "is not our problem," and that this is a very emotionally charged issue. It was even suggested that finding a solution that everyone can live with may be akin to resolving the baseball strike. We at the FDIC certainly hope that is not the case!
Of particular interest was the testimony of individual bankers about surviving the savings and loan crisis, the agricultural bank crisis, and the demise of the Ohio Deposit Guarantee Fund, to name a few. There were lessons learned that will not be soon forgotten. The common thread was the effect on financial institutions and their depositors when there is a crisis of confidence. Therefore, when queried as to whether they would be concerned if the SAIF failed, several bankers commented that "FDIC insured" is like a prized brand name to customers -- the logo on the door of a financial institution represents confidence -- and the integrity of that name must be preserved.
Clearly, there are no easy solutions to the problems of capitalizing the SAIF and meeting the FICO debt obligation, but I am encouraged by the willingness expressed by so many of our witnesses "to do the right thing" and to work together to find a constructive resolution. Several witnesses expressed their belief that the FDIC has a "moral obligation" to bring these problems to your attention and "the responsibility to articulate a comprehensive solution to the Congress." I now would like to turn to a discussion of possible legislative options.
A large number of proposals to address the SAIF problem have been made. In weighing the options, we must seek a real and permanent solution, not one that simply defers the issue to a later time while leaving in place the conditions that are the source of the problem.
In that regard, any solution should be judged by how well it accomplishes three goals. First, it should reduce the premium disparity between BIF- and SAIF-member institutions, and eliminate to the extent possible the portion of the SAIF premium attributable to the FICO assessments. This disparity encourages SAIF members to engage in legal and regulatory maneuvering to avoid SAIF assessments and in my view renders infeasible the existing mechanism to fund the FICO. This standard leaves open the question of what level of premium disparity between BIF and SAIF members would be small enough to eliminate the incentive for SAIF members to flee the SAIF. Second, it should result in the SAIF being capitalized relatively quickly, perhaps no later than 1998. The longer we allow the SAIF to be undercapitalized, the greater the possibility that unanticipated losses will deplete the fund. Third, a solution should address the immediate problem that on July 1, the SAIF will take over from the RTC the responsibility of handling thrift failures. Unfortunately, the SAIF will assume this responsibility in a vulnerable and grossly undercapitalized condition.
The progress towards capitalization, in other words, should be "front-loaded," with a substantial chunk of the capital coming quickly.
We must also be concerned with the means used to achieve these ends. In that regard, we must consider the precedent that is being set for the use of the deposit insurance funds. To ensure sufficient insurance reserves to meet future losses and to protect the FDIC's independence, the deposit insurance funds should be used only for deposit insurance purposes. Ideally, the converse should also be true that deposit insurance expenses should not be paid out of public funds, although the savings and loan crisis is evidence of an unfortunate breach of the latter principle, and the diversions from the SAIF for other purposes proves the rule about the former. We also must carefully consider the fairness of the solution to all concerned. Finally, to the extent that Congress may wish to consider options involving the use of RTC money to address the problems outlined here, there may be budgetary issues outside the purview of the FDIC.
A number of options for addressing these issues are described below. The options are grouped as follows: one, no action; two, options using public funds; three, options involving a special assessment on the SAIF assessment base; four, options that would use investment income of the insurance funds to pay the FICO assessments; five, options using no public funds, including merging the funds and sharing the FICO assessments between BIF members and SAIF members; and six, options that combine the above approaches. Each option is described and evaluated in terms of how well it achieves the three goals just described. Other relevant advantages and disadvantages also are discussed. Information about each option is presented in Table 2.
Without any legislative action, SAIF members would bear the entire $15.1 billion cost of bringing the BIF and the SAIF into parity (option 1 of Table 2). Under a scenario that assumes no major unanticipated losses, a gradual shrinkage of the SAIF assessment base and a gradual increase in the portion of the base ineligible for the FICO assessment, the SAIF would not reach the designated reserve ratio until 2002. The premium disparity would be on the order of 19 basis points until the SAIF capitalizes. After capitalization, and assuming equal expenses for the two funds, the disparity would simply equal the basis-point equivalent of the fixed $779-million-per-year FICO obligation. Under the assumptions used regarding the shrinkage of the SAIF assessment base, this would amount to 12 basis points at the time of capitalization and would increase gradually until the FICO bonds mature.The analysis in Table 2 assumes that the FDIC would set assessments at the rate necessary to fund FICO interest payments after the SAIF achieves its designated reserve ratio. The law leaves the decision to the discretion of the FDIC Board.
Taking no action does not satisfy any of the three standards stated above. One, a premium disparity would continue to exist for 24 years and would almost certainly render the existing FICO funding mechanism obsolete. Two, the SAIF would not capitalize for at least seven years even assuming no major unanticipated losses. Three, there is no early injection of capital into the SAIF to alleviate the immediate problem of significant undercapitalization in the face of the requirement that the SAIF take over from the RTC the responsibility of handling failures of thrift institutions beginning July 1.
Approaches Using Excess RTC Funds
It has been estimated that there will be between $10 billion and $14 billion in RTC funds that have been appropriated but not spent -- the so-called excess RTC funds. It has been suggested that these funds be used either to pay the FICO assessments or to capitalize the SAIF, or some or all of both. Two such approaches are discussed below.
Use of Unspent RTC Funds to Pay the FICO Obligation. Under this approach, the FICO obligation would be paid out of excess RTC funds. This approach is presented in Table 2 as option 2. The approximate cost to the Treasury of this option is $8.4 billion.
Under our proposed standards, one, there would be no premium disparity arising from the FICO obligation and no chance of a FICO shortfall. Two, under this approach SAIF capitalization would occur in 1998 assuming no large unanticipated losses, significantly more quickly than currently expected. Three, this approach, however, would not address the immediate vulnerability of the SAIF beginning July 1.
There are several other public-policy issues related to this approach. The Congress recognized in FIRREA that statutory draws on the SAIF fund to support the FICO, the REFCORP, and the FRF could result in an undercapitalized SAIF for an extended time. Consequently the Congress authorized up to $32 billion in income and net worth supplements for the SAIF -- monies that never were appropriated. In light of this legislative intent, it may be appropriate for excess RTC funds to be used to pay the FICO obligation.
Another issue with this approach would relate to budgetary scoring. Under current law, deposit insurance outlays do not trigger offsetting reductions in other federal spending or require increased revenue; FICO assessments, however, are counted as interest outlays rather than deposit insurance outlays. In this regard it should be noted that resolutions of failing banks can often give rise to obligations that require the insurer to make periodic payments. Such periodic payments have been scored as insurance outlays for budgetary purposes. Congress may wish to consider similarly classifying FICO assessments as insurance outlays for budgetary purposes.
Use of Excess RTC Funds to Capitalize the SAIF. Under this approach, the excess RTC funds described above would be contributed to the SAIF in the amount needed to allow the fund to achieve its designated ratio of 1.25 percent of insured deposits (option 3). This would amount to $6.7 billion at year-end 1994.
Under our three proposed standards, one, this approach by itself would do nothing to alleviate the 24-year premium differential arising from the FICO assessments. Without some means to alleviate this differential, we could not rule out further shrinkage in the SAIF assessment base, a resulting increase in the premium disparity, and a deficiency in premium income to service the FICO assessment base. Two, the SAIF would capitalize much much more quickly than under the status quo. Three, the short-term vulnerability of the SAIF would be eliminated.
As noted earlier, excess RTC funds are available to cover insurance losses of the SAIF provided the FDIC certifies that an increase in SAIF premiums would reasonably be expected to result in greater loss to the Government, and that SAIF members are unable to pay assessments to cover losses without adversely affecting their ability to raise and maintain capital or maintain the assessment base. Congress required those certifications in an effort to ensure that SAIF members pay the highest rates possible before taxpayer funds are used to cover SAIF losses. Of course, this would have the effect of exacerbating the impending premium differential. In addition, it may be difficult for the FDIC to certify that increasing SAIF assessments would result in increased losses to the government prior to the SAIF being at or near depletion. Consequently, making RTC funds immediately available to capitalize the SAIF would require modifying or removing the existing certification requirements.
A closely-related alternative to providing excess RTC funds to capitalize the SAIF would be to make such funds available to cover insurance losses from thrift failures if they occur over a specified time period. As discussed above, this would have to be accompanied by modification or removal of the certification requirements to provide meaningful relief from the possibility of the SAIF being depleted. This option for capitalizing the SAIF is fundamentally different from others described in this testimony in that it would involve contingent assistance rather than upfront funded amounts.
There are substantial public-policy concerns with the precedent set by using public funds to capitalize the SAIF. Independence is vital to the effective functioning of the deposit insurance system. This does not mean freedom from accountability but independence to constrain undue risk-taking and to protect the insurance funds. The exercise of safety-and-soundness powers, pricing risk for insurance purposes, and closing and disposing of insolvent institutions all are accomplished most effectively when they are insulated from the political process. Capitalization of the SAIF with appropriated money could create a climate in which the FDIC's exercise of its insurance responsibilities would be influenced by policy concerns outside the scope of the FDIC's mission.
Approaches Involving a Special Assessment on the SAIF Base
Under this approach (option 4 of Table 2), a special one- time assessment that contributes to the capitalization of the SAIF would be levied against the SAIF assessment base. This special assessment could amount to some or all of the $6.7 billion needed as of year-end 1994 to capitalize the SAIF. In order to collect the full $6.7 billion, a special assessment of about 70 basis points would have to be levied over and above the current average assessment of about 24 basis points. The question of how many additional thrift failures would be triggered by such a special assessment is discussed below.
One, a special assessment would not eliminate the premium disparity -- even if large enough to recapitalize the SAIF -- because of the continuing FICO obligation. Two, it would substantially reduce, or eliminate, the time needed to reach the designated reserve ratio. Three, it would inject funds quickly, addressing the short-term vulnerability of the SAIF. A special assessment on SAIF members could act to short-circuit the types of legal and regulatory assessment-avoidance tactics described earlier. To put it bluntly, a special assessment could tax SAIF deposits before they can escape the fund. In this regard, Congress may wish to consider a cut-off date for a special assessment that would ensure that institutions attempting to avoid the assessment pay their fair share. A special assessment also would reduce to some extent the need for SAIF members to engage in assessment-avoidance tactics by reducing the capitalization component of the premium disparity.
If the full $6.7 billion were not collected at once, the SAIF would fall short of the 1.25 minimum reserve ratio. Under current law this would mean that SAIF premiums would have to average at least 18 basis points until 1998, and at least 23 basis points thereafter, until the required reserve ratio is achieved. Thus, there would continue to be a premium disparity on the order of 14 to 19 basis points until the SAIF is capitalized, and possibly thereafter if FICO bonds remain a SAIF obligation.
For a variety of reasons, however, if a special assessment were levied against the SAIF assessment base, it may be reasonable to eliminate the 18 basis-point statutory minimum average assessment rate required under current law. Assuming that the FICO-related premium disparity were eliminated by one of the options described above, a premium disparity would exist because of the need to complete the capitalization of the SAIF. The greater the special assessment, the less would be the need for additional assessment revenues to complete the capitalization of the SAIF. Table 3 shows how the size of the special assessment (treated as an addition to the existing premiums) and the time allowed to achieve capitalization affect the premium necessary for the SAIF to capitalize in the desired time.
For example, under a special assessment of 30 basis points, and assuming we wish the SAIF to reach the 1.25 reserve ratio in 1998, we would have to charge a SAIF premium of 15.5 basis points and the resulting premium disparity would be approximately 11 basis points under the current proposal. Alternatively, if we were willing to impose a 40-basis point special assessment and extend the deadline to capitalization to 1999, the necessary SAIF premium would be about 9 basis points and the disparity would be about 5 basis points. These numbers assume that the minimum assessment rate for BIF members would be 4 basis points, and that there are no major unanticipated losses for either fund. They also assume that the FICO assessment and the current statutory minimum assessment rates for SAIF could be eliminated. If the FICO assessment were shared pro rata, both BIF and SAIF premiums would be about 2.4 basis points higher than indicated here.
Depending on the size of the special assessment, a disadvantage would be that there could be additional failures of SAIF members as a result. Under a one-time assessment on the SAIF assessment base of 94 basis points, the full amount needed to bring the SAIF to its designated ratio (70 basis point special plus 24 basis point current assessment), three SAIF members with total assets of $500 million would become critically undercapitalized, based on year-end 1994 financial reports, and another 103 SAIF members would be downgraded one notch from current capital categories.
Approaches Using Investment Income of the Insurance Funds to Pay the FICO
There have been a number of proposals to use investment income of the insurance funds to pay the FICO assessments. Two such proposals are considered here as option 5 of Table 2. One proposal would inject RTC funds into the SAIF in the amount needed to achieve the 1.25 reserve ratio. The interest on the SAIF's investment portfolio would then be used to pay a portion of the FICO assessments. With a fully invested fund at today's interest rates, this would yield approximately $600 million annually as compared with the $779 million required to meet FICO debt service obligations.
Another option that has recently been proposed would allow investment income equal to two basis points of the BIF assessment base to be used to pay the FICO assessments. Based on the current BIF assessment base, about $500 million of the $779 million annual FICO assessment would be paid by the BIF under this approach.
The first option does not constitute a complete solution to the problems posed by the difference in the condition of the two funds, but simply changes the form in which the FICO assessment would be paid by the SAIF industry. Instead of being paid by the SAIF members through assessments, the FICO would be serviced by garnishing the SAIF's income. If the BIF and the SAIF started at the same reserve ratio, had the same loss experience going forward, and maintained their respective 1.25 ratios, SAIF premiums would have to be higher than BIF premiums by a sufficient amount to offset the drain in the SAIF's income caused by the FICO service. Otherwise, if there were no premium differential, the BIF reserve ratio would increase continuously relative to the SAIF reserve ratio during the full 24-year period in which the FICO bonds are outstanding, and SAIF members would have to be assessed higher premiums to make up the difference if losses to the SAIF dropped the balance below the 1.25 ratio.
The advantage of the approach is delaying the SAIF premium increase until justified by losses. On the other hand, over the long term, this approach does not address the first standard set out above, address the premium disparity arising from the FICO assessment, as well as the incentive of SAIF members to avoid these assessments, and the resulting difficulties in funding the FICO debt. Our proposed standards two and three are met, because the SAIF would be capitalized immediately.
Looking at the approach involving BIF investment income, first, a premium differential arising from FICO assessments would still exist to the extent the SAIF's share of the remaining portion of the FICO assessment is greater than the investment income of the SAIF. Based on the current assessment bases of the two funds, the SAIF would pay about two basis points more than the BIF for its share of the FICO assessment. This differential could change over time if the BIF and SAIF assessment bases grew at different rates. The differential is not likely to be substantial, but could increase somewhat over time. Two, this option would capitalize the SAIF in 1999 under current conditions. Three, it would do nothing to address the short-term vulnerability of the SAIF.
Using investment income of the BIF to pay FICO assessments would set a precedent for using BIF funds to pay expenses not related to the BIF, although use of only investment income would be a more limited precedent. In addition, diverting investment income of the BIF would increase the likelihood that assessment rates for BIF members would have to be increased at some future time to replace the contribution investment income would have made to covering losses to the BIF from failed banks.
Use of No Public Funds
Options 6 and 7 in Table 2 present two approaches that rely solely on FDIC-insured institutions to raise some or all of the $15.1 billion needed to bring the SAIF into parity with the BIF. These are sharing the FICO assessments between the BIF and the SAIF without merging the funds (option 6) and merging the BIF and the SAIF (option 7).
The BIF Share of the FICO Obligation Without a Merger. Under this option, the BIF members would be assessed for a portion of the FICO assessments. For example, a pro rata sharing of the FICO assessments between the BIF and the SAIF, based on insured deposit levels in the two funds, would cost BIF members about $6.5 billion in present-value terms. The BIF's share of the annual $780 million obligation would be about $600 million, or 2.4 basis points per year because 77 percent of the total domestic deposits of FDIC-insured institutions are held by BIF members, and 23 percent by SAIF members.
Under our proposed standards, this approach would, one, eliminate any premium disparity arising from the FICO obligation, currently about 11 basis points of the proposed 19 basis point differential. By making the entire assessment base of both funds available to service the FICO debt, it would virtually rule out a deficiency of premium income to service the FICO assessment. Two, this approach would enable the SAIF to capitalize significantly more quickly than currently anticipated by eliminating most of the FICO drain on SAIF assessment revenue. Assuming no large unanticipated losses, capitalization would occur in 1999, three years earlier than currently projected.
Three, this approach would do nothing to address the concern that the SAIF will begin resolving thrift failures on July 1 in a significantly undercapitalized position and remain there for several years. This makes the SAIF very vulnerable to unanticipated losses. It thus leaves open the possibility that the SAIF could be bankrupted and that both SAIF- and BIF-insured institutions would suffer from the resulting negative publicity. The other concern with this approach has already been discussed. By using BIF funds for purposes other than paying for deposit insurance costs, this approach sets a precedent that could erode the effectiveness and independence of the deposit insurance system.
Another alternative for this approach would be for the BIF to contribute 50 percent of the cost of servicing the FICO obligation (option 6(b) of Table 2). This currently would amount to approximately 1.5 basis points annually for BIF members, or about a $4.2 billion present-value cost.
Under our proposed standards, this approach, one, would not eliminate the premium disparity. Unlike the pro rata sharing approach, this approach retains a 24-year premium disparity, although at lower levels than some other options. To illustrate, with the 50 percent sharing described here, equal shares of the annual FICO cost by the BIF and the SAIF of $390 billion would amount to about 1.5 basis points for BIF members and 5.5 basis points for SAIF members. Thus, after the SAIF is capitalized, there would remain a premium disparity of about four basis points that could grow larger if the SAIF assessment base were to shrink.
Two, this approach would not achieve SAIF capitalization as quickly as the alternative in which the BIF shares the FICO assessments on a pro rata basis -- 2000 rather than 1999 --, thus leaving the SAIF undercapitalized for one more year. Three, this option also does not address the short-term vulnerability of the SAIF.
In addition, this approach sets a precedent by using BIF resources for other purposes. BIF members probably would argue, however, that equal dollar sharing is less unfair than proportional sharing because it entails less use of BIF resources.
Merging the BIF and the SAIF. Under this option, the two funds would be combined and the existing premium rates maintained until the combined fund meets the designated reserve ratio. FICO assessments would continue to be paid by the thrifts. The designated reserve ratio for the combined fund could be expected to be achieved in 1996.
The cost to the BIF of this approach is estimated at $5.5 billion, or the equivalent of a one-time charge of 22 basis points on the BIF assessment base. By our proposed standards, one, there would be no premium disparity until capitalization of the combined fund occurred. At capitalization the disparity would equal the size of the fixed $779 million FICO charge relative to the SAIF assessment base. This would be about 11 basis points in 1996, assuming no drastic change in the SAIF assessment base during the next year.
This option meets standard two and three because there is an immediate and substantial capital injection into the SAIF and the combined fund recapitalizes quickly. The resulting 11-basis point disparity, based on the current SAIF assessment base, would nevertheless appear large enough to provide an incentive for further legal and regulatory maneuvering by SAIF members to avoid assessments. If successful, SAIF assessment revenue would prove insufficient to fund the FICO earlier than otherwise.
Merging the funds would set an unfortunate precedent for the use of the resources of the deposit insurance funds -- in this case the BIF. Existing law requires that BIF resources be used to cover only BIF expenses; merging the funds would violate that principle. There is a danger in overriding the law governing the use of insurance fund resources solely for the sake of expediency. If an insurance fund's resources can be used for purposes other than protecting the depositors of that fund, where should we draw the line about what charges to deposit insurance reserves are appropriate? Such "other uses" of deposit insurance funds weaken the distinction between those funds and general federal monies and pose a danger to the independence of the deposit insurance system. Moreover, there is a significant question of fairness to BIF member banks, who have paid $22 billion during the last four years to recapitalize the BIF at the level mandated by the Congress. Finally, the current problem of capitalizing the SAIF as a result of the diversions of SAIF assessment revenue for other purposes illustrate the effect of using deposit insurance funds for other purposes.
This section presents some options that involve combinations of the approaches outlined above. These are grouped under option 8 in Table 2. All of these options share a common theme: they are designed to enhance some of the approaches above that did not address the long-term premium disparity arising from the FICO assessments.
The first such option involves merging the funds and having BIF and SAIF share the FICO assessments proportionately. The most important shortcoming of merging the funds would be that, taken by itself, it would do nothing to resolve the 24-year premium disparity. By providing that the FICO burden be shared proportionately between current BIF and SAIF members this problem could be mitigated. The cost to the BIF would be $11.7 billion, or the equivalent of a one-time charge of 47 basis points on the BIF assessment base. This option would entail proportional sharing between the BIF and the SAIF of the total $15.1 billion cost of bringing the two funds into parity.
Under this approach, there would be no premium disparity, and, because the SAIF would be capitalized quickly, there would be an up-front substantial injection of funds. It would, therefore, meet our three standards. On the other hand, as emphasized above, there would be an unfortunate precedent set in using the BIF for purposes other than BIF insurance costs.
The second option would be to combine RTC capitalization of the SAIF with a pro rata sharing of the FICO assessments between BIF and SAIF. The drawback in using the excess RTC funds to capitalize the SAIF is that such an approach by itself would not alleviate the long-term premium disparity arising from the FICO assessments. This problem could be alleviated by combining this approach with a pro rata sharing of the FICO assessments between the BIF and the SAIF. This approach would eliminate the premium disparity and would result in an immediate capitalization of the SAIF, thus meeting our proposed standards. As emphasized above, however, these advantages come at a cost: the use of public funds and all that entails for the independence of the deposit insurance system.
A special assessment on the SAIF assessment base, either in combination with a BIF and SAIF sharing of the FICO or with excess RTC funds being used to pay the FICO assessment constitutes the third and fourth options. A special assessment by itself does nothing to resolve the premium disparity arising from the FICO assessments. Either two approaches could correct this problem. Either of these two approaches are presented in Table 2 under the assumption that the entire $6.7 billion needed for the SAIF to achieve the reserve ratio is collected at once through a special assessment. Approaches involving smaller special assessments were discussed above (see Table 3 and the accompanying discussion). Both approaches have advantages. One, there would be no long-term premium disparity; two and three, the SAIF is capitalized immediately.
There is an urgent need for legislative action to reduce the disparity in the financial condition of the BIF and the SAIF. This immediate need arises from three sources. First, on July 1 the SAIF will assume the responsibility for handling failures of thrift institutions. It will not assume this responsibility in a position of strength, because it is grossly undercapitalized. This condition is directly attributable to the fact that until 1993, most assessment revenues from SAIF members were statutorily diverted from the SAIF to pay for past losses related to the thrift crisis. In addition, revenue and net worth supplements totalling $32 billion that Congress had authorized for the SAIF never were appropriated. As a result of this history, the existing SAIF balance simply does not provide an adequate margin of comfort. The resources of the SAIF are insufficient to absorb the cost of the failure of one large or a few medium-sized thrifts, or other substantial unanticipated losses.
Second, as a result of the SAIF's significant undercapitalization, there can be no assurance that the Congress will not again have to address these issues. If there are no major unanticipated losses, the SAIF balance should inch up to its target over the next seven years. Over this length of time, it is difficult to take comfort that unanticipated losses will not prevent the SAIF from reaching its target. The longer the time before the SAIF capitalizes, the greater the chance the SAIF might fail to capitalize.
Third, the current structure for funding the FICO obligation is not viable. Requiring this fixed cost to be paid from deposit insurance assessments on the SAIF creates enormous economic incentives for the targeted group to engage in legal and regulatory maneuvering to reduce their potential costs. We are already seeing such maneuvering in the current interest expressed by some large thrifts in opening new banks and by applications from thrifts to operate branches that would share bank and thrift operations. As stated earlier, the question is not whether there will be insufficient premium income to service the FICO obligations, but when the deficiency will occur.
Any solution to these problems should address all three concerns. It should eliminate the long-term premium differential caused by the FICO assessments. It should greatly reduce the time needed to capitalize the SAIF. The longer the SAIF is allowed to remain undercapitalized, the greater the chance that unanticipated losses will prevent us from reaching the target or will force Congress to consider these issues again. Finally, the solution should include an immediate injection of funds into the SAIF or a ready source of backup funding for SAIF losses. As matters stand now, the SAIF will begin its responsibilities for handling thrift failures after June 30 in a dangerously vulnerable condition.
Madam Chairwoman, the FDIC is committed to finding solutions that address these three concerns in a manner that is consistent with good public policy. We stand ready to assist the Subcommittee in this effort in the weeks ahead. I commend your forsightedness in holding this hearing, and I look forward to your questions and to questions from members of the Subcommittee.
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