[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]




                        DEPOSIT INSURANCE REFORM

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
               FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 16, 2001

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 107-16

                               ----------

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
    Chair                            PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska              MAXINE WATERS, California
RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
ROBERT W. NEY, Ohio                  JAMES H. MALONEY, Connecticut
BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
SUE W. KELLY, New York               JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
DAVE WELDON, Florida                 BARBARA LEE, California
JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama                   JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin                HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York              JOSEPH CROWLEY, New York
GARY G. MILLER, California           WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia                STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania         
SHELLEY MOORE CAPITO, West Virginia  BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio

             Terry Haines, Chief Counsel and Staff Director
       Subcommittee on Financial Institutions and Consumer Credit

                   SPENCER BACHUS, Alabama, Chairman

DAVE WELDON, Florida, Vice Chairman  MAXINE WATERS, California
MARGE ROUKEMA, New Jersey            CAROLYN B. MALONEY, New York
DOUG BEREUTER, Nebraska              MELVIN L. WATT, North Carolina
RICHARD H. BAKER, Louisiana          GARY L. ACKERMAN, New York
MICHAEL N. CASTLE, Delaware          KEN BENTSEN, Texas
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             MAX SANDLIN, Texas
BOB BARR, Georgia                    GREGORY W. MEEKS, New York
SUE W. KELLY, New York               LUIS V. GUTIERREZ, Illinois
PAUL E. GILLMOR, Ohio                FRANK MASCARA, Pennsylvania
JIM RYUN, Kansas                     DENNIS MOORE, Kansas
BOB RILEY, Alabama                   CHARLES A. GONZALEZ, Texas
STEVEN C. LaTOURETTE, Ohio           PAUL E. KANJORSKI, Pennsylvania
DONALD A. MANZULLO, Illinois         NYDIA M. VELAZQUEZ, New York
WALTER B. JONES, North Carolina      JAMES H. MALONEY, Connecticut
JUDY BIGGERT, Illinois               DARLENE HOOLEY, Oregon
PATRICK J. TOOMEY, Pennsylvania      JULIA CARSON, Indiana
ERIC CANTOR, Virginia                HAROLD E. FORD, Jr., Tennessee
FELIX J. GRUCCI, Jr, New York        RUBEN HINOJOSA, Texas
MELISSA A. HART, Pennsylvania        KEN LUCAS, Kentucky
SHELLEY MOORE CAPITO, West Virginia  RONNIE SHOWS, Mississippi
MIKE FERGUSON, New Jersey            JOSEPH CROWLEY, New York
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 16, 2001.................................................     1
Appendix:
    May 16, 2001.................................................    41

                               WITNESSES
                        Wednesday, May 16, 2001

Bochnowski, David, Chairman and CEO, Peoples Bank, Munster, IN; 
  Chairman, America's Community Bankers..........................    24
Gulledge, Robert I., Chairman, President and CEO, Citizens Bank, 
  Robertsdale, AL; Chairman, Independent Community Bankers of 
  America........................................................    26
Smith, James E., Chairman and CEO, Citizens Union State Bank and 
  Trust, Clinton, MO; President-elect, American Bankers 
  Association....................................................    23
Tanoue, Hon. Donna, Chairman, Federal Deposit Insurance 
  Corporation....................................................     7

                                APPENDIX

Prepared statements:
    Bachus, Hon. Spencer.........................................    42
    Oxley, Hon. Michael..........................................    48
    Crowley, Hon. Joseph.........................................    44
    Gillmor, Hon. Paul E.........................................    47
    Kelly, Hon. Sue W............................................    45
    Ney, Hon. Robert W...........................................    46
    Bochnowski, David............................................    73
    Gulledge, Robert I...........................................   130
    Smith, James E...............................................    53
    Tanoue, Hon. Donna...........................................    49

              Additional Material Submitted for the Record

Bochnowski, David:
    America's Community Bankers letter to FDIC, Dec. 13, 2000....    85
    Deposit Insurance Reform for a New Century...................   101
Tanoue, Hon. Donna:
    Clarification letter to Hon. Spencer Bachus, May 16, 2001....    52

 
                        DEPOSIT INSURANCE REFORM

                              ----------                              


                        WEDNESDAY, MAY 16, 2001

             U.S. House of Representatives,
            Subcommittee on Financial Institutions 
                               and Consumer Credit,
                           Committee on Financial Services,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 9:36 a.m., in 
room 2129, Rayburn House Office Building, Hon. Spencer Bachus, 
[chairman of the subcommittee] presiding.
    Present: Chairman Bachus; Representatives Weldon, Roukema, 
Baker, F. Lucas of Oklahoma, Kelly, Gillmor, Manzullo, Toomey, 
Cantor, Grucci, Hart, Ferguson, Tiberi, Waters, C. Maloney of 
New York, Watt, Ackerman, Bentsen, Sherman, Meeks, Moore, 
Hooley, Carson, Hinojosa, Lucas of Kentucky, Shows, and 
LaFalce.
    Chairman Bachus. The hearing will come to order. The 
subcommittee meets today for the first of a planned series of 
hearings on the subject of reforming our country's deposit 
insurance system. And I want to stress that this is the first 
of what will be more hearings on the subject. The focus of 
today's hearing will be on a report prepared by the FDIC 
entitled ``Keeping the Promise: Recommendations for Deposit 
Insurance Reform.''
    As we commence this hearing, the Vice President is speaking 
before the Republican Conference, so on the Majority side, our 
attendance may be down some. I understand that the Democrats 
are also in a caucus. But our primary focus at today's hearings 
will be listening to our witness, and I don't anticipate a lot 
of questions, although the Members are free to ask as many as 
they want to. I don't say that in a limiting way.
    Federal deposit insurance, established during the Great 
Depression to restore confidence in the Nation's troubled 
banking system, is that rare product of the legislative 
sausage-making factory that has actually worked pretty well as 
it was intended to. It has enhanced economic stability, largely 
eliminated the prospect of panic-driven runs on banking 
institutions, and succeeded in minimizing the risk to taxpayers 
from bank failures. Yet even the most effective Government 
programs require periodic review and updating to ensure that 
they continue to serve the purposes for which they were 
originally created.
    Our objective this morning is to begin what I hope will be 
a constructive dialogue about the future of the deposit 
insurance system. I can think of no better starting point for 
that discussion than the report filed by the FDIC last month.
    We are pleased to have FDIC Chairman Donna Tanoue with us 
this morning to present the Agency's findings and 
recommendations, and I will say that your report and 
recommendations basically focus on every aspect of the reforms 
that people have proposed.
    The subcommittee's consideration of deposit insurance 
reform comes at a time when the system itself is as healthy as 
it has been in more than 20 years. Thanks largely to sizable 
contributions by the banking and thrift industries in the 
1990's, the Bank Insurance Fund and the Savings Association 
Insurance Fund are both fully capitalized, with combined 
balances exceeding $41 billion.
    The strong condition of the deposit insurance funds might 
cause some to conclude that the status quo should simply be 
maintained, or argue for a more proactive approach. As the FDIC 
has correctly pointed out, the current system leaves open the 
possibility of sizable 23-basis-point premium assessment on 
institutions if and when the designated reserve ratio falls 
below 1.25 percent.
    While there is significant debate within the industry about 
the factors that might cause a penetration of this 1.25 hard 
target, there is no doubt that a 23-basis-point assessment, 
which has been aptly compared to falling off a cliff, would 
have serious consequences both for banks' profitability and for 
their ability to fund economic growth in the communities they 
serve.
    If such were to occur in a period of economic weakness, it 
would even be worse. The FDIC's request for more flexibility in 
setting the reserve ratio, therefore, warrants the 
subcommittee's careful consideration.
    Perhaps no deposit insurance issue has been more hotly 
debated than the question of whether to increase coverage 
levels above the current $100,000 per account limit. While 
several influential policymakers have been openly skeptical of 
the need for such an increase, many of us on this subcommittee 
have heard from community bankers in our district who strongly 
believe that a substantial coverage increase is critical to 
their ability to attract core deposits and remain competitive 
in their local markets. In my view, devising solutions to the 
funding challenges faced by community banks should be this 
subcommittee's highest priority. It is my hope that the 
subcommittee will be reviewing various reform proposals with 
that in mind.
    In this regard I am particularly interested in hearing from 
our witnesses on the issue of higher coverage levels for 
municipal deposits, which have historically been a vital source 
of funding for community banks, but have become increasingly 
expensive to attract and maintain.
    I notice the FDIC's recommendations for coverage limits is 
simply to go up on all deposits--at least that is my 
understanding from reading your proposal--and index them for 
inflation as opposed to singling out retirement accounts, 
pension accounts or municipal accounts.
    In closing, I want to commend Chairman Oxley for his 
leadership in placing the issue of deposit insurance reform on 
the subcommittee's agenda. I look forward to working with him 
and other Members of the subcommittee to develop legislation 
that ensures the continued strength and vitality of a system 
that has served us well for over 70 years.
    I now recognize the Ranking Minority Member Ms. Waters for 
her opening statement.
    [The prepared statement of Hon. Spencer Bachus can be found 
on page 42 in the appendix.]
    Ms. Waters. I thank you very much, Chairman Bachus. I would 
like to be somewhat brief in my opening remarks to allow time 
to hear from the witnesses.
    First of all, I really do want to thank you for calling 
this hearing, and I look forward to working with you on Federal 
deposit insurance reform. I want to commend Chairman Tanoue for 
her work on this issue. She has worked very hard to produce a 
comprehensive analysis of the strengths and weaknesses of the 
deposit insurance system, and I think she and her staff have 
given their time and attention to this issue than anyone since 
Congressman Henry Steagall, who was the original architect of 
the system in 1932. It was his infamous partnership with 
Senator Carter Glass that produced the system we know today, as 
well as other aspects of banking law that we won't necessarily 
be talking about today.
    In any case, deposit insurance has served America well for 
over 65 years. It has maintained public confidence in our 
banking system throughout times of prosperity and times that 
weren't so good. It is important that we examine these issues 
closely in order to maintain and strengthen today's system for 
tomorrow's consumers.
    I look forward to hearing the testimony of the witnesses so 
that we can ensure that we have a deposit insurance system that 
will serve us well throughout the new millennium.
    I thank you very much, Mr. Chairman, and I yield back the 
balance of my time.
    Chairman Bachus. Thank you.
    Mr. Baker.
    Mr. Baker. Thank you, Mr. Chairman. I want to compliment 
you for bringing this subject to the subcommittee's attention 
and conducting this hearing this morning. My concerns go to the 
basic fairness of the current system, and I have read with 
considerable interest past studies of how the current system 
has been constructed and the consequences of it.
    For example, there are a significant number of new 
institutions de novo who have enjoyed full and complete 
insurance coverage without contributing a penny toward the cost 
of that premium expense, while at the same time there are those 
institutions which have been operational for many years, 
operating at relatively low risk levels, that endured the 
difficult years of the S&L bailout and repayment of obligations 
not of their own making.
    And in looking at the statutorily created risk categories, 
the difference between the profile of the most risky 
institution and the least risky institution, there is no 
differential in premium paid because they pay nothing. There 
seems to be little incentive in the current regime to operate 
prudently, safely and conservatively.
    My view is that there should be some modest increase in the 
amount of coverage provided today, given inflationary factors, 
but we should be very careful as we move forward in increasing 
exposure for the taxpayer.
    However, as to whether someone deposits their funds at a 
small institution or one of the largest, there should be no 
disparity in the coverage given to the depositor, so that there 
should be a uniform system from the depositor's side.
    However, I would like to know the view of the FDIC with 
regard to one particular recommendation. I believe the agency 
has evaluated in past years with regard to coinsurance. And 
perhaps in looking at the market where you have 10 percent of 
the institutions that represent potentially 90 percent of the 
exposure to the fund, perhaps a different premium structure 
than we currently view today with regard to coinsurance, where 
the larger institutions perhaps would contribute significantly 
more in premium to those that represent no risk to the fund 
ultimately.
    My basic question, then, Ms. Tanoue, is can you comment on 
the possibility and usefulness of risk sharing, either through 
reinsurance or other means, in determining an adequate price 
for deposit insurance; and second, if such arrangement could, 
in fact, be useful to limit the Government's exposure in a 
potential institution's failure?
    Chairman Bachus. I am sorry. We are still in opening 
statements, Mr. Baker.
    Mr. Baker. I am sorry. Rhetorically. Thank you, Mr. 
Chairman.
    Chairman Bachus. Mr. LaFalce.
    Mr. LaFalce. Thank you very much, Mr. Chairman.
    Today, the American deposit insurance system appears sound, 
with surpluses in both the BIF and the SAIF above the statutory 
minimum reserves. However, the current system contains 
features, many enacted during the banking and thrift crises of 
a decade ago, which do not represent optimal public policy. 
Therefore, it is very appropriate for you to have this hearing 
and for Congress to examine the structure of this system to 
ensure that it provides the protection of depositors and 
taxpayers that it should.
    The FDIC recently issued a comprehensive report on the 
deposit insurance system. In examining the need for reform, 
Congress should thoroughly review all of the issues identified 
in the FDIC report and other relevant analyses of the current 
system.
    In my view, a priority should be the merger of the BIF and 
the SAIF. This would clearly benefit the deposit insurance 
system by creating a single more diversified fund that is less 
vulnerable to a regional economic problem.
    In addition, a merger of the funds would more accurately 
reflect the reality of today's financial services industry, in 
which over 40 percent of the SAIF deposits are held by 
commercial banks and FDIC-regulated State savings banks. But I 
am increasingly of the opinion that the ultimate stability of 
any combined fund would be dependent on the adoption of a more 
effective risk-based premium system.
    Part of the unfortunate fallout of the banking and thrift 
crises is the current FDIC recapitalization provision that 
requires the FDIC to impose a 23-basis-points assessment if one 
of the FDIC funds falls below the required reserve ratio and 
the funds cannot be recapitalized in a year. Such a mandatory 
assessment could come precisely at the wrong time during an 
economic downturn.
    Chairman Greenspan recently expressed concern about 
precisely this aspect of the current system, and the FDIC has 
put forward meaningful recommendations to deal with this 
problem. The change in this approach should be a part of any 
deposit insurance reform legislation.
    Another priority should be a reexamination of the current 
risk-based system in which over 92 percent of all banks and 
thrifts have paid no deposit insurance premium since 1996. This 
zero premium creates a poor set of incentives for risk-taking 
that would not exist if pricing were more accurately tied to 
risk.
    Additionally, the zero premium situation permits 
institutions with dramatic deposit growth to significantly 
increase the amount of funds protected by the deposit insurance 
system without compensating the FDIC.
    Many in the industry are understandably concerned that the 
current pricing system allows institutions with large growth in 
deposits to spread the cost of the increased exposure to the 
other members of the system. And this, too, is clearly another 
issue that deserves attention in our discussion.
    Now, some banks, especially community banks, and a number 
of Members of Congress have called for an examination of the 
level of deposit insurance coverage. I am not yet convinced of 
the wisdom of this, and the burden of proving either the 
necessity or desirability of such an increase rests, it seems 
to me, on the advocates of an increase. However, this is 
clearly a very important issue for the banking industry, 
particularly those community banks that rely more on core 
deposits for funding. Then it is also an important issue for 
many consumers who wish to ensure their savings are secure.
    This subcommittee in Congress should give due consideration 
to their concerns, but we must also give great consideration to 
the views of those such as Chairman Greenspan, former Secretary 
of the Treasury Summers, and so forth, who believe that an 
increase in the level of coverage will increase the moral 
hazard within our deposit insurance system. There may be a way 
to increase the coverage, but also at the same time better 
assessing both risk and the premiums necessary for that risk. I 
look forward to a thoughtful exploration of this issue.
    Any debate on comprehensive deposit reform must also 
inevitably include a discussion of the proper level of reserves 
of the FDIC. In determining the proper level for the FDIC's 
reserves and insurance premiums, policymakers must strike an 
appropriate accommodation between many objectives, and at least 
two: first and most importantly, ensuring that the FDIC is able 
to meet its obligation to depositors, while protecting 
taxpayers, and that might well include paying for the costs and 
examinations and supervision by regulators other than the FDIC; 
and second, minimizing transfers of capital from the thrift and 
banking industries where that capital can be used to fund 
business loans, mortgage and other consumer credit needs. The 
current approach that is a hard 1.25 ratio may not best achieve 
an appropriate balance.
    And I look forward to hearing the testimony of the FDIC 
Chairman and other witnesses. I thank the Chair very much.
    Chairman Bachus. Thank you.
    Are there any Members on the Majority side that wish to be 
recognized? Not so.
    Ms. Carson.
    Ms. Carson. Thank you very much, Mr. Chairman, for 
convening this hearing. I look forward to the panelist 
testimonies. I thank them for their presence. I am especially 
pleased to see here again my good friend Mr. David Bochnowski 
from the State of Indiana, who will be testifying on the second 
panel. He brings to this hearing a wealth of experience, a 
lifetime of public service dedicated to the people of Indiana 
and the United States, and I certainly thank him for attending 
today.
    Mr. Chairman, Members of the subcommittee, since the 
1930's, the full faith and credit of the United States has 
stood behind $3 trillion of insured deposits at banks and 
savings associations. Although Congress has only modified the 
system twice, once in 1989 and again in 1991, in response to 
financial crisis, there has been a renewed effort to reform the 
current system.
    In August of last year, FDIC Chairman Donna Tanoue--I hope 
I didn't mispronounce your name--released an 84-page overview 
of options on deposit insurance reform position paper, which 
was opened to public comment until the beginning of this year. 
The FDIC in the paper described in detail several possible 
approaches to reform the deposit insurance system without 
advocating any of them, except to recommend the merger of the 
Bank Insurance Fund, BIF, and the Savings Association Insurance 
Fund, SAIF.
    Today, we are faced with a very different report. One which 
takes a strong stance on four key areas of reform, including 
the need to merge the BIF and the SAIF, the need to reform how 
deposit insurance is priced to reflect risk, the need to adjust 
insurance premiums, and the need to keep insurance coverage in 
line with inflation. However, while there is general agreement 
between FDIC, the banking industry and Congress on some of 
these issues, there are still areas that we need to address 
with specific care.
    Unlike the previous reforms of deposit insurance in 1989 
and 1991, economic crisis is not acting as a catalyst. To an 
onlooker, concern over deposit insurance may seem to come at an 
unlikely time, at least as far as the U.S. banking industry is 
concerned. Banks are performing well, along with the U.S. 
economy, despite the slight slowdown, downturn, recently, and 
the industry has been stable in recent years. However, 
interstate banking restrictions have been lifted, and the 
barriers between commercial and investment banking are starting 
to fall.
    U.S. Banks are consolidating in record numbers, and the 
size and complexity of our largest banks are growing. While 
this consolidation and growth may not in itself be bad, one 
thing is clear. The loss of just one of these too-big-to-fail 
banks could pose an even greater systemic risk than before. Yet 
too much depositor protection could result in such banks taking 
too much risk.
    Having said this, we are faced with a unique opportunity, 
because we are not forced to reform deposit insurance because 
of an economic crisis. We have an opportunity to reform deposit 
insurance to avert future economic crisis. I stress again we 
must do it with care and develop a consensus within the banking 
industry on the right way to approach this issue.
    There is general agreement that the BIF and the SAIF funds 
should be merged, and as my colleague Mr. LaFalce pointed out 
when he introduced his legislation to do this, the merger of 
the BIF and SAIF would clearly benefit the deposit insurance 
system by creating a single more diversified fund that is less 
vulnerable to regional problems.
    However, there has been a great deal of discussion within 
the banking industry as well as here in Congress over some of 
the other issues presented in the FDIC report. For example, if 
insurance coverage is to be kept in line with inflation, what 
is the appropriate year for beginning this inflation 
adjustment? The FDIC has pointed out that if the base year were 
1980, when the limit increased from $40,000 to $100,000, the 
insurance level would be approximately $200,000 today to 
account for inflation. If 1974 was chosen as the base year, 
when the limit was increased from $20,000 to $40,000, the new 
limit would be approximately $135,000.
    Both Senator Phil Gramm and Mr. Greenspan initially 
expressed opposition at setting the level at $200,000, and 
there were also many bankers who were very concerned about the 
loss of the current buffer above the 1.25 reserve ratio and a 
potential for premium increases that would accompany a doubling 
of the insurance limit. There were also bankers who expressed 
concern about the political price that would have to be paid if 
such an increase were to be enacted.
    We must also consider the problems associated with 
effectively pricing deposit insurance to reflect risk. We must 
establish which financial institutions currently pay FDIC 
insurance premiums and which ones do not. Are the distinctions 
reasonable, or should they be changed? How can we as 
policymakers toughen risk-based premium pricing but still 
ensure that it is fair? It is my understanding that many 
banking industry trade--officials--and there is one more point 
that I want to make, and that is for community bankers who 
believe insurance reform will help them compete with larger 
banks and want to FDIC to increase the coverage to $200,000.
    I am sorry, Mr. Chairman, that I extended my time, but I 
appreciate the opportunity to make a few points. Thank you.
    Chairman Bachus. Are there any other Members that wish to 
be recognized?
    All right. At this time we will introduce our first panel, 
which is made up of one panelist, the Honorable Donna Tanoue, 
Chairwoman of the Federal Deposit Insurance Corporation, whose 
report, as she says, has raised some yellow flags, and we look 
forward to hearing from you, Ms. Tanoue. And as I have told you 
privately, if you want to take longer than 5 minutes, that 
would be fine.

   STATEMENT OF HON. DONNA TANOUE, CHAIRMAN, FEDERAL DEPOSIT 
                     INSURANCE CORPORATION

    Ms. Tanoue. Thank you. Mr. Chairman, and Members of the 
subcommittee, on behalf of my colleagues at the FDIC, I want to 
extend our sincere appreciation for the subcommittee's 
recognition of the importance of Federal deposit insurance 
reform and for your holding hearings today.
    Chairman Bachus. Chairwoman, if you would move the mike a 
little closer.
    Ms. Tanoue. OK.
    In addition, we appreciate the efforts of several Members 
of the Congress who have introduced or cosponsored legislative 
initiatives addressing deposit insurance issues. We believe 
strongly that these efforts will stimulate and further advance 
the debate.
    Deposit insurance plays a vital role in promoting financial 
stability. As a recent survey by the Gallup organization 
showed, the security that Federal deposit insurance provides is 
a very important and continuing consideration when Americans 
weigh where to place their money.
    This morning I would like to talk about why reforming our 
deposit insurance system is important, why reform should be 
addressed now, what our recommendations are, and why reform of 
deposit insurance should be comprehensive.
    Why is reform important? As good as it is, our current 
system has certain flaws, some of which undercut the very 
purpose for which deposit insurance was created. Under our 
current system, 92 percent of the insured institutions pay no 
premium for coverage. Because deposit insurance has been free 
for most of these institutions, our current system distorts 
incentives. The results? More than 900 institutions, or about 1 
out of every 10 institutions in our country, have never paid 
premiums. Major investment firms have begun sweeping large 
dollar volumes of brokerage accounts into deposit accounts in 
their FDIC-insured subsidiaries.
    In addition, underpriced deposit insurance also may promote 
moral hazard, the incentive for insured institutions to engage 
in riskier behavior than they might otherwise in the absence of 
deposit insurance.
    Our current system could also have a harmful economic side 
effect, a procyclical bias, that is, a tendency to make an 
economic downturn longer and deeper than it might otherwise be. 
How is that? During a severe downturn, the current statutory 
framework would require that the FDIC charge banks high 
premiums, thus limiting the availability of credit to 
communities when they need it most, and thus impeding economic 
recovery.
    If we don't reform our system, it is likely to take a toll 
on the safety and soundness of the banking industry and on the 
economy, because a premium increase would hit when banks are 
less healthy and losses might be depleting the insurance funds.
    Why do we advocate deposit insurance reform now? Despite 
some recent trends that are of some concern, both the economy 
and the banking industry remain strong. We need to address the 
flaws in our deposit insurance system now, without the 
pressures and distractions that a downturn would bring or the 
urgent demands for action that might arise during a crisis.
    We at the FDIC have five recommendations. Recommendation 
number one: the FDIC should be permitted to charge all 
institutions premiums on the basis of risk. Insurers generally 
price their product to reflect the risk of loss. Today, because 
more than 92 percent of our insured institutions are in the 
FDIC's best risk category and paying no deposit insurance 
assessment, our premium system is ineffective in capturing and 
curbing risk.
    Recommendation number two: change the law to eliminate 
sharp premium swings. If the fund falls below a target level, 
the law should allow premiums to increase gradually. Charging 
premiums more evenly over time, allowing the fund to absorb 
some losses temporarily, and increasing premiums more gradually 
than is required at present would soften the blow of an 
economic downturn.
    Recommendation number three: give the FDIC the authority to 
rebate portions of deposit insurance premiums based on past 
contributions to the fund when the fund is above a specified 
target level. Tying rebates to the current assessment base 
would increase moral hazard. Fairness dictates that rebates 
should be based on past contributions to the fund. Allowing the 
FDIC to pay rebates would create a self-correcting mechanism to 
control the growth of the fund. The higher the fund gets, the 
larger the rebate. Thus, should the fund continue to grow, 
rebates eventually might exceed assessment income and provide a 
break on the growth of the insurance fund.
    Recommendation number four: merge the Bank Insurance Fund 
and the Savings Association Insurance Fund. As I am sure many 
of you are aware, the FDIC has made this recommendation for a 
number of years, in large part because the resulting fund would 
be stronger and more diversified.
    Recommendation number five: index deposit insurance 
coverage for inflation so that depositors do not see the real 
value of their coverage erode over time. While Congress should 
decide on the initial coverage level, indexing would provide a 
systematic method of maintaining the real value of deposit 
insurance coverage.
    In closing, I would like to emphasize that it is important 
for these recommendations to be implemented and to be 
considered and implemented as a package. Picking and choosing 
among the parts of our proposal could weaken the deposit 
insurance system, magnify economic instability and distort 
economic incentives. In particular I can't emphasize enough 
that the ability to price for risk is essential to an effective 
deposit insurance system and must be included in any reform 
package.
    Thank you, and I am happy to address any questions or 
comments that you might have.
    [The prepared statement of Hon. Donna Tanoue can be found 
on page 49 in the appendix.]
    Chairman Bachus. Chairman Tanoue, I will lead off the 
questioning, and I think we are all concerned about a possible 
erosion of the ratio below $1.25. And you have pointed out 
several factors where that may happen. One, you have talked 
about the addition of new deposits. Sort of looking at the 
figures--at least up until 6 months ago, the infusion of new 
deposits hasn't brought down that ratio that much as it seems 
to be--is it about $1.35?
    Ms. Tanoue. Yes.
    Chairman Bachus. Go ahead.
    Ms. Tanoue. That is true. Some recent examples of rapid and 
dramatic growth, though, have made people more appreciative and 
more sensitive to how the factor of growth in deposits can 
affect the reserve ratio level. What we have tried to emphasize 
at the FDIC, however, is that it could be a potential 
combination of factors, perhaps a slowing of the economy, 
unanticipated or expensive bank failures and perhaps continued 
deposit growth. It is not inconceivable that those factors 
could combine to reduce the current cushion and perhaps to 
reduce the reserve ratio over time and, therefore, to cause the 
FDIC to charge very steep premiums.
    Chairman Bachus. Have you noticed, we have had some periods 
of stock market volatility in the past year. We have had large 
shifts of deposits from some of the full-service financial 
institutions into insured deposits. Has there been any evidence 
that that has caused--has the ratio at times dropped three or 
four basis points, or has it pretty much been steady at a $1.35 
ratio?
    Ms. Tanoue. Some of the recent infusion of deposits into 
the system has caused a reduction in terms of several basis 
points, but I would like to emphasize that the issue of rapid 
growth is on the minds of many. The FDIC has made several 
recommendations to address this issue of rapid growth. And we 
would do so first by recommending that all insured institutions 
pay premiums based on risk, including those that are growing 
rapidly. If that growth--and I would underscore ``if''--if that 
growth presents additional risk exposure to the fund, then we 
would recommend that premiums reflect that additional exposure.
    In concert with the recommendation to charge all 
institutions based on risk, we are recommending that rebates be 
paid if the fund meets the target level that is established or 
deemed essential by the FDIC and that those rebates take into 
consideration past contributions to the fund. We would 
recommend that such rebates not be made based on the current 
assessment base, because we think that would create some 
perverse incentives. In other words, you might have a 
situation--if you use the current assessment base for your 
rebate methodology--you might have a situation where you are 
encouraging growth and actually rewarding institutions that are 
growing rapidly, but may not have made past contributions to 
the fund.
    Chairman Bachus. You have mentioned that if the ratio fell 
below $1.25 or 1.25 percent, that it could trigger--well, it 
would, if it was not recapitalized within a year--a 23-basis 
point premium, and you further said that that could trigger a 
$65 billion loss of ability to loan money. Would you give me 
some basis for the $65 billion figure?
    Ms. Tanoue. Yes. The current statutory framework envisions 
a situation if the fund falls below the 1.25 designated reserve 
ratio, and the fund isn't recapitalized within a year, the FDIC 
would be required to charge premiums as steep as 23 basis 
points. We are recommending, again, that institutions be 
charged premiums based on risk, but I would like to emphasize 
that we are not trying to increase the assessment burden. We 
are trying to allocate the existing assessment burden more 
evenly over time. So we would avoid that kind of premium 
volatility.
    We believe that if institutions could pay small, steady 
premiums over time, they would be able to manage their 
operational expenses better and, again, avoid a situation where 
during tougher economic times, they might be called upon to pay 
such steep premiums, thereby taking monies out of the economy 
and taking monies away really at a time when communities would 
really need money for credit extension most.
    Chairman Bachus. I guess my question was the $65--you 
mentioned there might be a $65 billion reduction in lending.
    Ms. Tanoue. Yes.
    Chairman Bachus. And was that based on the cost of the 
premiums?
    Ms. Tanoue. That is based, yes, potentially on the steep 
increase in premiums during a downturn.
    Chairman Bachus. My time has expired, but I would also be 
interested in whether you have any evidence--and I want to ask 
this as a question--any evidence that fast growth in and of 
itself increases risk, whether you have focused on that, or 
whether charging premiums to fast-growing institutions is more 
a question of fairness as opposed to risk?
    Ms. Tanoue. I would say that fast growth in and of itself 
is not risky, per se. At the FDIC we would look at fast growth 
in combination with other factors, capital, assets, management, 
the quality of an asset portfolio.
    Chairman Bachus. Thank you.
    Ms. Waters.
    Ms. Waters. Mr. Chairman, we all must be concerned about 
whether or not we are going to take resources away from 
consumers, that whether or not the recommendations that you are 
making would place consumers who would need loans, need to have 
access to the resources of the banks, in jeopardy here, and I 
guess, you know, what I would like you to respond to that a 
little bit more, and I would also like to understand a little 
bit better your discussion about how you determine risk. You 
make the case that the risk now is determined for the short 
term rather than the long term, and you believe that it should 
be looked at over a longer period of time. I would like you to 
explain that a little bit better, and I would also kind to like 
the ask the question that if under the present system we have a 
surplus, we have excess to the point of rebate, then what is so 
terribly wrong with it?
    Ms. Tanoue. Well, perhaps I could take that last issue 
first. In terms of the size of the fund, an appropriate level 
of the fund, the FDIC would conduct an analysis based on 
expected loss presented by the institutions that are insured by 
the fund, but there is always a tradeoff between the size of 
the fund, ensuring that the fund is sufficient and adequate to 
protect taxpayers, and also ensuring that the fund doesn't grow 
so large that funds over and above, say, the level that is 
deemed necessary by the FDIC might not be otherwise returned to 
institutions to be put back into the communities for community 
lending.
    In terms of assessing risk, that is our job basically, and 
we have put forward in the recommendations an example of how we 
might assess the risk exposure of institutions, particularly 
the small institutions. And we consider a number of factors, 
including supervisory ratings based on examinations as well as 
a number of different types of financial ratios.
    Going back to the earlier point that you made, one of the 
central features of our recommendation is to avoid the 
potential premium volatility that exists potentially under the 
current statutory framework. We want to, again, allocate the 
assessment burden of our institutions more evenly over time and 
to avoid a situation where we might be calling upon them to pay 
premiums again as high as 23 basis points at a time when the 
economy might be suffering a sharp downturn.
    We believe that if you moderate the premiums more slowly 
and steadily over time, you would avoid that type of sharp 
premium increase at the roughest part of the economic cycle, 
and we would avoid a situation where we are exacerbating the 
economic downturn by extracting large sums of money from 
insured institutions at a time when communities might need that 
money for lending purposes and also to help an economic 
recovery.
    Mr. Weldon. [Presiding.] The gentlelady yields back her 
time.
    The hearing will stand in recess for a vote on the floor of 
the House and reconvene in about 10 minutes.
    [Recess.]
    Chairman Bachus. The hearing will come back to order.
    Mr. Gillmor, you are recognized for questions.
    Mr. Gillmor. Thank you very much, Mr. Chairman and Madam 
Chairwoman. I would like to just ask you to comment on the 
question of municipal deposits. Concerns that I hear expressed 
on a number of occasions in my district are from local 
communities who would like to put public funds into their local 
financial institutions, but because some of these institutions 
are relatively small and also because of the FDIC coverage 
limit, they have to put the money in some other institution 
outside the community. This is detrimental because it takes 
money out of the community, which could be utilized there. I 
am--along with some other Members--considering legislation that 
would extend the level of insurance for municipal deposits in 
local banks. I would just like what ever comments you would 
want to make on that subject.
    Ms. Tanoue. Thank you. We have taken a look at the issue of 
raising coverage for municipal deposits. Raising the coverage 
level for this category of deposits could potentially provide 
banks with greater latitude to invest in other assets. Higher 
coverage level also might help such institutions be more 
competitive for public deposits. But the collateralization 
requirements that are placed by different States also place 
limits on the ability of riskier institutions to attract public 
moneys, while a higher deposit insurance coverage level might 
not. And I would also point out that giving higher coverage or 
full coverage for municipal deposits might also relieve some of 
the State treasurers or community treasurers from having to 
vigorously monitor local institutions or financial 
institutions, and that might result in a loss of some level of 
depositor discipline. But having said that, I will say that 
there are obviously potential benefits as well as consequences 
of favoring these types of deposits with higher coverage levels 
and the full potential benefits and consequences are not yet 
certain. It is our view that this issue should be looked at 
further, analyzed further and discussed with the parties that 
have a stake in the system.
    Mr. Gillmor. If I might attempt to characterize your 
response, I guess I would say if this is accurate, it is 
cautiously favorable, but we still want to look at it; is that 
pretty close to on the mark?
    Ms. Tanoue. I would say cautious.
    Mr. Gillmor. But also favorable, we hope.
    Ms. Tanoue. I guess what I would also point out is that 
there are obviously other calls for higher coverage levels that 
might favor other classes of depositors, and these will all 
present issues for Congress to consider. Some people are asking 
for higher coverage for certain types of retirement accounts, 
and we could anticipate that the calls for higher coverage for 
different categories might expand. Those might include deposits 
by charities or savings for college You would have to take a 
hard look from a public policy standpoint at the potential 
benefits and consequences.
    Mr. Gillmor. Well, I think my time is about to expire, but 
I might say, I think you can find a lot of worthy types of 
deposits, but the one thing that distinguishes this category of 
deposits from others is that it is local money raised in that 
community, which may not be the case with other deposits, and 
the failure to provide that protection is taking money out of 
those communities, which means small businesses aren't getting 
loans, which means that some home mortgages aren't being made. 
So I think there is a little bit of a distinguishing character 
to these types of deposits, but I appreciate your comments.
    Chairman Bachus. Would the gentleman yield?
    Mr. Gillmor. Yeah, I yield.
    Chairman Bachus. I would also say, Chairman, you talked 
about moral hazard, or that this may encourage some lack of 
supervision, but I would focus on the fact these are community 
banks, and these would be the cities in which they do business, 
and I would think those cities would probably be more aware of 
those banks and the soundness in that there would probably be a 
local board of directors, and they would probably be well 
qualified to make judgments on the soundness of the bank, you 
know.
    Ms. Tanoue. Again, we would want to look hard and we 
probably want to do more analysis on any potential significant 
increase in deposit coverage for any new category of expanded 
deposit insurance coverage.
    Chairman Bachus. I am not sure these cities now are 
depositing their moneys with different banks, so I think they 
would simply be transferring a lot of that money into banks, 
into the city, would try to invest it or deposit it in their 
own city or in their own county to ensure that it was loaned 
within their own communities. But we may further explore this 
with you with some.
    Ms. Tanoue. We would be happy to discuss it further.
    Mr. Chairman, if I could, you had asked me a question 
earlier about the $65 billion potential contraction in lending, 
and I was wondering if I might call up one of my staff members 
to explain how we calculated that.
    Chairman Bachus. Certainly.
    Ms. Tanoue. And to explain it more directly, if I could ask 
Fred Carns who is with our Division of Insurance.
    Chairman Bachus. If you could just identify yourself for 
the record. I know the Chairman just did that.
    Mr. Carns. I am Fred Carns, Associate Director of the 
Division of Insurance with the FDIC. Just in simple terms, the 
$65 billion, a 23 basis-point assessment with today's total 
deposits of about $4 trillion would result in about $9 billion 
in assessments from that 23 basis point rate, and then with the 
industry's average capital ratio in the neighborhood of 14 
percent, that translates into lending of about 7 times that 
amount, or somewhere in the neighborhood of $65 billion.
    Chairman Bachus. Thank you.
    Ms. Tanoue. Thank you, Mr. Chairman.
    Chairman Bachus. Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman. And I thank the 
Chairwoman for being here today. Right at the outset of your 
prepared comments, you expressed appreciation to the efforts of 
Members of Congress who have introduced or cosponsored 
legislative initiatives addressing deposit insurance and 
applauded those efforts which stimulate and further advance the 
debate. I happen to be one of those people as cosponsor of H.R. 
557, which acknowledges that there is an excess in the deposit 
insurance fund and advocates first the application of that 
excess to FICO assessments, and then subsequently to rebates 
after the FICO bonds have been paid off. I notice that you 
have, I guess, pretty much for the first time, acknowledged the 
possibility that there might be value to some rebates, and I 
won't ask you to comment particularly on our bill. I want to go 
through and compare how your recommendations match up with the 
bill, but I am delighted to see that you have acknowledged that 
rebating some of these excess insurance deposits might help us 
get more money into the lending process, and I take it that is 
what this last set of comments was about in response to the 
Chairman's questions.
    Let me ask a question about, just for my own edification, 
the banks that are currently exempt from paying insurance, 
paying into the insurance fund, I take it that that was, that 
is based on some analysis of that those banks don't 
substantially contribute to risk. How does that correspond with 
the movement toward a risk-based analysis to get to assessing 
the premium?
    Ms. Tanoue. Well, essentially, in 1996, when the Congress 
passed the legislation recapitalizing the SAIF and the BIF, the 
Congress chose to limit the FDIC's discretion to differentiate 
among its institutions and to charge premiums to those 
institutions that are basically rated one or two. So under the 
current law, the FDIC can only charge premiums to institutions 
that are rated 3, 4 or 5.
    Mr. Watt. Isn't that, in and of itself, a somewhat of a 
risk-based system that Congress has put in place? Isn't that a 
determination that banks that are rated 1 and 2, much, much 
less likely to contribute to a draw on the insurance fund?
    Ms. Tanoue. Congress did envision a risk-based premium 
system, and as I testified earlier, our system is painfully and 
obviously deficient. In terms of the 1- or 2-rated institutions 
that fall within the best category for insurance purposes, I 
would want to emphasize that you can't assume that a 1- or 2-
rated institution does not present risk to the fund.
    Mr. Watt. How do they get to be 1 or 2, then, if they are 
presenting risk?
    Ms. Tanoue. Well, I would mention that our studies show 
that in looking back over historical periods, 2 years prior to 
failure, almost 47 percent of the institutions that failed 
during the crisis period had ratings of 1 or 2, and if you look 
3 years prior to the failure, over 60 percent of the banks are 
rated 1 or 2. We have further studies that also show that the 
5-year failure rate for CAMELS 2-rated institutions since 1984 
was more than 2\1/2\ times the failure rate for 1-rated 
institutions.
    So again, I think there is a great deal of information that 
shows that institutions, even if they are rated 1 or 2, do 
present risk. And our point is that currently, our system 
doesn't distinguish among those institutions. Again, more than 
92 percent of the industry, thousands and thousands and 
thousands of institutions, do not pay premiums even though 
there are large and discernible and identifiable differences in 
terms of risk exposure among those institutions. And so 
essentially you have those institutions that are less risky 
subsidizing those that are riskier.
    Mr. Watt. I than think my time is expired although the 
clock seems to move faster. Maybe if I just talk slower.
    Chairman Bachus. We have actually two clocks.
    Mr. Watt. I yield.
    Chairman Bachus. Thank you, Mr. Watt.
    Mr. Weldon.
    Mr. Weldon. Thank you, Mr. Chairman. Madam Chairwoman, on 
the issue of rebates, you have testified that they should be 
based on past contributions to the fund and not on current 
premium assessments. What is your recommendation to us as to 
how those rebates should be calculated? For example, what I am 
talking about, the banks that helped recapitalize the BIF and 
the SAIF, should they be entitled to a greater refund if there 
is going to be a rebate than, say, those who did not contribute 
to that recapitalization?
    Ms. Tanoue. There are a number of ways that the FDIC could 
develop rebate methodology, but again, one of our most 
important recommendations is that rebates be based on past 
contributions to the fund, and that would mean essentially that 
those institutions that helped to build the fund over time 
would see rebates earlier and in larger amounts.
    Mr. Weldon. What about those institutions that have 
contributed nothing to the fund?
    Ms. Tanoue. Those institutions would, assuming the risk-
based premium system is put into effect and all institutions 
are charged premiums, those institutions, once they started 
putting money into the system, would eventually over time earn 
the right to attain rebates.
    Mr. Weldon. Some people would advocate retiring FICO bonds 
early as opposed to issuing rebates. Can you comment on that?
    Ms. Tanoue. Yes, our recommendations basically would 
recommend rebates once target levels of a fund are met, but we 
would leave it to the institutions themselves to decide how to 
use those moneys once they are rebated. Now I know that there 
is the bill that Congressman Lucas mentioned, H.R. 557, that 
would use funds above a certain level to pay for the FICO 
obligation. I would emphasize that that bill would not base 
rebates on past contributions. Old members of the fund would 
benefit from reduced FICO payments, even those that had never 
paid a penny in terms of insurance assessments.
    Mr. Weldon. You talked about indexing insurance coverage, 
and I think you also mentioned increasing the limit. Should we 
do both, increase the limit and index? Which do you think is 
more important: indexing it or increasing the limit if we are 
going to increase the limit on FDIC, the size of FDIC 
insurance?
    Ms. Tanoue. Our recommendation really goes only to 
recommending indexation of the current coverage level. We 
believe that Federal deposit insurance is a valuable program 
and confers a valuable benefit. And like other important 
Federal import programs like Social Security and Medicare, 
those benefits are indexed to inflation, and so Federal deposit 
insurance coverage should be as well. As to increasing coverage 
levels, that is a public policy decision that we would leave to 
Congress. We would point out, however, that you can index based 
on different points, from 1974, 1980, or you could start from 
today and those would result in very different coverage levels 
over time. I would also want to emphasize that in looking at 
any potential increase in coverage, we would strongly recommend 
that one part of any package of recommendations must be the 
putting into place of an effective risk-based premium system 
which would lend itself to mitigating any concern about 
increased moral hazard as a result of increasing coverage 
levels.
    Mr. Weldon. And finally, can you comment for me on the too-
big-to-fail doctrine? Do you think this permits certain large 
institutions to take on too much risk?
    Ms. Tanoue. We have not addressed the too-big-to-fail 
issue, or the issue of systemic risk directly in our 
recommendations. There has been some concern that there is 
implicitly greater coverage for those institutions that are 
very large in size, and we would not recommend at this time 
charging premiums that would take such a factor into 
consideration.
    Mr. Weldon. Thank you very much. Mr. Chairman, I believe my 
time has expired.
    Chairman Bachus. Ms. Hooley.
    Ms. Hooley. Thank you, Mr. Chairman.
    Madam Chairwoman, some people and some regulators have 
testified that the current zero premium creates improper 
incentive s for bankers to take risk. Do you agree with this, 
and can you explain why?
    Ms. Tanoue. I do think that when you have a zero-based 
deposit insurance premium, that that can sometimes create the 
wrong incentives or create no incentives. We believe that it 
might increase the tendency of some institutions to take more 
risk, to engage in riskier activities than they might 
otherwise, if there was a risk-based premium system in place, a 
truly effective system in place.
    Ms. Hooley. Is that problem more acute when the economy is 
in a downturn, or does that, do you think that has an impact at 
all?
    Ms. Tanoue. I think it is an issue regardless of the 
economic circumstances.
    Ms. Hooley. So you think that banks will take more risk, 
and it doesn't really matter whether the economy is in a 
downturn. Is that what I heard you say?
    Ms. Tanoue. Well, if the institutions are not paying 
anything in premiums, that would probably exacerbate the impact 
on the economy.
    Ms. Hooley. OK. Do you think it will have a negative impact 
on the economy?
    Ms. Tanoue. It could potentially have a negative impact, 
yes.
    Ms. Hooley. OK. Thank you. I yield back the rest of my 
time.
    Chairman Bachus. Thank you. Mr. Toomey. Ms. Hart.
    Ms. Hart. I have no questions.
    Chairman Bachus. Mr. Grucci, do you have questions?
    Mr. Grucci. No, sir.
    Chairman Bachus. Mrs. Roukema.
    Mrs. Roukema. All right. I will take the opportunity, and I 
do apologize for not being here for your full testimony. There 
were unavoidable conflicts so you may have already addressed 
this, and I must say that I am not fully apprised of the 
totality of Chairman Greenspan's statement, recent statement, 
and it was reported in the paper the other day. I believe he 
recommended a regulatory policy that would quote: ``flatten out 
or even reverse the cyclicality of the current system.''
    Did you address that question, or what is your reaction to 
Chairman Greenspan's statement, and what is the implications of 
it? I am not quite sure I understand it in its totality, and 
when Chairman Greenspan speaks, many of us listen. Could you 
assess that for us or give us an initial reaction?
    Ms. Tanoue. I think our recommendations are very consistent 
with what Chairman Greenspan was talking about there. One of 
the key features that we focus on in our recommendation is the 
potential procyclical bias that our system has and that we 
would charge institutions potentially very steep premiums 
during a severe economic downturn, and our recommendations 
really go to avoiding that circumstance, avoiding charging 
institutions the highest premiums at a time when they are least 
able to pay, and we tried to allocate the assessment burden 
more evenly over time and to avoid such a procyclical bias in 
our system.
    Mrs. Roukema. So you feel that that is consistent with 
Chairman Greenspan's perspective and will resolve the problem 
and make it sound and secure?
    Ms. Tanoue. Well, we think that the recommendations that we 
have put forward would go a long way to strengthening the 
system.
    Mrs. Roukema. All right, thank you. I will, of course, 
review your testimony. If there are further questions, I will 
submit them to you in writing, because this is certainly 
something that I believe strongly in, and I certainly am for 
merging the funds and want to work to make them secure for the 
future.
    Ms. Tanoue. Thank you.
    Mrs. Roukema. Thank you.
    Chairman Bachus. Mr. Bentsen, I want to apologize to you, I 
was down the list and I overlooked you earlier.
    Mr. Bentsen. No apology necessary, Mr. Chairman. I was 
trying to remember everything I read about your invigorating 
testimony that I looked at.
    Madam Chairwoman, a couple of questions. It would look like 
what your study is--what the FDIC is proposing is to move to a 
more of a subjective-based premium, risk based premium, and a 
subjective reserve ratio, and as I read through your testimony, 
in looking at the example that you go through in the back, is 
it the idea would be, if I understand correctly, is to 
reinstate a premium on all insured deposits, and then adjust 
that premium based upon some risk analysis that the FDIC comes 
up with. And then on top of that, assuming that the total DRR 
is between, say, 115 and 135, then lay back a rebate of 30 
percent to insured depository institutions based upon first, or 
maybe only their history and paying premiums, those that have 
paid, who have paid the most premiums would be first in line 
for rebates.
    Is that generally a correct analysis? And is this just a 
model that you all are proposing, or one idea of how you would 
establish the structure, or is this the basic concept?
    Ms. Tanoue. We have put forth the basic concepts, and then 
we have put forth some numerical examples to illustrate how 
those concepts might work, but obviously these are designed to 
engender further discussion and further narrow the debate. One 
thing that caught my attention was when you mentioned 
subjective premium system and a subjective reserve ratio. We 
would be asking that the FDIC be given discretion to establish 
an appropriate range or target, appropriate level.
    Mr. Bentsen. And that is fine. I will swap adjectives with 
you. ``Discretionary'' is probably a better adjective. I 
understand as opposed to a statutory DRR, but is the idea--I 
think your concept is interesting and I am sure some of the 
subsequent panelists will tell us what might be wrong with it, 
but it seems to me your idea sort of mirrors what our colleague 
from New Jersey just talked about with what the Chairman of the 
Federal Reserve had said, which is to establish sort of a 
current flow of funds so you don't have either a procyclical or 
countercyclical effect, if all of a sudden the economy turns 
downward and the fund starts to get hit, that you have to jack 
premiums up so high that you have a countercyclical effect 
coming out of the fund with everything else going on in the 
economy.
    And this way, given the FDIC, a substantial amount of 
discretion I would add would allow you basically to go back and 
say within this range of 115 to 135, everybody pays a premium 
to start, but then, based upon your payment history, not your 
payment history, but how long you have been paying premiums, 
and what I don't know is based upon, well, I guess your initial 
premium would be set.
    Ms. Tanoue. Based on certain risk exposure, yes.
    Mr. Bentsen. But the rebate, I am curious why the rebate 
would only be set on how long you had been paying premiums. I 
understand that, but why you also wouldn't look at some risk 
bases as well unless you think you have already accounted for 
that?
    Ms. Tanoue. There is a potential to incorporate risk-based 
factors into the rebate methodology as well. So, for example, 
whether a rebate should be given to an institution that is 
actually paying premiums, because it is in serious financial 
trouble that would be a factor that would have to be looked at 
as we further look at how to develop the rebate methodology.
    Mr. Bentsen. It seems to me, and you sort of acknowledge 
this--I know my time is up. If I can just finish this point. 
You seem to acknowledge the historical aspect will go away as 
new funds are melded in and everybody will sort of equal out 
for the most part. So it would seem to me that you would want 
to have some risk basis associated with the rebate function so 
thank you. Thank you, Mr. Chairman.
    Mr. Baker. [Presiding.] Thank you, Mr. Bentsen. Obviously 
Mr. Bachus stepped out for a moment, and fortunately I am next 
in line so I will recognize myself.
    You may recall this question from earlier comments. I have 
grave concerns about the basic equity of the current assessment 
requirements. The compression of the rating from the best to 
the least under the current regime seems not to reward 
conservative management, and in fact, there is no penalty of 
significance for being a bad operator in the current assessment 
of premium, much less the new entries into the market who paid 
nothing for 100 percent coverage plus the sweep account issue 
that you have talked about.
    So in looking at the reconstruction of the insurance pool, 
I strongly recommend and support whatever the agency recommends 
in the way of appropriately assigning risk to the responsible 
parties, and then join those who suggest that some premium be 
assessed to everybody continually. I know that this is, to some 
extent, modestly controversial, but it is apparent that should 
we have significant downturn in our economic condition and a 
very small number of the very large institutions run into 
trouble, that we could rapidly dissipate the reserves that we 
have built up.
    However, my specific question is, and I have to read this 
to make sure I get it constructed properly, can you comment on 
the possibilities and usefulness of risk sharing, either 
through reinsurance or other means in determining an adequate 
price for deposit insurance; and second, if such arrangement 
could, in fact, be used to limit the Government's exposure in a 
potential institution's failure.
    And my point here is that we have talked internally in the 
office in looking at this issue, and reports generated by the 
FDIC of maintaining for the individual depositor, uniformity in 
the level of coverage, so when you walk in the bank, you don't 
know how the premium is paid or anything else. You just know 
that no matter where you are, you get the same coverage. But 
for those larger institutions which represent the bulk of the 
risk to the fund, coinsurance, some differing manner of 
assessment that brings about more market discipline in 
understanding the risk, those institutions really pose to the 
fund, and I don't know if you want to answer that today or get 
back to me at a later time.
    Ms. Tanoue. Well, let me just say that the FDIC shares your 
interest in exploring the potential for reinsurance and we 
think that reinsurance does have the potential to offer us 
additional information about how we might be pricing risk in 
terms of the institutions of various classes of institutions.
    You may be aware that the FDIC, several months ago, 
contracted with a company for this very purpose, and 
essentially they have developed a prospectus, and we will be 
going to the market to ascertain what interest there might be 
in the private sector in this issue with the FDIC, and we would 
be happy to keep you apprised of the developments.
    Mr. Baker. Thank you very much. I appreciate that.
    Mr. Moore.
    Mr. Moore. I have no questions, Mr. Chairman.
    Mr. Baker. Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman. Thank you for coming 
to speak to our subcommittee. I was looking at your conclusions 
and you talk about the economy being strong and that there is a 
window of opportunity to make improvements to the deposit 
insurance system. I am pleased that you are proactive instead 
of reactive, and I want to address the part where you talk 
about, you say in particular, the ability to price for risk is 
essential to an effective deposit insurance system. I have 
concerns that I want to express to you, and that is that as you 
make the risk calculations for each of the banks and knowing 
that even if they have a rating of 1 and 2, that some of them 
could go under, I would like to see what your response is.
    What assurances can you give me that any policy decisions 
that are being made to change and improve the system will not 
hurt the smaller community banks, many of which I have in a 
congressional district like mine?
    Ms. Tanoue. Well, let me just say as the primary supervisor 
for State chartered non-member institutions, we always have 
taken into consideration how proposals might affect 
institutions, and particularly community institutions, and let 
me also say that in developing any kind of methodology to 
assess premiums based on risk, it would be envisioned that the 
FDIC would have to go out for notice and comment through a 
public rulemaking.
    So in other words, the methodology that we might come up 
with would have to be put out for the public to comment on 
before any kind of rulemaking could occur.
    Mr. Hinojosa. And how long would you have as a period to 
get input?
    Ms. Tanoue. Usually the rulemaking process allows for 
certain substantial periods of time to allow interested parties 
to comment fully.
    Mr. Hinojosa. Give me an idea, would it be 90 days? 6 
months?
    Ms. Tanoue. Excuse me just one moment. I was just checking 
as to whether the Administrative Procedures Act had some 
minimum timeframe and sometimes, apparently, it is usually 
about 90 days, but an agency can always provide for more time 
for public comment.
    Mr. Hinojosa. Very well. Mr. Chairman, I have no other 
questions.
    Ms. Tanoue. If I could just add one other thing. During 
this whole process that we have been looking at the deposit 
insurance issues, I would emphasize that the FDIC has worked 
very hard to provide for extensive outreach opportunities with 
the industry, and we have worked very closely and extensively 
with all the banking trade organizations and made a significant 
effort to be aware of their concerns throughout the process, 
and we would continue to do so.
    Chairman Bachus. [Presiding.] Chairman, has any 
consideration been given to granting banks the power to, or the 
ability to purchase on an optional basis, additional insurance 
for municipal deposits?
    Ms. Tanoue. Yes. That subject was raised earlier and we 
have taken a look at that. We believe that conferring 
additional coverage for any category of deposits, including 
municipal deposits, does warrant further analysis and study and 
discussion with the parties.
    Chairman Bachus. If we were able to calculate, if we had 
some preset level and a definition and it was limited to local 
deposits or to, in State deposits and the premium was 
calculated and would fully cover the additional risk to the 
insurance fund, would that address most of your concerns or 
your concern?
    Ms. Tanoue. You know, I am not sure at this point if higher 
coverage was to be provided for municipal deposit, what the 
potential impact or effect would be in terms of additional risk 
to the fund. But again, we are happy to look at that issue 
further and then get back to you.
    Chairman Bachus. When you look at it, could you also maybe 
look at the collateral requirements.
    Ms. Tanoue. Well, the collateral requirements vary from 
State to State, but we can take that into consideration as 
well.
    Chairman Bachus. All right. Thank you.
    Mrs. Maloney.
    Mrs. Maloney. First of all, I would like to thank Donna 
Tanoue for your service and leadership at the FDIC, and I wish 
you the best in all your future endeavors, and I certainly 
thank Chairman Bachus for holding this important hearing on 
modernizing the deposit insurance system.
    For over 65 years, our deposit insurance system has 
effectively maintained public confidence in the banking system 
during periods when financial institutions have been profitable 
and when they have suffered failures. As we consider 
modernizing the system, maintaining public confidence in our 
financial institution and guarding their safety and soundness 
must be our driving focus. We are fortunate to be considering 
this topic at a time when banks are highly profitable and well 
capitalized.
    At the same time, uncertainty about the future of the 
economy is a warning that the good times will not last forever. 
While the insurance funds are still comfortably above their 
mandated reserve ratios, the uncertainty about equity market 
has driven a substantial amount of funds into the banking 
system, increasing the deposit base. The possibility that this 
trend continues makes the need to merge the insurance funds 
even more timely.
    I really want to compliment you on a very thoughtful 
proposal for the future of the insurance system, and I agree 
with the FDIC's position that a modern insurance system should 
include a general principle of risk-based pricing. But I would 
like to know, since today, we have 92 percent of our 
institutions do not pay for deposit insurance, yet many of 
these institutions have made substantial contributions in the 
past to the funds.
    Individually, many are highly rated for safety and 
soundness and are well capitalized. How do you balance the fact 
that risk-based pricing may be the future but that many 
institutions have a history of contributing to and stabilizing 
the financing of the funds?
    Ms. Tanoue. Again, I would emphasize that if you have a 
system as we do now where 92 percent of the institutions are 
assigned to the same risk category, you don't truly have a 
risk-based pricing system, and there are large and identifiable 
differences in terms of risk exposure among these institutions 
that are presently classified in the best category.
    Our recommendations include a recommendation to charge 
premiums for all institutions, but also coupled with that, we 
are recommending that when the fund meets certain targets or 
ranges that are established by the FDIC from time to time, that 
consideration be given to giving rebates back to the insured 
institutions to prevent the fund from growing overly large, and 
to make sure that funds are going back into the communities as 
appropriate.
    Mrs. Maloney. So I know that you have suggested rebates, 
but would institutions, but would institutions that have 
contributed to the funds be subject to charges under this 
system?
    Ms. Tanoue. Yes. We would recommend that all institutions 
again be charged based on risk, but in terms of the 
recommendation for rebates, the rebates would be based taking 
into consideration not the current assessment base, but past 
contributions. So it would be a very important consideration.
    Mrs. Maloney. So you will take in consideration the past?
    Ms. Tanoue. Yes.
    Mrs. Maloney. Thank you very much, and again, 
congratulations on your service to the country and we 
appreciate the proposal that you have put forward today.
    Ms. Tanoue. Thank you.
    Chairman Bachus. This concludes----
    Mr. Watt. Mr. Chairman, could I, before you excuse the 
witness, make a brief comment?
    Chairman Bachus. Mr. Watt.
    Mr. Watt. I just wanted to thank her for flattering me by 
confusing me with Mr. Lucas.
    Ms. Tanoue. Excuse me, that is right. Because you mentioned 
the bill. I apologize.
    Mr. Watt. I would suggest to you that you might want to 
drop Mr. Lucas and apologize to him.
    Chairman Bachus. One has a southern accent and the other 
has a Midwestern accent. The subcommittee does want to wish you 
well in your further endeavors and thank you for your service 
to the country and to the banking system.
    Ms. Tanoue. Thank you very much. I appreciate the 
opportunity to testify today. Thank you.
    Chairman Bachus. This concludes our first panel and we will 
ask the second panel of witnesses, all of whom are veterans 
testifying before this subcommittee, to take their seats.
    The subcommittee would like to welcome the second panel. 
All of you gentlemen testified before us in March on business 
checking. We welcome you back. To my left is Mr. James Smith, 
chairman and chief executive officer of Union State Bank and 
Trust of Clinton, Missouri, also president-elect of the 
American Bankers Association, who will be testifying on behalf 
of the ABA; Mr. David Bochnowski, Chairman and Chief Executive 
Officer, Peoples Bank, Munster Indiana, we welcome you back. 
You are testifying as Chairman of America's Community Bankers; 
Mr. Robert Gulledge, President and Chief Executive Officer, 
Citizens Bank of Robertsdale, Alabama, Chairman of the 
Independent Community Bankers of America. Bob, welcome back to 
Washington.
    At this time, Mr. Smith, we will start with you, not 
because you are an ex-New York Yankee.

 STATEMENT OF JAMES E. SMITH, CHAIRMAN AND CEO, CITIZENS UNION 
   STATE BANK AND TRUST, CLINTON, MO; PRESIDENT-ELECT OF THE 
                  AMERICAN BANKERS ASSOCIATION

    Mr. Smith. I want to thank you, Mr. Chairman, for holding 
this hearing. Assuring that the FDIC remains strong is of the 
utmost importance to the banking industry. Over the past 
decade, the industry has gone to great lengths to ensure that 
the insurance funds are strong. In fact, with $41 billion in 
financial resources, the FDIC is extraordinarily healthy. The 
outlook is also excellent. There have been few failures and the 
interest income on BIF and SAIF easily exceeds the FDIC's cost 
of operation. Thus now is a good time to consider how we might 
improve an already strong and effective system.
    I would like to commend the FDIC under the leadership of 
Chairman Tanoue for developing an approach to the key issues. 
While we do not agree with every detail in the FDIC report and 
are particularly concerned about the possibility of increasing 
premiums, that provides a reasonable basis for congressional 
discussion.
    An industry consensus is key to any bill being enacted. As 
you will see today, while some differences remain the positions 
of the ABA, America's Community Bankers and the Independent 
Community Bankers of America are very similar. Our three 
associations have agreed to discuss the issues together and 
work with this subcommittee to develop legislation that would 
have broad support.
    I would add that while there is willingness to work with 
Congress, we do have concerns that such legislation could 
increase banks' costs or become a vehicle for extraneous 
amendments. If that were to be the case, support among banks 
would quickly dissipate. In my testimony today, I would like to 
make several key points. First, today's system is strong and 
effective, but some improvements could be made. The current 
system of deposit insurance has the confidence of depositors 
and banks. Its financial strength is buttressed by strong laws 
and regulations, including prompt corrective action and 
enhanced enforcement powers, just to name a few. Even more 
important is that the banking industry has an unfailing 
obligation to meet the financial needs of the insurance fund. 
Simply put, the system we have today is strong, well-
capitalized and poised to handle any challenges that we may 
encounter.
    Second, a comprehensive approach is required as 
improvements are considered. Because deposit insurance issues 
are interwoven, any changes must consider the overall system. A 
piecemeal approach would only leave some important reforms 
undone, but worse, could lead to unintended problems. Since 
last year, support for our comprehensive approach has clearly 
grown. We are pleased that the FDIC's proposal is comprehensive 
and acknowledges the important interactions between issues. A 
comprehensive reform system should include, among other things, 
a mutual ownership approach for determining rebates. Permanent 
indexing of the insurance limit, consideration of an increase 
in the $100,000 level, but one that does not result in 
significant cost that would outweigh the value of the increase. 
A higher level of coverage for IRAs and Keoghs, some method to 
address the issue of fast-growing institutions and a cap on the 
fund and expanded rebate authority.
    On this last point, I would like to thank Mr. Lucas and Mr. 
Watt for introducing their bill that caps the fund and issues 
rebates to pay the FICO premium.
    My third point is that changes should be adopted only if 
they do not create material additional costs to the industry. 
The current system is strong, and we see no reason why changes 
should be made that impose significant new costs or additional 
burdens on the industry. For instance, the example used by the 
FDIC in its report would result in unacceptable premium 
increases for many banks. We see no justification for such 
increases when the insurance funds are above the required 
reserve ratio.
    Mr. Chairman, we are prepared to work with you and the 
Members of this subcommittee to pass a reform package that 
would enhance the safety and soundness of the deposit insurance 
system. Thank you.
    [The prepared statement of James E. Smith can be found on 
page 53 in the appendix.]
    Chairman Bachus. Thank you.
    Mr. Bochnowski

STATEMENT OF DAVID BOCHNOWSKI, CHAIRMAN AND CEO, PEOPLES BANK, 
       MUNSTER IN; CHAIRMAN, AMERICA'S COMMUNITY BANKERS

    Mr. Bochnowski. Thank you, Mr. Chairman. It is a pleasure 
to be here representing America's Community Bankers and to 
speak to you on deposit insurance reform. Our complete 
recommendations, which we provided to the FDIC last December, 
are included in ``Deposit Insurance Reform for a New Century, a 
Comprehensive Response to the FDIC Reform Options,'' which has 
been made available to this subcommittee.
    [The information can be found on page 101 in the appendix.]
    Bankers do have varying views on deposit insurance reform, 
but let me assure you in this subcommittee that we are engaged 
in an open and constructive dialogue. The staffs of our 
respective associations have met to begin a more detailed 
discussion of our respective policy positions. The entire 
industry has every incentive to cooperate, because the safety 
and soundness of the deposit insurance system is important to 
our customers and the Nation's economic health.
    Under Chairman Tanoue's leadership, the FDIC took advantage 
of the health of our banking system and the banking climate to 
review deposit insurance issues. ACB commends Chairman Tanoue 
for taking this important initiative.
    The most urgent deposit insurance issue we face today stems 
not from any weakness in the system, but ironically, from its 
strength. A few companies are taking advantage of that 
situation by shifting tens of billions of dollars from outside 
the banking system into insured accounts at banks they control. 
The problem is not that the FDIC is holding fewer dollars, BIF 
and SAIF balances are stable, but that those dollars are being 
asked to cover a rapidly rising amount of deposits in a few 
institutions.
    The situation could get worse. Under current law, if a fund 
falls below 1.25 percent, the designated reserve requirement, 
and the FDIC does not expect it to return to that level within 
a year, all insured institutions would have to pay a 23-basis-
points premium. For a community bank with $100 million in 
deposits, that equals $230,000.
    ACB believes that Congress should act quickly on 
legislation to help ensure the continued strength of the FDIC 
and prevent unnecessary diversion of billions of dollars away 
from communities that could go into home lending, consumer 
lending and small business lending.
    A bill is before you today that would do just that. 
Representatives Bob Ney and Stephanie Tubbs Jones have 
introduced the Deposit Insurance Stabilization Act, H.R. 1293. 
It has three key features. First, it would permit the FDIC to 
impose a fee on fast-growing institutions for their excessive 
deposited growth. Second, it would merge the BIF and SAIF 
insurance funds, creating a more stable, actuarially stronger 
insurance deposit fund. And third, it would allow for the 
flexible recapitalization of the deposit insurance fund.
    Acting on this bill now would not preclude action on 
broader deposit insurance reform. In fact, H.R. 1293 is an 
excellent place to begin.
    We are pleased that many of the FDIC's recommendations are 
consistent with our own for comprehensive reform, but they 
differ in one key respect. We agree on merging the Bank 
Insurance Fund in the Savings Association Insurance Fund, 
giving the FDIC flexibility to gradually recapitalize the fund 
in the event of a shortfall and establishing rebates based on 
past contributions, as well as indexing coverage levels.
    However, unlike the FDIC, ACB does not believe that the 
highest-rated institutions should be required to pay premiums 
when there are ample reserves in the fund. Rather, as provided 
in the Ney-Tubbs Jones bill, ACB recommends that the FDIC have 
the authority to assess a special premium on excessive growth 
by existing institutions, such as Merrill Lynch, if necessary 
to preserve adequate reserves.
    ACB also recommends indexing the coverage levels to help 
maintain the role of deposit insurance in the Nation's 
financial system.
    Congress should use as a base the last time it adjusted 
coverage primarily for inflation, which was done in 1974. Under 
that system, which was at $40,000 then, adjusted for inflation, 
the coverage limit would be approximately $135,000 today.
    To recognize the increasingly important role that 
individual retirement accounts play in the economy and in our 
pension system, ACB recommends that Congress substantially 
increase the separate deposit insurance coverage for IRA, 
401(k) and similar retirement accounts. ACB also recommends 
that Congress set a ceiling on the composite insurance fund 
designated reserve ratio, giving the FDIC the ability to adjust 
that ceiling, using well-defined standards after following full 
notice and comment procedures.
    ACB appreciates the opportunity to present our views on 
these important issues. The deposit insurance system is strong 
today, but could be made even stronger. We hope that Congress 
will use the work the FDIC and the industry have done to craft 
legislation that will make the improvements necessary to ensure 
the continued stability of this key part of our Nation's 
economy.
    Thank you for this opportunity. I look forward to answering 
your questions.
    [The prepared statement of David Bochnowski can be found on 
page 73 in the appendix.]
    Chairman Bachus. Mr. Gulledge.

 STATEMENT OF ROBERT I. GULLEDGE, PRESIDENT AND CEO, CITIZENS 
BANK, ROBERTSDALE, AL; CHAIRMAN, INDEPENDENT COMMUNITY BANKERS 
                           OF AMERICA

    Mr. Gulledge. Good morning, Chairman Bachus, Ranking Member 
Waters and Members of the subcommittee. My name is Bob 
Gulledge, and I am a community banker from Robertsdale, 
Alabama. I also serve as Chairman of the Independent Community 
Bankers of America, on whose behalf I appear before you today.
    Chairman Bachus, I commend you and Chairman Oxley for 
moving this important issue forward. It has been 10 years since 
the Congress last took a systematic look at the deposit 
insurance program. Now is the time, during a non-crisis 
atmosphere, to modernize our very successful Federal Deposit 
Insurance system. I have been asked to testify on the FDIC's 
impressive and comprehensive deposit insurance reform 
recommendations.
    First, deposit insurance coverage levels have been badly 
eroded by inflation and must be increased and indexed for 
inflation. Today, in real dollars, deposit insurance is worth 
less than half what it was in 1980 and even less than what it 
was worth in 1974 when the coverage was raised to $40,000. The 
charts and table attached to my written testimony illustrate 
this dramatic loss in real value.
    Higher coverage levels are critical to support local 
lending, especially to our small businesses and agricultural 
customers. They are critical to meet today's savings and 
retirement needs, especially with a graying population. A 
Gallup Poll showed that four out of five consumers think that 
deposit insurance should keep pace with inflation. And they are 
critical because many community banks increasingly face funding 
pressures, because funding sources other than deposits are 
scarce.
    Examiners are warning against our growing reliance on 
Federal Home Loan Bank advances. We don't have access to the 
capital markets like the large banks do. In troubled times, we, 
unlike large banks, are too small to save.
    A recent Grant Thornton survey revealed that four out of 
five community bank executives believe higher coverage levels 
will make it easier to attract and keep core deposits. The ICBA 
strongly supports the Hefley bill in the House and the Johnson-
Hagel bill in the Senate. Both bills would substantially raise 
coverage levels and index them for inflation. This feature of 
deposit insurance reform is essential for our support of the 
legislation.
    The ICBA supports full FDIC coverage for municipal deposits 
and higher coverage for IRAs and retirement accounts.
    The second issue that must be addressed is the free rider 
issue. Free riders, the Merrill Lynches and Salomon Smith 
Barneys, have moved more than $83 billion in deposits under the 
FDIC umbrella without paying a nickel in insurance premiums; 
and by owning multiple banks, they offer their customers 
multiple accounts and higher coverage levels than we can. This 
is a double-barreled inequity, which must be addressed.
    Third, a risk-based premium system should be instituted 
that sets pricing fairly. Currently, 92 percent of the banks 
pay no premiums. The FDIC says this is because the current 
system underprices risk. This proposal, as well as a proposal 
to charge premiums even when the reserve ratio is above 1.25 
percent, will face controversy. But we believe that as a part 
of an integrated reform package, most community bankers would 
be willing to pay a small, steady, fairly-priced premium. In 
exchange, we would get less premium volatility and a way to 
make sure the free riders pay their fair share. The ICBA 
generally supports a risk-based premium system.
    Fourth, the FDIC proposes that the 1.25 percent hard target 
be eliminated and replaced with a flexible range with 
surcharges if the ratio gets too low and rebates if the ratio 
gets too high. We support the FDIC recommendation as a part of 
the integrated package that includes higher coverage levels. 
Using a more flexible target would help eliminate wild 
fluctuations in premiums. The statutory requirement that banks 
pay a 23 cent premium when the fund is below the designated 
reserve ratio should be repealed.
    We also strongly support the FDIC proposal to base rebates 
on past contributions to the fund rather than on the current 
assessment base. This would avoid unjustly rewarding those who 
haven't paid their fair share, like the free riders.
    Fifth, the FDIC proposes to merge the BIF and the SAIF. The 
ICBA supports the merger as part of an overall comprehensive 
reform package.
    In conclusion, Mr. Chairman, now is the time to consider 
these important FDIC reforms. Thousands of communities across 
America and millions of consumers and small businesses depend 
on their local community banks. And without substantially 
increased FDIC coverage levels, indexed for inflation, 
community banks will find it increasingly difficult to meet the 
credit needs of our communities.
    The less deposit insurance is really worth due to inflation 
erosion, the less confidence Americans will have about their 
savings in banks, and the soundness of our financial system 
will be diminished. Congress must not let this happen. We 
support the overall thrust of the FDIC's recommendations. We 
urge Congress to adopt an integrated reform package as soon as 
possible, and I will entertain questioning that you might have. 
Thank you very much.
    [The prepared statement of Robert I. Gulledge can be found 
on page 130 in the appendix.]
    Chairman Bachus. Thank you.
    Mr. Smith, in your testimony, you suggest that retirement 
accounts should have a higher level of deposit insurance 
coverage. What do you see as an appropriate level of insurance 
coverage for retirement accounts, 401(k)s, IRAs?
    Mr. Smith. Well, basically, in 1978, when we had insurance 
coverage of $40,000, Congress chose to give us insurance 
coverage on those types of accounts at $100,000. While 
insurance on regular accounts has risen to $100,000, the IRA 
accounts are still at a level that we think is too low. So we 
would like to see that that amount increased so we can 
encourage savings in our country, encourage our customers to 
save more; and I think this would be a great move that we could 
do to entice that.
    Chairman Bachus. For instance, going back to 1980 and 
increasing it according to the CPI increase?
    Mr. Smith. Well, it was 2\1/2\ times in 1978, so if we did 
it 2\1/2\ times today, the regular coverage would be $250,000 
per account, and taking in inflation and indexing that to 
inflation, I think that would be a very appropriate number to 
look at.
    Chairman Bachus. You suggest we should eliminate the too-
big-to-fail doctrine. Congress has repeatedly tried to limit 
that doctrine. How would you advise us, or what suggestions do 
you have for us in eliminating that doctrine?
    Mr. Smith. I don't know that I have any specific 
suggestions. I think this topic should be on the table to be 
addressed under comprehensive reform. It was looked at in 
FDICIA and FIRREA, and some steps were taken, some measures 
were taken, to eliminate it; but the fact is that it is still 
there to some extent, and I think whatever Congress can do to 
eliminate the too-big-to-fail doctrine and put that issue on 
the table, it would be appropriate.
    Chairman Bachus. OK. Thank you.
    Mr. Bochnowski, your testimony doesn't address the issue of 
municipal deposits, which it wasn't required to do, but do 
America's Community Bankers have a position on proposals that 
would either increase the coverage limits on such deposits or 
permit institutions to purchase coverage in excess of $100,000?
    Mr. Bochnowski. Mr. Chairman, we have been neutral on this 
in both speaking with our members and surveying them. It is not 
an issue which comes to the fore. A number of our States 
provide municipal deposit insurance--not privately, but at 
least through the State system, and it has not been an issue 
that has been a major concern to our members.
    Chairman Bachus. I thank you.
    Mr. Gulledge, let me continue on that thought. In your 
testimony, you support further coverage of municipal deposits. 
Would that increase the risk to the Federal Deposit Insurance 
Fund, ultimately to other institutions or the taxpayer?
    Mr. Gulledge. Well, we do support the 100 percent coverage 
of municipal deposits, and we do feel that this is very 
important because this is a great source of funding for 
community banks and a great source of the funds to make 
meaningful contributions to their community in providing the 
services that they are organized for. And we do feel that this 
is not going to be a detriment to the fund.
    At the end of 2000, there were $162 billion in municipal 
deposits. Of that $162 billion, only $113.8 billion of those 
were uninsured at that time. The BIF has $31 billion in 
reserves, and it presently has a reserve ratio of 1.35. If the 
BIF-insured deposits were increased by that $113.8 billion, 
then that would bring down the ratio to a 1.28 ratio, which 
still is above the statutory minimum.
    Chairman Bachus. All right. Thank you.
    At this time, Ms. Waters.
    Ms. Waters. Thank you very much. Let me just say to Mr. 
Gulledge that I appreciate the clearness of the case that you 
make about the free riders.
    Mr. Gulledge. The case of what? I am sorry.
    Ms. Waters. The free riders must pay their fair share. I am 
surprised, even as I learn more about FDIC, that this has gone 
on for this long; and it must be corrected. And I strongly 
support the remedy to the free rider problem as you have 
articulated it. And I am anxious that we not allow the Merrill 
Lynches and the Smith Barneys or anybody else to be able to 
have that kind of an advantage. So I just wanted to say that so 
then you would understand that for at least one person here 
today, your testimony certainly has struck a very strong chord 
with me.
    Let me just ask Mr. Smith, what were you referring to when 
you said that some of the recommendations would cause 
unacceptable increases? What were you referring to?
    Mr. Smith. The FDIC recommendations would advocate that we 
start assessing certain rated banks that are not now paying 
premiums. They would have to start paying premiums. Right now 
banks that are CAMEL-rated 1 or 2 pay no premiums if they are 
well capitalized, and so I think under the FDIC 
recommendations, they certainly would start charging 2-rated 
banks a premium; and possibly some portion of the 1-rated 
banks, I think they want to change.
    Ms. Waters. Did you hear what the chairwoman said about a 
47 percent failure among 1- and 2-rated banks? I think that is 
what she said--within 2 years?
    Mr. Smith. She quoted a specific period of time, and I am 
not sure how that equates out. I could only say from a banker 
who experienced the ag depression in the 1980's, who was in an 
ag bank--I experienced the depression in our bank, and the risk 
assessment is very real and very important. And the fact now 
that we have 92 percent of the banks in the 1 and 2 category, I 
would say, hurrah, because I think that is a great incentive, 
at least for me.
    I am in that category; I do not have to pay FDIC premiums. 
And so I try to run my bank to make sure we have the proper 
safety and soundness procedures in effect. I try to run my bank 
to make sure that we are taking care of our community properly, 
because that is my market. And at the same time, I want to try 
to make sure I don't have additional costs on my balance sheet 
with FDIC premiums.
    So I am not sure what timeframe Chairman Tanoue was talking 
about when she said 47 percent of the banks that were rated 1 
or 2 failed.
    Ms. Waters. Well, Congressman Watt just clarified exactly 
what she said. She said that 47 percent of those banks that 
drew on the FDIC had shown that--what was it, the last 2 years?
    Mr. Watt. Rated either as 1 or 2 in the last 2 years. That 
is what she said.
    Ms. Waters. That is what she said. So I guess, you know, 
what I was asking you was, given the information, the facts 
that have been presented to us, I guess I am wondering how you 
can make the case that the large number of banks that are not 
participating should not be participating.
    I just don't have an appreciation for the way the risk is 
determined, perhaps, whether or not it has been looked at as 
short-term risk or long-term risk, but I just don't see that 
you make the case that it would be unacceptable increases to 
have them pay in a small amount and spread the amount of the 
fund to be collected among all of the banks, small and large, 
so that no one small sector of the banking community is bearing 
all of the burden of capitalizing the fund.
    I mean, I just don't see the case that you make.
    Mr. Smith. Well, I think what we are trying to say there, 
Congress will set a designated reserve level, whatever that 
level is. Our position is that banks that are well capitalized 
and CAMEL-rated 1 or 2 should not have to pay premiums if we 
have met the designated reserve level or exceeded it.
    Obviously, we don't like the hard, designated reserve level 
of 1.25. We would like to have a softer level, maybe a range 
where we start paying if it falls down below, but also we could 
have the dividends on rebates if it gets above that. And I 
think two things have to happen. You have to be at the 
designated reserve level, and you have to be a well capitalized 
bank. And you have to be a CAMEL 1- or 2-rated by your 
regulatory agency.
    And my bank just underwent a safety and soundness exam in 
January from the FDIC, and I think that is risk assessment, 
because they do come in and take a look at everything in your 
bank, and they give you a rating from that.
    Ms. Waters. Yeah. But you still don't answer the question 
that we are raising--some of us are raising--despite that kind 
of reserve and despite what appears to be low-risk situation, 
that you still fall within that 47 percent who have been rated 
1 and 2 within 2 years before they drew on FDIC. I mean, the 
fact of the matter is, it could happen.
    Mr. Smith. Well, I don't know that I have an answer there, 
depending upon the timeframes that they are looking at, because 
that probably was during the ag depression or during the real 
estate crisis that we experienced, which was, I think, a 
combination of an oil crisis and a real estate crisis, and we 
had an ag crisis, almost a domino effect across the country. I 
think we have a better regulatory structure in place today; I 
think we are smarter. I know, as a banker, I feel like I am 
smarter and have more things in place today in order to assess 
the risk and be sure that I am out front of any problems that 
we are going to address in our banks.
    Ms. Waters. How do you answer the question of Merrill Lynch 
and Smith Barney and the others with banks that do not pay into 
the fund?
    Mr. Smith. Well, I think FDIC has said that they do not 
have the authority to charge them premiums at this time.
    Ms. Waters. They have banks, though.
    Mr. Smith. Pardon me?
    Ms. Waters. They have banking operations.
    Mr. Smith. That is correct, but I think if you are well 
capitalized and you fall under the criteria that are set, the 
FDIC is saying that if they fall under these criteria, we do 
not have the authority to charge them for the funds going into 
the system. You know, obviously, they are looking to 
capitalization and the things that are taking place there.
    Ms. Waters. Thank you.
    Chairman Bachus. In the FDICIA, the Congress actually set 
the criteria for their charging the premium and--with CAMEL 
ratings, when they are in the--either ranked 1 or 2. I might 
point out, we have heard that 47 percent of the banks who 
failed--now, we are talking about the banks who failed--47 
percent of those that failed had a rating system of 1 or 2 in 
the 2 years prior.
    Another way of saying that is that 53 percent of those 
banks that could have failed did not, and they were within--92 
percent of the banks in this country are rated 1 or 2. So 
within the 92 percent of your total institutions, most--in 
other words, over 9 out of 10 banks do have a 1 or 2 rating; 
yet, less than 1 out of 2 failed within that category. So it 
actually confirms that we are doing, I think, a fairly good job 
of identifying the 8 percent, singling out the 8 percent who do 
not have a 1 or 2 rating. Most of the failures came from that 
group.
    And I would predict that when you look at 6 months or a 
year, if you shorten that period to 6 months as opposed to 2 
years, that you would probably find almost all of the banks who 
failed had a rating of 3 at the time they failed. Some do go 
down. You know, this can be a 2-year process.
    Ms. Waters. Mr. Chairman, if I may----
    Chairman Bachus. Do you understand what I am saying?
    Ms. Waters. Yes, I do.
    Chairman Bachus. That most of the failures came within that 
8 percent?
    Ms. Waters. Well, you certainly can make that case.
    I guess what I am looking at is the fact that while we are 
smarter and we can predict certain things, we are sitting here 
now and we don't know what the energy crisis is going to cause 
in this country.
    I never would--nobody could have predicted that in the 
State of California we would be facing rolling blackouts. 
Nobody could have predicted we would be up to $3 per gallon of 
gasoline. Nobody could have predicted that NASDAQ took the dip 
that it took this year. So what we do know is that there is 
enough volatility in our economy where, even though we have 
calculated as best we can, anything can happen. And so I just 
kind of keep that as a reference when I look at whether or not 
we are, in some cases, spreading the risk, we are being fair to 
all.
    The independent community banks are very important to me 
because, I think, despite the sophistication of banking, that 
these are the units that really keep middle America and small-
town America and small-city America running. And so I want to 
make sure that they are not disadvantaged, that they have the 
ability to--I am not sure, and I have to ask this one question: 
The calculation by the FDIC, did it also calculate the 
retention of the reserve requirements for the banks, along with 
spreading out the FDIC charges? What did they say about reserve 
rates for the banks?
    Mr. Smith. No. That is not included in it, because each 
bank holds their own reserves for any loan losses or any 
problem situations.
    And I would like to clarify that we do advocate that those 
large, fast-growing institutions with funds from Merrill Lynch, 
and so forth, be charged a premium. I was merely stating that 
the FDIC has told us that they don't have the authority to 
charge those; but we do think that they should be charged and 
that should be addressed in this bill.
    Ms. Waters. Thank you very much, Mr. Chairman.
    Chairman Bachus. Thank you. So I think there is agreement 
there.
    Mrs. Kelly.
    Mrs. Kelly. Thank you, Mr. Chairman. I am sorry that I 
wasn't here earlier, because I am caught in a markup, but this 
is an important hearing and I wanted to know if I have 
permission to put a statement into the record and also if you 
are going to hold the hearing open, if I may have permission to 
submit written questions to the panels?
    Chairman Bachus. Yes. In fact, it is a good point. Mrs. 
Kelly, all Members will have 5 days with which to enter in 
written statements or any other material they have.
    Mrs. Kelly. Thank you. I would like to yield my time to Mr. 
Weldon.
    Mr. Weldon. I thank the gentlelady.
    Mr. Gulledge, you are of the strong opinion that raising 
the coverage level on the deposit insurance will help ease the 
liquidity problems facing the small community bankers, members 
of your association. In your view, is there anything else that 
Congress can do to help stem the tide of core deposits leaving 
community banks? Are there new products, for example, that 
Congress could authorize or other measures that we could take 
to address the funding issues that I know are of tremendous 
importance to your association? And maybe some of the other 
members may want to comment on this as well.
    Mr. Gulledge. Well, certainly I would voice the opinion 
that the increase of insurance coverage is the most important 
issue that is on the table at this point. This is very crucial 
to many, many community banks and particularly those in rural 
areas.
    Now, last year, the work that was done with the Federal 
Home Loan Banks did make advances from the Home Loan Banks more 
available, and this has helped a great deal. But there are 
problems with that. Some of the examiners are now questioning 
the heavy use of withdrawing at the windows there. The program 
that we need is to develop stronger core deposits, and I do 
believe the increase in insurance coverage and particularly 
with the municipal coverage, if that can be extended to full 
coverage, and also the increased coverage for the retirement 
accounts, I think that would be very helpful.
    Mr. Weldon. Mr. Bochnowski, did you want to add to that at 
all?
    Mr. Bochnowski. Thank you, Congressman. Yes, I would 
appreciate that opportunity.
    We would basically see it a little bit differently. We 
think that indexing coverage in 1974 would put behind us the 
issue of advancing coverage as time goes by. We do not favor 
moving to $200,000. We think that current market conditions 
maybe prove the point slightly, because all of us at the 
community bank level are experiencing an influx of funds as a 
result of what is happening in the equity markets. So we are 
not totally sure that increasing coverage is what would trigger 
consumers to bring money in.
    We think that the action of this subcommittee in the House 
in passing business checking was a very wise decision. We think 
that is a wonderful opportunity for all of us to bring in more 
deposits.
    We would agree that to increase coverage for IRA accounts, 
401(k) accounts, the Keogh accounts, that that could make a 
difference, particularly as time is going to go on, because so 
many of those accounts have built up great values in our 
institutions. And I think that those of us who are baby 
boomers, that as we age, we are going to see more and more of 
our funds go back into the banking system, and increased 
coverage there would be very helpful.
    Mr. Weldon. Mr. Gulledge, opponents of raising the level of 
deposit insurance claim that it will not really lead to any 
more deposits, rather a consolidation of accounts. Thus, while 
one bank may gain from the consolidation, another may actually 
lose accounts. Do you have any response to that criticism?
    Mr. Gulledge. My response would be that this goes straight 
to the area of competition, which banks should be strongly 
engaged in. My experience in my bank is that there are many 
customers who come in, and I see them take cashier's checks out 
of my bank to another bank simply and purely because we do not 
have the coverage of that. I think that it would make us all 
more competitive, and I think we would serve the public better 
if we had the additional coverage and we got out and had to 
work and compete for those deposits.
    Mr. Weldon. Mr. Bochnowski, in your testimony, you talk 
about setting a 1.35 percent ceiling on the reserves in the 
fund and using the excess to pay off the FICO bonds. What are 
banks paying now on FICO bonds?
    Mr. Bochnowski. I would have to ask. It is 2.1.
    Mr. Weldon. 2.1?
    Mr. Bochnowski. 2.1 basis points.
    Mr. Weldon. Do you have any idea how much this would cost 
to do what you are talking about?
    Mr. Bochnowski. In specific numbers, no. It is about $800 
million a year.
    Mr. Weldon. $800 million a year for the industry, or your 
members?
    Mr. Bochnowski. For the industry.
    Mr. Weldon. For the industry, industry-wide.
    I know I am asking you a lot of detailed questions. You can 
ask the people behind you. How long would it take to pay off 
the FICO bonds in that scenario?
    Mr. Watt. 217.
    Mr. Weldon. Pardon me? Is that correct, 217,000? The 
gentleman from North Carolina says 217,000.
    Mr. Bochnowski. Seventeen years of interest.
    Mr. Weldon. Seventeen years of interest, OK.
    I think my time has expired; is that right? I had one more 
question.
    Chairman Bachus. Go ahead and ask your--we will----
    Mr. Weldon. No. I will yield back.
    Chairman Bachus. No. If you----
    Mr. Weldon. Mr. Bochnowski, in your testimony, you call for 
a special premium on institutions that have grown rapidly.
    Mr. Bochnowski. Right.
    Mr. Weldon. Can you define ``excessive growth''--I think 
that is the term you use--and isn't this going to be a penalty 
on banks that are successful if we implement something like 
this?
    Mr. Bochnowski. I think ``excessive growth'' would be 
defined anything that is outside of the norm, and I think the 
FDIC can calculate for us what normal growth rates are across 
the banking industry.
    I don't see it as a penalty. I think that they have not 
paid into the fund, and they are the free riders that we are 
describing. When I look at the impact of the free riders on the 
First Congressional District of Indiana--and this gets back to 
Mr. Bachus' question earlier.
    The FDIC Chairman talked about the $65 billion impact on 
lending. We have 16 independent banks and thrifts left in our 
community; together, they have about $5 billion in deposits. If 
this 23-basis-points premium were imposed, if we fell over that 
cliff and we had to pay it because of what the outsiders are 
causing us to do, it would have an impact on $80 million of 
loans.
    Mr. Weldon. That would be sucked out of the district?
    Mr. Bochnowski. Correct, loans that we wouldn't be able to 
make. And what is astounding about that, Congressman, is that 
we haven't done anything.
    Mr. Weldon. Right.
    Mr. Bochnowski. We have just done our job, and someone from 
the outside can come in and cause that mischief. And that is 
why we think bill H.R. 1293 is important, because it goes to 
the heart of the problem immediately. And I think that that is 
an experience that we are all going to have.
    Mr. Weldon. H.R. 1293? Is that what you are talking about?
    Mr. Bochnowski. Yes, sir.
    Chairman Bachus. OK. Thank you.
    Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman.
    Let me just ask a couple of quick questions that I think I 
can get yes and no answers to, to try to get to a subsequent 
point.
    Is there any prohibition against banks currently reinsuring 
deposits beyond $100,000?
    Mr. Smith. No, there is not.
    Mr. Watt. Would there be any prohibition against banks 
advertising that if they chose to do that?
    Mr. Smith. Not that I am aware of, no.
    Mr. Watt. Is there anybody out there who is writing 
reinsurance?
    Mr. Smith. I am.
    Mr. Watt. A lot of people are?
    Mr. Smith. Yes.
    Mr. Watt. Are doing reinsurance?
    Mr. Smith. It is a private insurance carrier, but we 
provide insurance if they want more coverage, over the $100,000 
limit.
    Mr. Bochnowski. Congressman, we do that a little bit 
differently. We don't do the reinsurance, but we do repurchase 
agreements where we can cover more than $100,000 by permitting 
our customer to buy a security that we own.
    Mr. Watt. OK.
    My visceral response is that I strongly favor indexing the 
$100,000 figure and moving it up and then indexing it.
    My visceral response on either an unlimited coverage for 
retirement accounts or for municipal accounts being 100 percent 
insured is that that would be fairer done in some reinsurance 
or separate fund, because you are basically creating a 
different level of coverage for people, which I think ought to 
be the same. Can I just get your reaction to that?
    I mean, I obviously haven't studied this to any great 
degree. I am just giving kind of a visceral, gut response to 
it. Is there anything wrong with the analysis that I am--with 
my visceral response, I guess is the question.
    Mr. Bochnowski. We really haven't looked into that issue 
directly. I think the problem with reinsurance may be how the 
reinsurer rates each individual bank: Where are they going to 
get their information from; are they going to want access to 
our individual examination reports?
    Mr. Watt. How are you doing it now?
    Mr. Bochnowski. Well, we are not.
    Mr. Watt. What would be the difference, Mr. Smith?
    Mr. Smith. No. Our banker bond carrier offers deposit 
insurance coverage, and they do not come in and rate the bank. 
Obviously, we have done business with this company for a number 
of years, and they provide the insurance level that we request. 
We have no criteria.
    Mr. Watt. Does it cost you more than the premium would be 
into the FDIC?
    Mr. Smith. At this point, depending upon, of course, what 
level you would have to pay into the FDIC for the coverage, the 
premium now is costing about 4 cents.
    Mr. Watt. And your FDIC premium--you are not in. But what 
is the typical----
    Mr. Smith. Well, out of the 23 cents, if you were paying 
the maximum, that would be very healthy plug for our bank. 
Depending upon what level, of course, risk that the FDIC----
    Mr. Watt. Healthy level is what?
    Mr. Smith. The average level right now is, I think, about 6 
cents for people falling out of the 1 or 2.
    Mr. Watt. So you are actually paying less to fully insure 
municipal deposits than you would be paying if we just upped 
the coverage for municipal deposits under FDIC to full 
coverage; isn't that right?
    Mr. Smith. I think----
    Mr. Watt. I mean, shouldn't that be a cost that you are 
passing basically factoring into the quotes you are giving to 
municipalities and factoring into whatever proposal you are 
making to a municipal government?
    Mr. Smith. Well, in the municipal deposits, every State is 
different, and I can only give you the example of my State of 
Missouri. We have to collateralize every dollar over the 
$100,000 that they have in the bank, so we pledge a security 
for that.
    Now, that does not cost us anything in actual dollars 
except some opportunity costs, possibly. The cost there is the 
burden of bookkeeping and recordkeeping that we have to go 
through to pledge a specific security to, say, the school 
system. And, for instance, if that security matures or that 
security is called, we have to go get that security released, 
and then we have to reassign another security for the school 
system to cover their deposits. There is no specific dollar 
cost on my books for that.
    What I was talking about, the additional deposit cost was 
if an individual comes in and they want to put $200,000 in the 
bank. They say, we would like to have coverage over the 
$100,000. We try to provide them that coverage.
    Now, probably I would somehow try to give them a rate that 
would help pay some of the cost of that coverage, and they 
understand that, because I explain it up front; but they would 
prefer to have the additional coverage over the $100,000 limit 
and possibly have some sharing there.
    Mr. Watt. Mr. Chairman, I am going to yield back, the point 
I am making is, I think in some of these individual municipal 
transactions, it seems to me that it would be fairer to think 
about building that into their costs rather than spreading it 
to all depositors, the cost of doing this.
    I mean, I obviously haven't reached a conclusion on this, 
and maybe you all want to talk to me more about it if we move 
in that direction. But my kind of gut reaction is, I am not 
sure that I think it is necessarily a good idea for us to be 
100 percent insuring any individual class of depositors and 
putting that class of depositors in some separate category than 
the regular insurance fund, because the whole idea of a regular 
insurance fund, an FDIC insurance fund, was to give kind of a 
Social Security theory more than it is insuring 100 percent, as 
I understand it.
    Maybe I am just wrong about that.
    Mr. Bochnowski. Mr. Watt, if I could add an observation. In 
Indiana we do have a public deposit insurance fund so, in 
theory, those deposits are covered. But insurance is not an 
issue. It is price-driven. The consideration of the depositor 
is--if the money is currently at a large securities firm right 
now, earning a certain yield, for us to bid on those funds 
successfully, we have to meet their price. Some days we want to 
meet that price, and some days we don't, and it is really a 
cost factor.
    Insurance, I think, at least in our State, is not as 
significant to bringing those funds in as price.
    Chairman Bachus. Thank you.
    Mr. Bentsen.
    Mr. Bentsen. Thank you, Mr. Chairman.
    Yeah, I--on the municipal--and I don't want to ask too much 
about that, but I am not sure I see the case yet to do that on 
municipal, and I am not sure we would want to get that confused 
if we were looking at doing an FDIC reform bill, because there 
are a lot of avenues for municipalities to set up their funds, 
and I think you intertwine yourself with different State codes, 
and even municipal codes, on how funds can be deposited.
    But let me go back to the FDIC's proposal.
    I looked at two out of three of the testimonies, but in 
listening to everyone's testimony, it would appear obviously 
that everyone is in favor of some broad concept of reform of 
the insurance system. And would it be fair to say--clearly, I 
think this is what the ABA is saying, and I didn't get a chance 
to go through the others--but, would it be fair to say that 
everyone is in favor of some form of a mutual insurance system, 
which is a term that the ABA uses in their testimony, as 
opposed to the current system?
    And getting more specific--and I am not necessarily saying 
that the FDIC concept is the prototype or the ideal model, and 
I would ask this of Mr. Smith in particular--is the primary 
concern with the FDIC model that both the risk-based premium 
might result in a higher premium for some banks or thrifts and 
that the rebate mechanism might result in some banks and 
thrifts paying a net-net higher premium than they would under 
the current system?
    And I guess I would add to that, is there an objection to 
having an ongoing payment, even if it is rebated back in a 
greater amount?
    Mr. Smith. Well, as I travel around the country, clearly I 
don't think we have a consensus among the bankers, because we 
find a lot of bankers want the $200,000 level. A lot of bankers 
want maybe a lesser level, and I have found a lot of bankers 
that don't want any increase in the insurance. So I think it is 
important that we have a consensus.
    And if I don't get eaten up here, I think it is important 
that we have a consensus among the bankers, because I think 
cost is going to drive this consensus in order to get the 
bankers to agree upon a bill. And I think if we increase the 
cost to a significant number of bankers, then I think it is 
going to be difficult to get those bankers to agree upon.
    Mr. Bentsen. Excuse me.
    In terms of cost--I am not focusing as much on the level of 
insurance of--I mean, I think we will work out the 100,000 to 
whatever at some point; but I guess I am focusing more on the 
premium mechanism for the funds.
    Is the concern that the FDIC model would result in--I mean, 
on the one hand, it seems to me the FDIC model would bring 
everybody into the system; everybody who is accessing the fund 
would have some obligation to pay into the fund. And I think--
and I would gather from what everyone said, there is consensus 
among this panel on that.
    Where the consensus breaks down, or where the concern 
rises, is the way the rebate model is structured under the FDIC 
proposal, is that for some would end up paying more premium, or 
paying a premium, since someone is paying a premium right now, 
as opposed to the status quo. Is that the concern?
    Mr. Smith. We like the model, but basically we just don't 
necessarily like the numbers that they have put with the model. 
And I think--yes, I think we are interested in the model, in 
approving that model, but I think we would like to see what we 
can do about the numbers and how that would play out with the 
cost to our bankers across the United States.
    Mr. Bochnowski. We would not object to certain parts of 
their model, but do object, obviously, to others. We think that 
the CAMEL-1-rated banks should not pay a premium at all. We 
would be open to CAMEL-2s paying some premium. But we think 
that, in the end, it gets back to what is the maximum level of 
the fund and how will rebates come back; and to the extent that 
the mutual model provides opportunity for all to participate in 
that, then that would be something we could support.
    Mr. Gulledge. Well, in my testimony, I indicated earlier 
that it was our belief that our banks would be willing to pay a 
premium if it was small, steady and fairly priced.
    And in order to get an integrated reform package, I would 
comment here also that the purpose of the study that the FDIC 
made is not to enhance revenues or total premiums. It is to 
find a more workable situation. And certainly--and I have 
testified earlier in my comments that the rebates should be 
based on what had been paid in previously by the banks rather 
than from the assessment base now.
    So I approve of the model.
    Mr. Bentsen. Let me very quickly ask this, because I have 
been sitting here for a while.
    Is it fair to say that everyone here would agree, though, 
with going to more of a risk based--and arguably we have that 
under FIRREA or FDICIA--but, to more of a risk-based premium 
model? Obviously, more details are critical, but also--and I 
think Mr. Gulledge answered this.
    On the rebate, would you agree with what the FDIC talks 
about on historical payments, or would you see that there, as 
well, you would want to have a risk-based model for the level 
of rebates or who receives the rebates?
    Mr. Bochnowski. I think that it is probably a hybrid. 
Again, if we have fast-growth institutions, should they be 
participating fully in the rebate? I am not sure that we are 
prepared to say that they should.
    Mr. Smith. And I would agree with that.
    Mr. Bentsen. Thank you.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you. Mrs. Maloney, and if you have 
additional time, you are going to yield to Mr. Crowley?
    Mrs. Maloney. Absolutely.
    Chairman Bachus. And then we will conclude with his 
questions.
    Mrs. Maloney. The FDIC indicated that the 23 basis points, 
that is currently required by law if the reserve ratio dips 
below 2.5 percent, would reduce lending by $65 billion. Do you 
have any idea what the impact on lending would be from the 
FDIC's proposal of risk-based pricing combined with rebates? 
Would it reduce lending?
    Mr. Smith. I can give you only the example of my bank 
during the early 1990's, when we had a 23-cent premium; it cost 
our bank about $120,000 a year. And if you extend that over a 
10-year period, that is a lot of money. And if you loan that 
money in your community, and your customers buy goods and spend 
money, the United States Chamber of Commerce itself tells us 
every dollar turns over seven times, so I think you can see 
where this could--the multiplier effect could really have a big 
effect on what is available in our communities with these 
dollars.
    Mr. Bochnowski. We know, Congresswoman, if we were to 
follow that 23 basis points in our company, it would impact us 
by not having approximately $5 million in lending, and that is 
20 percent of our loan growth from last year.
    On a smaller scale, though, if we have--for the 1- and 2-
rated companies--some modest premium, I think it is possible to 
say that--and that is to suggest that it is, you know, a 2- or 
3-basis points premium--it is not going to be that steep. It is 
the higher end that causes the problem.
    Mr. Gulledge. Well, we believe that the enhancement in the 
safety and soundness of the banks resulting from these reforms 
would be good for everybody.
    Mrs. Maloney. Thank you very much, and I yield my time to 
my distinguished colleague from New York.
    We have a vote taking place right now, so we don't have a 
lot of time.
    Chairman Bachus. We have about 9\1/2\ minutes, so you have 
plenty of time.
    Mr. Crowley. OK. Thank you, Mr. Chairman.
    I thank my colleague from New York, Mrs. Maloney. I have 
two questions, kind of playing a little bit of devil's 
advocate.
    If you can say on the record or off the record--and Mr. 
Bochnowski, I hope I am----
    Mr. Bochnowski. Bochnowski.
    Mr. Crowley. Bochnowski. That is correct.
    At least many of the large banks are saying that Gramm-
Leach-Bliley was in part done to create this benefit for the 
consumer, their customers--I am talking about the free rider 
issue--to have access for their consumers and their customers, 
the protections of FDIC accounts and all the protections that 
go along with them.
    Now, despite the fact that that may anger some, isn't that 
the argument they are making upon a fine argument?
    Mr. Bochnowski. It is a curious argument. I had an 
opportunity earlier in my testimony to suggest that if we were 
to have a premium enforced upon us in the First Congressional 
District in Indiana, it would have an impact of reducing the 
available dollars for loans by $80 million. I hardly think that 
Congress intended when they passed that law to put those of us 
who are community bankers in the position of having an $80 
million retraction of credit in the First District of Indiana. 
And I don't know how that plays across the country and all 
other districts, but that is an example.
    So I think it is a very specious and curious argument that 
they make.
    Mr. Crowley. Thank you.
    And this really is to the entire panel, if anyone wants to 
jump in: The increase in the amount of money that would come 
into these accounts and from these large banks, based on 
security brokerage accounts, common sense tells me that it 
would increase substantially the level of insured dollars 
within the FDIC; and because of that, the ratios would be 
changed and that although they are pretty flush at this point 
in time, right at this time, that there has been a slight 
decrease in the DRR since then, albeit they have only been 
around for about a year-and-a-half or so.
    Is it your contention or the panel's contention that you 
expect you will see a further decrease in DRR?
    Mr. Bochnowski. I believe that the numbers are that for 
every 100 billion that comes across the DR--declines by about 6 
basis points. So there is approximately $180 million that the 
chairman has suggested that the bank security firms' 
combination have under their control that could move over.
    Mr. Crowley. How much do we anticipate will be rolled in 
these FDIC accounts?
    Mr. Bochnowski. I would have no way of knowing what they 
would do.
    Mr. Crowley. Even if the return is going to be 
substantially less than what they could get?
    Mr. Bochnowski. It depends on market conditions. It also 
depends on a fiduciary question that they face. If the return 
is the same on the----
    Mr. Crowley. Insured accounts.
    Mr. Bochnowski. They might take the insured account.
    Mr. Crowley. Got you. Thank you.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you.
    In conclusion, we are going to adjourn this hearing. I do 
want to say that we have some additional information. The FDIC 
indicated that the failure rate was actually significantly 
lower than what was initially indicated.
    And let me also say this: Of over 10,000 banks last year, 
we had one bank failure of a small institution in West 
Virginia. So, I think when we talk about bank failures, we are 
talking about something that in the last few years--and we have 
passed additional regulations and put additional structures in 
place. They have been very successful.
    A bank failure today is rare indeed. It is a very unusual 
event.
    With that, the hearing is adjourned, and I thank you, 
gentlemen.
    [Whereupon, at 12:27 p.m., the hearing was adjourned.]


                            A P P E N D I X



                              May 16, 2001

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