Andrew C. Hove, Jr.
Federal Deposit Insurance Corporation
American Bankers Association
October 5, 1997
Thank you and good morning.
Every so often, experience reminds me that careful planning
and consideration often do not survive contact with reality. Life
For example, a lot of thought must have gone into the
signature system used with credit cards. The system is simple and,
you might think, effective. But several weeks ago, I was signing
a receipt for a bank credit card purchase at a supermarket when the
checker noticed that I had never signed my name on the back of the
card. He informed me that he could not complete the transaction
unless the card was signed. He explained that it was necessary to
compare the signature on the credit card with the signature I just
signed on the receipt.
So I signed the credit card in front of him. He carefully
compared that signature to the one I had signed on the receipt. As
luck would have it, they matched.
Not only is reality unpredictable, it can also be dangerous. You
might think that the chances of being killed by a flood of molasses
on the streets of Boston would be zero -- but you would be wrong.
In January, 1919, a storage tank exploded near the sites where the
world famous Faneuil Hall and the New England Aquarium stand today.
Thirty-foot high walls of molasses flooded down the surrounding
streets at up to 35 miles per hour. They moved with a force of two
tons per square foot, smashing buildings, crushing cars and
knocking over elevated train trestles. The flood killed 21 people,
and injured another 150. Even today, no one in Boston ever says
that anything is "as slow as molasses."
Federal deposit insurance was created sixty-four years ago to
address an unpredictable and potentially dangerous reality -- the
reality that banking rests on public confidence. When public
confidence has not been anchored in the absolute certainty that the
public's deposits were backed by the resources of the government,
depositors under stress in a financial crisis have panicked again
and again. Panic, however, is the wrong word to describe
withdrawing funds from a bank if there is sudden uncertainty they
will be safe there. Withdrawals in those conditions are rational.
Certainly, one of the purposes of deposit insurance was to
protect the small depositor. Federal deposit insurance has allowed
tens of millions of Americans to sleep more soundly at night than
would have otherwise been the case by erasing the fear that their
savings would evaporate if their banks failed. In creating the
FDIC, our government made a promise to the American people -- they
would have a haven of security and of certainty in the uncertain
financial world. We have kept that promise to three generations of
In protecting depositors, insurance has achieved other
important objectives. By maintaining confidence, deposit insurance
has preserved the integrity of the payments system and the ability
of banking organizations to continue to perform the intermediation
that supports much of our economic activity. Along with prudential
supervision and the lender of last resort role played by the
central bank, deposit insurance is a critical thread in the safety
net that prevents our financial system and our economy from hitting
bottom when under stress.
Large banks benefit from that safety net along with small
banks -- money center banks along with community banks -- in fact,
everyone in the economy.
By assuring financial stability, continued intermediation by
diverse banking organizations, and the continued efficient
operation of the payments system, deposit insurance has had an
enduring value for all Americans, depositors and nondepositors
Federal deposit insurance, therefore, has a purpose in the
public interest beyond the peace of mind it provides depositors.
One might even say that the peace of mind we provide is the means
to a greater end.
I remember how deposit insurance held the financial system
together during the thrift and banking crisis of the 1980s and
early 1990s -- and I know that many of you remember that, too. I
came to the FDIC in 1990, after a 30-year career as a banker in an
agricultural town in Nebraska.
In 1991, the United States had 124 bank failures, and the
assets of those banks totaled $63 billion. The banking system
continued to operate throughout the crisis without a shudder.
There were no panics. The anchor for public confidence that
deposit insurance provides held. During good times -- like those
we have enjoyed over the past five years -- it is tempting to
underestimate the value of a safety net and to focus on the costs
that go with it, rather than on the security it provides.
There has been a lot of talk lately about possible changes to
the deposit insurance system.
Some of this talk is inspired by the ongoing revolution in our
industry -- a revolution that has been reshaping banking for more
than twenty years. One side of that revolution is called
"globalization" and can be seen in this headline from the American
Banker earlier this week: "Bank Boston Buys Deutsche Retail
Business in Argentina."
Another side of the revolution is called "modernization" and
its outlines can be seen in this recent prediction from the
American Banker: " . . . by year-end, the country's first truly
diversified financial firm will be born. The Travelers Group soon
will push beyond its insurance stronghold into the securities
industry with its Salomon Inc. merger, and then invade banking --
via the thrift charter. And it's all legal."
Given these two trends, the legitimate question people are
asking is: "What is the role of deposit insurance when geographic
restraints and legal barriers have faded?"
That question assumes a role for deposit insurance.
A number of people also recently have been calling for
dramatically scaling back federal deposit insurance or eliminating
it -- notions that we have frequently -- and forcibly -- responded
to, and will continue to oppose until critics propose a basis for
public confidence that has the absolute certainty that a federal
government backing offers.
These proposals appear to arise from a desire to escape
regulation. The emphasis on this burden reflects industry
conditions, but there will come a time when the focus returns to
assuring confidence, as it did in the late 1980s and early 1990s.
Other suggestions for changes to the deposit insurance system
arise from the well-intentioned impulse to address perceived
We all remember that deposit insurance was reformed less than
a decade ago, at a time of great stress on the system. The focus
then was on moral hazard -- which is the incentive that deposit
insurance may give some managers to take greater risks than they
otherwise would take if deposit insurance did not exist. The
reforms -- including prompt corrective action and risked-based
deposit insurance premiums -- were designed to control excessive
risk-taking. Reforms to toughen prudential supervision accompanied
the insurance reforms.
It is important to note that the reforms in insurance and
prudential supervision have not yet been tested in difficult times.
At the FDIC, we appreciate the importance of continually
assessing whether the deposit insurance system and the efforts that
accompany it strike the necessary balance between the pursuit of
safety and soundness and the need to allow banks to compete and to
evolve. This is a constant tension that exists in any financial
system in which the government plays a meaningful role.
Deposit insurance is just one element in striking that balance
-- without deposit insurance there would still be a need to
regulate banks. We also know that we have the responsibility to
keep the costs of deposit insurance -- direct costs as well as
indirect -- as low as possible.
Deposit insurance affects bankers, because you pay for it. In
its effects, however, deposit insurance affects everyone that our
economy touches. Deposit insurance is a subject of complex
technicalities and of broad public policies.
In a democracy such as ours, any change in how the deposit
insurance system operates will be the result of discussion and
dialogue. We hope that this discussion and dialogue will occur in
the spirit of deliberation, not in the heat of crisis as did the
debate that resulted in the reforms of a decade ago. And we are
willing to act to take the lead in encouraging that discussion and
dialogue, and in fostering a spirit of deliberation.
As a first step in that direction, we are sponsoring a
symposium on deposit insurance in January. It will focus
discussion on the evolving role of deposit insurance in financial
modernization and globalization, and it will explore refinements to
the current system. We will invite community bankers, regional
bankers and money center bankers to the discussion, as well as
representatives of trade, consumer, and public interest groups,
other regulators, Congressional staff, analysts, and scholars.
We will ask for views on how deposit insurance should operate
in a world that the Travelers/Salomon merger foreshadows. Clearly
banking is headed toward a new world, though the exact route it
will take to get there is a bit uncertain.
We will ask the participants for their thoughts on how to
strike a balance among the potentially competing objectives of
maintaining stability, allowing banks to evolve and compete, and
controlling moral hazard. We will explore alternatives to our
current assessment system. And we will examine whether the current
target reserve ratio for the insurance funds is appropriate.
In the end, in encouraging discussion among bankers, analysts,
regulators, consumer representatives and other informed observers,
we hope to define the ground upon which reasonable people can agree
when considering changes in deposit insurance -- what needs to be
done and why.
A man and his gorilla are sitting in the club house when the
club champion walks in. "I'll bet you $500 per hole my gorilla can
play better golf than you can," says the man. The champion looks
at the man, looks at the gorilla, and says: "You're on." And off
they go to the first tee. The first hole is a long par four over
water. The man gives the champion the honors. The champion tees
up and hits a beautiful drive straight up the middle, over the
water, and chipping distance from the green. "Nice shot," says the
The gorilla then tees up, booms the drive onto the green, and
into the hole!
The champ picks up his ball and they head off to the next
hole, a beautiful par five, along the creek with a slight dogleg
The gorilla tees up and boom another drive, drawing it just
enough to land it on the green, inches from the pin. The champ,
humiliated, concedes the hole and the match. They head back to the
As they settle the bet, the champ remarks how well the gorilla
plays. "I've never seen anyone drive it as far. By the way, since
he aced the first hole and I conceded the match before finishing
the second hole, I never got to see how he putts."
"Oh," says the man, pocketing his money, "he putts exactly
like he drives!"
I believe that the best decisions are informed decisions --
those that are based on knowledge -- and that the best public
policy comes from a free exchange of information. The alternative
-- uninformed decisions -- may very well result in an expensive
By sponsoring an open discussion of deposit insurance next
January, we may spark new information and new thinking on several
prickly issues. By bringing together the range of participants we
are planning, we certainly will encourage a recognition that the
issues cut across diverse interests.
Because the FDIC is a government corporation, we have an
obligation to be open to the public in our operations and an
obligation to be open-minded in addressing the issues we face. Our
symposium next January is evidence that we take both obligations