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




                               BEFORE THE

                            SUBCOMMITTEE ON

                                 OF THE


                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION


                            OCTOBER 17, 2001


       Printed for the use of the Committee on Financial Services

                           Serial No. 107-47

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                    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
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         

             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         JAMES H. MALONEY, Connecticut
WALTER B. JONES, North Carolina      DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois               JULIA CARSON, Indiana
PATRICK J. TOOMEY, Pennsylvania      BARBARA LEE, California
ERIC CANTOR, Virginia                HAROLD E. FORD, Jr., Tennessee
FELIX J. GRUCCI, Jr, New York        RUBEN HINOJOSA, Texas
MELISSA A. HART, Pennsylvania        KEN LUCAS, Kentucky
MIKE FERGUSON, New Jersey            JOSEPH CROWLEY, New York

                            C O N T E N T S

Hearing held on:
    October 17, 2001.............................................     1
    October 17, 2001.............................................    25

                      Wednesday, October 17, 2001

Carnell, Richard S., Ph.D., Associate Professor of Law, Fordham 
  University School of Law, New York, NY.........................    17
North, Nolan L., Vice President and Assistant Treasurer, T. Rowe 
  Price Associates, Inc., on behalf of the Association for 
  Financial Professionals........................................    19
Powell, Hon. Donald E., Chairman, Federal Deposit Insurance 
  Corporation....................................................     2
Thomas, Kenneth H., Ph.D., Lecturer on Finance, The Wharton 
  University of Pennsylvania.....................................    21


Prepared statements:
    Bachus, Hon. Spencer.........................................    26
    Oxley, Hon. Michael G........................................    28
    Carnell, Richard S., Ph.D....................................    45
    North, Nolan L...............................................    55
    Powell, Hon. Donald E........................................    30
    Thomas, Kenneth H., Ph.D.....................................    67




                      WEDNESDAY, OCTOBER 17, 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 10:04 a.m., in 
room 2128, Rayburn House Office Building, Hon. Spencer Bachus, 
[chairman of the subcommittee], presiding.
    Present: Chairman Bachus; Representatives Royce, Kelly, 
Cantor, Hart, Waters, Bentsen, Sherman, Lucas and Shows.
    Chairman Bachus. The subcommittee meets today for its third 
hearing this year on reforming the deposit insurance system. 
We're delighted to have with us today the new Chairman of the 
FDIC, Don Powell, who assumed his responsibilities at the 
Agency less than two months ago, after a distinguished career 
in Texas banking. Chairman Powell will provide us with the 
FDIC's updated recommendations on how to reform a system that 
has served our country well over the years but is in need of 
some retooling for the 21st century marketplace.
    Shortly after the subcommittee's last hearing on deposit 
insurance reform in late July, the Office of Thrift Supervision 
announced the failure of Superior Bank, a Chicago-based thrift 
with assets of $2.3 billion and a heavy concentration of sub-
prime loans. Early estimates are that Superior's failure could 
end up costing the Savings Association Insurance Fund upward of 
$500 million, which would in turn lower SAIF's ratio of 
reserves to insured deposits from its current level of 1.43 
percent to 1.35 percent or even lower.
    In and of itself, the Superior failure is hardly cause for 
panic. Both the SAIF and its banking industry counterpart, the 
Bank Insurance Fund, remain extremely well capitalized and the 
banking and thrift industries appear well-positioned to weather 
any significant downturn in the economy. Nonetheless, a 
precipitous drop in SAIF's reserve ratio--coinciding with 
recent declines in the BIF ratio--highlight the need for 
Congress to consider reforms before the ratios fall below 
levels which, under the current system, would trigger sizable 
premium assessments on all institutions.
    As this subcommittee begins in earnest to consider 
legislative proposals to address deficiencies in the current 
deposit insurance system, I can think of no Government official 
better qualified to provide us with wise counsel than our first 
witness at today's hearing. With more than 30 years of 
experience in the financial services industry, including his 
recent tenure as president and CEO of the First National Bank 
of Amarillo, Chairman Powell brings to his new position a real 
world understanding of the industry he is now charged with 
overseeing, that is truly refreshing.
    I had the pleasure of spending time with Chairman Powell 
when he visited my office last month. I found him to be 
exceedingly well versed on the issue of deposit insurance 
reform as well as extremely sensitive to the challenges faced 
by America's Main Street banks.
    Chairman Powell pledged to work closely with the 
subcommittee both in the context of deposit insurance reform 
and in other areas to ensure that the legislative and 
regulatory initiatives we pursue here in Washington make sense 
when viewed from the perspective of a Main Street banker and 
his customers. In the area of deposit insurance reform, I've 
been particularly encouraged by Chairman Powell's endorsement 
of the principle of indexing coverage levels to inflation and 
increasing coverage for individual retirement accounts.
    And I was extremely pleased to see an analogy you made in 
your testimony that actually that's the only way we can keep 
coverage at the same level because of inflation. If we don't 
move it up or index it, it actually diminishes in value. And I 
think that's probably the best argument that I've heard in ten 
years for an increase.
    As I said, Chairman Powell has expressed a willingness to 
work with the subcommittee in exploring possible changes in the 
system, and one of the changes I've advocated is insuring 
municipal deposits. If we are truly serious about addressing 
liquidity problems facing small community banks across America, 
we should be doing everything possible to encourage local 
government agencies to keep their receipts in the community by 
depositing them with local banks.
    Currently, many States require banks that maintain 
municipal deposits to pledge collateral against the portion of 
such deposits that exceed $100,000 and are therefore not 
insured by the FDIC. This not only makes it difficult for small 
banks to compete for those deposits with larger institutions, 
but it also ties up resources that could otherwise be devoted 
to community development and other lending activities.
    This is an issue I look forward to discussing further with 
Chairman Powell as the deposit insurance reform debate moves 
    Let me close again by issuing Chairman Powell a warm 
welcome, testifying for the first time before our subcommittee, 
and also welcome those who'll be testifying on our second 
    [The prepared statement of Hon. Spencer Bachus can be found 
on page 26 in the appendix.]
    I now recognize there are no other Members who wish to make 
opening statements so at this time, Chairman Powell, we look 
forward to your testimony.

                     INSURANCE CORPORATION

    Mr. Powell. Thank you, Mr. Chairman.
    It is a great pleasure to appear before you this morning, 
my first appearance before Congress as Chairman of the Federal 
Deposit Insurance Corporation, to discuss deposit insurance 
reform. The current system does not need a radical overhaul, 
but I agree with the FDIC's analysis that there are flaws in 
the current system. These flaws could actually prolong an 
economic downturn rather than promote the conditions necessary 
for recovery. The current system also is unfair in some ways 
and distorts initiatives in ways that make the problem of moral 
hazard worse. These flaws can only be corrected by legislation.
    The FDIC staff has prepared an excellent report on deposit 
insurance reform with very important recommendations. In fact, 
if I might digress for a few moments, Mr. Chairman. Last night, 
I attended a lecture and ceremony for the presentation of the 
Roger W. Jones Award for Excellent Leadership sponsored by the 
School of Public Affairs at American University. This 
prestigious award is given to two career employees in the 
Federal Government that exemplify an enhancing commitment to 
the effective and efficient operations of Government.
    Art Murton, the Director of the FDIC's Division of 
Insurance, was one of the recipients last night. He received 
the award, in large part, for the work he did on the deposit 
insurance study. I would like to take this opportunity to 
publicly congratulate Mr. Murton.
    I have studied the report and have full confidence in the 
product the FDIC has produced. This morning I will add my 
thoughts on how the Congress can create a better system. The 
current system is designed to ensure that the funds' reserves 
are adequate and that the deposit insurance program is operated 
in a manner that is fiscally and economically responsible.
    Any new system should retain these essential 
characteristics. It should also be fair, simple, and 
transparent. Specifically, what should we do?
    First we should merge the Bank Insurance Fund and the 
Savings Association Insurance Fund. That is the FDIC's 
longstanding position and the industry has strong consensus 
supporting such a merger. In fact, I have heard no one inside 
the industry or out suggest otherwise. Many institutions 
currently hold both BIF and SAIF insured funds. A merged fund 
would be stronger and better diversified than either fund 
standing alone. In addition, the merged fund would eliminate 
the possibility of a premium disparity between the BIF and the 
SAIF. Finally, merging the funds would also eliminate the costs 
to insured institutions associated with tracking their BIF and 
SAIF deposits separately, as well as the complications such 
tracking introduces for mergers and acquisitions.
    For all of these reasons, the FDIC has advocated merging 
the two funds for a number of years and I wholeheartedly agree.
    Second, we should index deposit insurance coverage. I do 
not believe it is necessary to raise the coverage limit now. 
While I'm acutely sensitive to the funding pressures faced by 
many community banks, this is a complex issue and there are 
many factors at work. It is not clear whether a higher coverage 
limit would significantly ease current funding pressures for 
most of these institutions.
    The impact of raising the coverage limit on the fund 
reserve ratio is also uncertain and we must be mindful of the 
potential for unintended consequences, such as facilitating 
deposit gathering by higher-risk institutions. We should, 
however, ensure that the present limit keeps its value in the 
future. For this reason, deposit insurance coverage level 
should be indexed to maintain its real value.
    My suggestion would be to index the $100,000 limit to the 
Consumer Price Index and adjust it every five years. The first 
adjustment would be on January the 1st, 2005. We should make 
adjustments in round numbers--say, increments of $10,000--and 
the coverage limit should not decline if the price level falls. 
These seem like the right elements of an indexing system, but 
I'm willing to support any reasonable method of indexing that 
ensures that the public knows that the FDIC deposit insurance 
protection will not wither away over time. I look forward to 
working with the Congress to find a method of indexing that 
    There has been some opposition to the FDIC's indexing 
proposal on the grounds that it would increase the Federal 
safety net. Frankly, I'm puzzled by this. The FDIC is not 
recommending that the safety net be increased, it is simply 
recommending that the safety net not be decreased inadvertently 
because of inflation.
    There is one class of deposits for which Congress should 
consider raising the insurance limit, and that is IRA and Keogh 
accounts. Such accounts are uniquely important and protecting 
them is consistent with existing Government policies that 
encourage long-term saving. When we think about saving for 
retirement in this day and age, $100,000 is not a lot of money. 
Middle-income families routinely save well in excess of this 
    Moreover, especially during this time of uncertainty when 
Americans may be concerned about the safety of their savings, I 
believe it is important for the United States Government to 
offer ample protection to facilitate savings through vehicles 
that will redeploy funds into the economy. In my view, we must 
do whatever we can to provide for the ongoing productive 
investments in our economy and solid, sustainable growth. 
Higher deposit insurance protection for long-term savings 
accounts could help.
    There is some history for providing such accounts with 
special insurance treatment. In 1978, Congress raised coverage 
for IRAs and Keoghs to $100,000, while leaving basic coverage 
for other deposits at $40,000. I urge the Congress to give 
serious consideration to raising the insurance limits on 
retirement accounts.
    On the issue of managing the insurance fund, right now 
there are two statutorily mandated methods for managing fund 
size. One of these methods prevents the FDIC from charging 
appropriately for risk during good economic times. The other 
can work to exacerbate an economic downturn. Together, they 
lead to volatile premiums.
    To address this issue, we must, third, allow the FDIC to 
price deposit insurance according to risk, and the FDIC's Board 
must have the flexibility to manage the fund size in periods of 
stability as well as in periods of crisis.
    Specifically, the FDIC should have the discretion to set 
the target size for the fund ratio and determine the speed of 
adjustment toward the target and charge appropriately for risk 
at all times.
    What is the appropriate target for the size of the fund? 
This will depend upon economic and banking conditions and other 
factors that affect the risk exposure of the industry. The FDIC 
is in the best position to gather information about risks in 
the industry and to analyze it for these purposes, using state-
of-the-art measurement methods, as well as to determine the 
best pace for moving toward the fund target.
    Although I believe that greater discretion for the FDIC 
Board is essential in these areas, I am not suggesting that the 
current target of 1.25 is inappropriate or that there should be 
no guidelines for the FDIC in managing the size of the fund. On 
the contrary, I believe that the 1.25 percent target has served 
us well in recent years, and is a responsible reserve against 
the current risks in the banking sector. The current target is 
a reasonable starting point for the new system.
    Moreover, I would steer clear of automatic triggers or hard 
targets. I would be happy to work with Congress to develop some 
guiding principles for the FDIC Board in managing the growth or 
shrinkage of the fund. I also believe that the FDIC should 
report regularly to the Congress on its actions to manage the 
fund, and we are fully prepared to do that.
    How would premiums work if the FDIC could set them 
according to the risks in the institutions we insure? First and 
foremost, the FDIC would attempt to make them fair and 
understandable. We would strive to make the pricing mechanism 
simple, straightforward, and easy for bankers to understand. In 
my view, we can accomplish our goals on risk-based premiums 
with relatively minor adjustments to the FDIC's current 
assessment system.
    Using the current system as a starting point, I believe 
that the FDIC should consider additional objective financial 
indicators based upon the kinds of financial information that 
banks and thrifts already report, to distinguish and price for 
risk more accurately within the existing least-risky 1A 
category. The sample ``scorecard'' included in the FDIC's April 
2001 report represents the right kind of approach.
    In short, I believe the right approach is to use the FDIC's 
historical experience with bank failures and with the losses 
caused by banks that have differing characteristics to create 
sound and defensible distinctions. Pricing deposit insurance 
risk is inherently difficult and some amount of subjectivity 
cannot be avoided.
    We will never be perfect, but we are committed to doing the 
best possible job. We will use objective factors whenever 
possible, and we will invite the participation of the industry 
and the public in the FDIC's decisionmaking process through 
notice-and-comment-rulemaking and other outreach efforts.
    Essentially, the FDIC wants to be able to fulfill the 
original mandate Congress gave it in 1991 to design and 
establish a truly risk-based system that allows the insurer to 
respond to emerging risks and evolving risk factors.
    Finally, one goal of deposit insurance reform should be 
that, over time, it produces a better and fairer system without 
increasing the net costs of deposit insurance for the industry 
or increasing the risk posed to taxpayers. If the FDIC is 
charging risk-based premiums to all institutions, then to check 
the growth of the fund in good economic times, the FDIC must be 
able to grant banks a credit toward future assessments.
    In its recommendations, the FDIC suggested giving rebates 
whenever their fund ratio moves above its target range. 
However, I am reluctant to mandate a cash payment out of the 
insurance fund at this time, given the uncertain economic 
environment. We can achieve the desired result by giving banks 
a credit toward future assessments. Initially, these credits 
should be allocated in proportion to assessments paid in the 
past, which would be fair to the institutions that built the 
insurance funds to where they stand today.
    Mr. Chairman and Members of the subcommittee, the Congress 
has an excellent opportunity to remedy flaws in the deposit 
insurance system before those flaws cause actual damage either 
to the banking industry or our economy as a whole. Both 
insurance funds are strong and despite a slowing economy, the 
banking industry also remains very strong.
    The FDIC has put forward some important recommendations for 
improving our deposit insurance system. While I believe we 
should remain flexible with regard to implementation, as a 
former banker and as the FDIC's new Chairman, I believe that we 
should work together to make these reform proposals a reality.
    Thank you.
    [The prepared statement of Hon. Donald E. Powell can be 
found on page 30 in the appendix.]
    Chairman Bachus. Thank you.
    At this time, I'm going to yield to Mrs. Kelly for 
    Mrs. Kelly. Thank you very much, Mr. Chairman, and Mr. 
Powell, thank you for testifying. I too want to applaud your 
idea of indexing coverage to inflation. I think that's a good 
suggestion and I think it's something we should consider. I'm 
glad to hear it.
    Mr. Powell, I understand that some Oakar banks that bought 
safe deposits during the savings and loan crisis are asking the 
FDIC to make substantial payments from the SAIF and shift 
deposits from the SAIF coverage to coverage by the BIF as a 
result of their purchase. The theory behind this request is 
that some BIF insured banks that had bought SAIF insured 
deposits miscalculated their relative BIF and SAIF deposit 
bases, causing them to pay incorrect premiums. As a result, the 
FDIC made the banks whole that paid too much, and forgave the 
banks that paid too little.
    Many Oakar banks calculated their SAIF obligations 
correctly, but several are now asking Congress to grant them 
cash, as if they had made a mistake when they calculated.
    What impact, if any, could this have on the Deposit 
Insurance Fund?
    Do you want me to wander through that again?
    Mr. Powell. No. That impact could be as much as $500 
    Mrs. Kelly. I'm sorry, sir, could you repeat that?
    Mr. Powell. That impact could be as much as $500 million.
    Mrs. Kelly. Five hundred million dollars, that would be the 
    Mr. Powell. Yes, ma'am.
    Mrs. Kelly. OK, that's at least good for us to know and we 
perhaps need to address that. Thank you.
    Another question I had was brought up by one of the people 
on my banking advisory committee. They were talking about 
municipal deposits. And the question is, do you think municipal 
deposits ought to get 100 percent insurance coverage, or should 
they get some other higher level of coverage, and if so, what 
level of coverage do you think is appropriate for municipal 
    Mr. Powell. I'm concerned about providing complete 
protection for any class of depositors. We're willing to talk 
about this, but I would say that I'm not persuaded that there's 
strong public policy argument for raising the limit on 
municipal deposits at this time. We at the FDIC would be more 
than willing to listen to those arguments for raising those 
    Mrs. Kelly. But you are willing to think about this?
    Mr. Powell. Yes, we would be willing to talk about it and 
think about it.
    Mrs. Kelly. Perhaps you'd want to get back to the 
subcommittee and let us know what you're ponderings are?
    Mr. Powell. Sure, I'd be happy to do that.
    Mrs. Kelly. I want to link that then to another issue that 
they brought up which was what level of coverage you think that 
the retirement accounts, like IRAs and 401Ks should receive, 
and should co-insurance be considered for higher coverage of 
mutual and retirement accounts?
    Mr. Powell. There's been some history, as I mentioned in my 
testimony, I think Congress chose to raise the retirement 
accounts, the IRAs and Keoghs to 2\1/2\ times the coverage that 
was in place in 1979. So with that formula, that would raise 
the coverage to $250,000. We have done some work at the FDIC 
looking at the number $500,000, and do not believe that between 
$250,000 to $500,000 that there would be any impact on the 
fund, but of course that is based upon some assumptions that we 
don't know, in fact, would happen.
    But, 2\1/2\ times, it seems to me, would be a reasonable 
    Mrs. Kelly. Thank you, Mr. Powell. Unfortunately, I'm going 
to have to go up to the floor so I'm going to yield the rest of 
my time to Chairman Bachus.
    Chairman Bachus. Thank you. And what I'm going to do, I've 
got several Members that want to participate in the money 
laundering debate on the floor too, so I'm going to yield at 
this time, and then when they are through, I have a few 
    The gentleman from Texas.
    Mr. Bentsen. Thank you, Mr. Chairman, and Mr. Powell, my 
fellow Texan, I'm sorry I missed the opening part of your 
statement and I, unfortunately, have not completed your 
testimony, but I was able to glean some information from it.
    From reading the initial part of your testimony, you seem 
to at least partially endorse the report of your predecessor in 
the approach that she and your staff were trying to take to 
reform in the FDIC, I'm sorry, the deposit insurance program. I 
agree with you on the merger of the funds. I think that makes 
perfect sense.
    You sort of get into some detail of more of a risk-based 
pricing model, which I also think makes sense, and rather than 
giving just a cash rebate back, you would want to, you just 
want to carry it forward on basically a credit against future 
assessments, and I think that makes some sense also.
    I particularly like the idea of trying to get away from 
this sort of counter-cyclical pricing approach.
    What I'm curious about is one of the things that I think 
your predecessors proposed was that even with a risk-based 
pricing and even with credit assessments, if I understood this 
correctly, that there would always be some assessment so that 
you could never get to zero in effect, so that there was always 
some cash flow coming into the fund in the event that you hit a 
real bump in the road.
    And we have seen, not in this industry, but in other 
industries, the bumps in the road can come out of nowhere, as 
we saw in the airline industry and potentially in the insurance 
industry because of September 11th.
    Is that your position as well, that even with the, if we 
were to develop a model or legislation off of your testimony 
and off of the FDIC's proposal, as modified by you, with the 
assessments, with the credit allocation, with the risk-based 
pricing, that there would still be at least, there would always 
be some premium that would be paid?
    Mr. Powell. Yes, sir. The thought behind that is that all 
institutions, we believe, benefit from FDIC insurance and every 
institution, even those that are extremely well run, offer some 
risk to the FDIC.
    Mr. Bentsen. Is it, and in the midst of everything going 
on, I realize banking policy isn't necessarily getting the full 
attention that this subcommittee might believe it deserves, but 
is this, is the reform of the deposit insurance system a top 
priority of the Administration, and is it something that you 
all will seek to push in this Congress?
    Mr. Powell. We have been in contact with the folks at 
Treasury and they have been informed of our position and we've 
had dialogue back and forth with the folks in Treasury. We at 
the FDIC, we believe that this is good public policy, we 
believe it's the right thing to do, and we will attempt to move 
this forward.
    Mr. Bentsen. Well, I'm glad to hear that, Mr. Powell, 
because I do think that it's something that we ought to do. 
They're not as many other issues on the agenda, having passed 
Gramm-Leach-Bliley, that I think are as important to the 
industry. We, as you know from your prior life, we have debated 
this issue for some time, long before I came here and hopefully 
not long after I leave, but we went through a number of 
machinations in 1995 and 1996. We came up with compromise 
language in 1996, but that was really left undone, and so I'm 
pleased with where your testimony is heading today, that you 
want to take the approach a step further and I encourage you to 
keep pushing, and at least for this Member, any assistance I 
can give in prodding the Administration--they don't listen to 
me all that often, but to the extent that we can work together, 
I'm eager to work with you and I yield back the balance of my 
    Mr. Powell. Thank you.
    Mr. Bentsen. Thank you, Mr. Chairman.
    Chairman Bachus. Let's see, the gentlelady from 
Pennsylvania doesn't have questions, is that correct?
    And the gentleman from California does not have questions.
    Gentleman from Kentucky, no questions.
    This is a great first hearing.
    Let me go over what I, I just made some notes on your 
testimony from reading it yesterday, and let me sort of go down 
this list as opposed to some questions and answers, and make 
sure that maybe I'm hitting the highlights.
    First of all, merge the funds?
    Mr. Powell. Yes, sir.
    Chairman Bachus. No across-the-board increase in the basic 
coverage now?
    Mr. Powell. Yes.
    Chairman Bachus. Index the present $100,000 limit to the 
Consumer Price Index, and adjust that every 5 years with the 
first adjustment 1/1/05.
    Rounding in whole numbers in $10,000 increments, and then I 
think I also agree with you, and retain the coverage level even 
if the price level falls.
    Mr. Powell. Right.
    Chairman Bachus. Because if you didn't do that, you could 
actually cause some unease in the market?
    Mr. Powell. Right.
    Chairman Bachus. Increase the insurance limit for IRA and 
Keough deposits since existing Government policies encourage 
long-term savings, and middle income families routinely save 
well in excess of that amount.
    Also higher IRA and Keough deposit insurance coverage 
promotes productive economic investment in growth, which is 
something I think Chairman Greenspan and other economists have 
asked this Congress to figure out ways to do.
    The basis, and some people question why have two different 
limits, but you pointed out, I think, that in 1978, when it was 
established the IRA/Keough coverage at $100,000, while leaving 
basic coverage at $40,000, so we already have that precedent.
    While banks and thrifts account for just $220 billion of 
IRA Keoughs, the short-term impact to the reserve ratio could 
be dramatic, because of $2.5 trillion in IRA/Keoughs in the 
overall economy. And that's a concern for you. And the FDIC is 
going to study that before they make a final recommendation?
    Mr. Powell. Yes, sir.
    Chairman Bachus. And will that include in the amount to 
bring that coverage up to?
    Mr. Powell. Yes, sir.
    Chairman Bachus. Deposit insurance within the 1A category 
can be priced according to risk using the existing system of 
subjective indicators. Then you're going to add six additional 
objective financial indicators?
    Mr. Powell. Yes, sir.
    Chairman Bachus. And I do have, I'm going to have a follow-
up question on that. Grant future assessment credits allocated 
in proportion to past assessment payments using 1996 as a 
baseline date when both funds have been capitalized. And I will 
have a follow-up on that too, I think, if no one else asks it, 
about how we compute that, if one institution's acquired 
another institution.
    But, you're not going to provide a cash out of the fund now 
due and that's due to the uncertain economic environment? And 
obviously, I don't think anybody would argue with that. I 
probably shouldn't have said no one will argue with it, but I 
think your position is certainly reasonable.
    Eliminate the 23 basis point cliff effect to ensure that 
new deposit growth no longer triggers premium increases. That's 
something that this subcommittee has also identified. I think 
there's some pretty broad agreement by the industry and the 
    I've got four more questions, and this is now getting into 
something that is maybe where the industry and regulators might 
see some disagreement.
    Provide the FDIC board with the flexibility to set the fund 
ratio's target size, determine the speed of adjustments toward 
the target and charge appropriately for risk at all times. 
Although no target range is specified, the current 1.25 percent 
level is a reasonable starting point for the new system. Avoid 
hard targets or automatic triggers in managing the fund's 
growth or shrinkage.
    Now in regard to that, as I see it, you're actually saying 
let the FDIC--basically it almost appears to be a request for 
total discretion. You're a Main Street banker, is the industry 
comfortable with that? I'm asking you as a regulator, but 
you've been in the business for 30 years. Is the industry 
comfortable with--and I'll stop, I've got one more.
    Mr. Powell. Mr. Chairman, I think you're correct, but I 
would add this to it, that there would be some parameters and 
some accountability back to Congress on an annual basis. I 
mean, we are willing to work with Congress about setting some 
parameters as relates to our discretion, but in fact, we would 
like to manage the fund without some hard targets associated 
with it.
    I look at it, not unlike a loan loss reserve at a bank. We, 
at the FDIC, should have the ability to make sure that we 
understand the risks in the system. It's a commercial bank and 
I have my loan portfolio. I need to assess what the risk is 
without saying that my reserves should be 2 percent of loans or 
1 percent of loans or 5 percent of loans, because the risk 
varies from time to time. And the risks will vary from time to 
time and we are simply asking that we be allowed, with these 
parameters in place and with reporting back to the Congress, of 
being accountable back to Congress, that we manage that risk, 
because risk is ever changing, to be fair to the system. And we 
have the data we think that would enable us to assess the 
    Chairman Bachus. I agree with you that, you know. Hard 
targets are not the way, and that ranges--you know, we talked 
about ranges, but I don't know that we've ever talked about not 
having a bottom of the range and a top of the range. Maybe 
there are extenuating circumstances, and let me tell you the 
reason I'm saying that.
    Two reasons, two concerns. One is the bank needs to know at 
a certain capitalization rate the Government is not going to be 
asking me to put more in, and you know, at a certain level, I 
know that I've probably got to start paying more. And you know, 
I see, as that ratio goes up and down, there's some 
predictability that I can make in business judgment.
    But another concern is, not while you're Chairman, but what 
is to prevent a new Chairman, unless there are some ranges, of 
saying we're going to raise the ratio to give--we're going to 
punish the--we're going to finance some of the operations with 
    Mr. Powell. I've been on that side, Mr. Chairman, yes.
    Chairman Bachus. You see what I'm saying?
    Mr. Powell. Absolutely.
    Chairman Bachus. As a banker, I think they'd be able to 
raise it to 2\1/2\ percent.
    Mr. Powell. It gets back to that accountability. I think we 
need to be accountable, and we would again work with the 
Congress. It may be there should be a minimum, there should be 
a maximum. We would again be willing to listen to any of those 
views, be they your views or any other Members of Congress.
    Chairman Bachus. You know, at a certain point, and as I've 
said before, you've come from Amarillo, you've come from the 
real world, and you know that there is a ratio at which, 
whether it's 1.5, 1.8, where banks, even that, you know, a one-
half of 1 percent or one-quarter of 1 percent makes you 
competitive or non-competitive in the marketplace.
    Mr. Powell. Yes sir, I think your point is very good and I 
want to stress that we want to be accountable. Accountability 
is something that we at the FDIC understand and we want to be 
accountable to Congress. And we would listen to any standards 
that Congress may want to put into that. We would just simply 
say that the economy moves from time to time, and a benchmark 
of 1.25 has served us extremely well in the past, but in the 
future, perhaps that should be managed in a different way. So 
we're willing to listen and willing to work with you.
    Chairman Bachus. Particularly, you know, the industry 
doesn't agree, but the regulators--and there are certain people 
saying there ought to be at least some premium paid, and at 
some level, I think we all agree that an assessment, when 
there's a certain capitalization rate, there's probably no need 
to go above that.
    Mr. Powell. Absolutely, yes, sir.
    Chairman Bachus. My first question is this. Well, let me, I 
had one other point, I think here, and that would maybe 
complete what I've sort of gone over your testimony just some 
high points, is the combination of risk-based premiums and 
assessment credits tied to past contributions would help to fix 
the problems related to rapid growers and new entrants. And I 
think that's a real concern among many people in the industry.
    Mr. Powell. Yes, sir.
    Chairman Bachus. Other than the new entrants and fast 
growers that aren't at all concerned about that problem, but I 
think that's a good recommendation. And here's my first 
question, it's sort of a follow-up. There's widespread industry 
concern that well-managed, well-capitalized institutions with 
ratings of 1 or 2 should not have to pay premiums. Why should 
premiums be reimposed on these institutions if their 1A 
assessment rating and high ratings accurately reflect their 
risk profile and financial condition? And I'll just ask the 
follow-up now and you can answer it all.
    And how do you persuade those institutions to support a 
proposal to pay premiums for the first time since 1997?
    Mr. Powell. I think that question really needs to be 
answered in taking into consideration the credit assessments 
that we are recommending. But we believe that every 
institution, in fact, does have some risk to the Fund. The FDIC 
has data that supports that statement in that banks in the past 
that have failed, and I don't have that data before me, but 
clearly, banks of a rating of 1 and 2 represented some 
percentage of the banks that failed 2 and 3 and 5 years later.
    So all banks have risk. And all banks benefit from FDIC 
insurance. Thus, it would seem to me that all banks should pay, 
again based upon the risk, and those that have paid in the past 
and those that are the best rated banks will receive some 
credit assessment, and obviously the premiums would be much 
lower for the best rated banks than those that present a higher 
risk to the system.
    Chairman Bachus. I think your response is very concise and 
hits two or three of the points very well, so I agree with you, 
and I think many on this subcommittee do.
    How do you perceive the public's reaction to a modest 
increase in the deposit insurance coverage limit of, let's say, 
$10,000 or $20,000 or is there a minimum that it goes up or 
$30,000 or even $40,000? What is the estimated effect to the 
Fund and the Fund ratio from such increases?
    Mr. Powell. The FDIC has done lots of work as relates to 
that and, Mr. Chairman, I would tell you that under the current 
proposal that the impact on the Fund is not material. That has 
lots of assumptions, of course, based upon it as we go forward 
depending upon what happens in the economy, but it's not 
    Chairman Bachus. At this time, I'm going to yield to the 
gentlelady from California, and invite you to make an opening 
statement, and I have explained to the Chairman that our money 
laundering bill is on the floor and that traditionally the 
minority Member as well as the Chairman were to be there, but 
the Chairman of the Full Committee is there on my behalf, and I 
think Ms. Waters has come from the floor.
    Ms. Waters. Thank you very much, Mr. Chairman. You're 
absolutely correct. Our bill is on the floor and a lot of other 
things are going on. But I certainly wanted to be here, Mr. 
Chairman, and I thank you for calling this hearing, the third 
in a series on Federal Deposit Insurance Reform, and I'm 
pleased that we'll be hearing from the new FDIC Chairman, 
Donald Powell, as well as Professor Rick Carnell, Mr. Nolan 
North, and Professor Kenneth Thomas this morning.
    Deposit insurance has served America well for almost 70 
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 
    Earlier this year, the FDIC released its report on deposit 
insurance reform which highlighted a number of major issues, 
including deposit insurance is currently provided by two 
different funds at two different prices. Deposit insurance 
currently cannot be priced effectively to reflect risk. Deposit 
insurance premiums are highest at the wrong point in the 
business cycle, and the value of deposit insurance does not 
keep pace with inflation.
    In addition, 92 percent of all institutions are currently 
paying nothing whatsoever for their deposit insurance coverage. 
This zero premium system became law in 1996, the same year that 
Congress passed Welfare Reform. Welfare Reform legislation was 
designed to reduce Federal assistance to poor people, the very 
same year that we decided that banks need not pay anything for 
Federal Deposit Insurance coverage.
    This does make good sense. I have a stellar driving record 
and my insurance company may have more than adequate cash 
reserves, but I still pay a premium for insurance coverage or I 
can't drive my car.
    As we examine various proposals for deposit insurance 
reform, we should keep this fact in mind. Banks should pay 
something for their insurance coverage.
    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'm going to try 
to stay as long as I can.
    Chairman Bachus. Thank you.
    We'll go back to questions. This is going to be the longest 
question I'm going to ask you, so you get through this one, 
you'll have my longest question.
    What objective financial and market factors should be 
considered when assessing premiums based on the risk posed by 
large and complex institutions, and how do you ensure large and 
small institutions are assessed premiums fairly and 
    Mr. Powell. That's our objective, obviously. The answer to 
the latter part of your question is we want to be consistent 
and fair, and that the system be transparent between large and 
small institutions. There are several market factors that 
perhaps are data we could use. I think there has been some work 
on that as it relates to some other capital work that's being 
done by the regulatory bodies.
    There are numerous market factors that we could look at and 
we're willing to look at those and to listen to the larger 
banks about something that they would like to see as part of 
our risk-based model.
    Chairman Bachus. All right, and I'm going to ask a follow 
up. I think you probably, you don't have to answer this today. 
What I might do is submit that question and some others just 
for the record in writing and get a comment.
    The other part of that question, what is the appropriate 
size cut for regulators to distinguish large and complex 
institutions from small and middle sized institutions for 
regulatory and assessment purposes? I'm not sure that's 
something you can answer today.
    Mr. Powell. Give us a little bit of time on that, and we'll 
attempt to answer that question for you, Mr. Chairman.
    Chairman Bachus. I think that's totally reasonable.
    At this time, I will yield to the lady from Pennsylvania.
    Ms. Hart. Thank you, Mr. Chairman. I'm sorry I wasn't here 
for the entire discussion, Chairman Powell, but I appreciate 
you coming before this subcommittee.
    You discussed in your statement, as I've been reviewing it, 
how an assessment credit would work instead of a rebate where 
the institutions would receive credit toward their future 
assessments based on their past contributions to the Deposit 
Insurance Fund, and how it would be based on the institution's 
relative deposit base at the end of 1996, which for an 
institution that existed in 1996 in its current form, is pretty 
    How would you address a situation which is becoming more 
and more common where a banker/thrift has acquired one or more 
institutions since the end of 1996, and would the acquiring 
institution assessment include the credits that had accrued to 
the acquired institution and how would that work? And how would 
you make sure that that's sort of done, I guess, in a balanced 
and fair way?
    Mr. Powell. Yes. Would the acquiring institution get credit 
for the past assessments paid by the acquired institution? The 
answer is yes. And we would have the records and data necessary 
to make sure that that, in fact, happens.
    Ms. Hart. I'm sorry, could you repeat that?
    Mr. Powell. Yes. I'm answering your question that if an 
institution acquires an institution, both would be combined 
together as if they were one institution so that we get total 
credit for both of those institutions.
    Ms. Hart. So it would be the----
    Mr. Powell. The acquiring institution would get credit for 
the past assessments paid by the acquired institution.
    Ms. Hart. OK. So all their assessments would be added 
together with the assessments for the new one?
    Mr. Powell. Yes, ma'am.
    Ms. Hart. What about the combined----
    Mr. Powell. It would be combined.
    Ms. Hart. From that date forward?
    Mr. Powell. That's right.
    Ms. Hart. OK. And is there anything about that that you'd 
be concerned about as far as like an imbalance because of the, 
I don't know, the change in size. There's no concern that you 
have about that?
    Mr. Powell. No, I really don't have any concern. I think we 
have the data necessary to calculate it.
    Ms. Hart. OK, so it's just a typical additional kind of 
    Mr. Powell. Yes, ma'am.
    Ms. Hart. OK, thank you.
    Thank you, Mr. Chairman.
    Chairman Bachus. Chairman Powell, if there are no other 
questions from Members of the panel, at this time we're going 
to discharge you to get back to the important work of the FDIC. 
We very much appreciate your testimony.
    I will tell you that I did not formulate that question on 
municipal deposits. My staff did, knowing my concern about 
municipal deposits and that's why you were asked it. But I did 
not put anybody up to asking you that question.
    I will tell you this. The public policy, I think, behind 
some greater level for municipal deposits is simply that when 
you have a small county or rural county, the people in that 
county, they want to be able to invest with their local 
institutions, their water boards, their school boards, their 
county government. They like those taxes to stay home if they 
can. At the same time, they want it federally-insured.
    I am in total agreement with you that it would be foolish 
to have an open-ended guarantee on municipal deposits with no 
level or no limitations. And I think one of the problems that 
maybe the FDIC has with that, the problems that we've had in 
struggling with it, is it sounds like a good idea. There is, I 
think, a public policy consideration for it, but how do you 
draft it and how do you get to sound legislation, and we're 
still in search of something that protects the public and 
protects the Fund, and is not discriminatory. So I do 
appreciate your comments, and as I said, you've been in banking 
for 30 years, you bring a world of experience from the 
institutions into this job. And I'm excited about working with 
    Mr. Lucas. Mr. Chairman? Over here.
    Chairman Bachus. Mr. Lucas.
    Mr. Lucas. Would not a county government, a city 
government, a sewer and water board each have their own 
insurance since they're not combined? Is that not true?
    Chairman Bachus. I beg your pardon?
    Mr. Lucas. Well, I mean, each entity has their own limits 
so it's not, they don't aggregate all those deposits together.
    Chairman Bachus. That's right. In fact, a water board could 
deposit $100,000, you know, and the school board. But, you 
know, as I think the Chairman knows, as you know, even in a 
small county, a water board or a gas board could have several 
million dollars in deposits and probably would have. So what 
they're having to do is that 95 and 98 percent of their money 
sometimes is deposited outside the county.
    Mr. Lucas. OK, thank you.
    Chairman Bachus. But that is a valid point, that you're 
talking about, the governments divided and they're different 
    Mr. Chairman, at this time, panel one is adjourned.
    Mr. Powell. Thank you, Mr. Chairman, thank you.
    Chairman Bachus. At this time, we will recognize our second 
    Mr. Richard Carnell, Associate Professor of Law, Fordham 
University School of Law. I have his resume before me. He 
teaches courses in banking law and corporations. Also taught 
corporations in law school, so I understand that to be a 
difficult job, and a write-in lecturer on a wide range of 
topics. Served as Secretary of the Treasury of the Association 
of American Law Schools Section on Financial Institutions and 
Consumer Financial Service. A note of interest to this 
subcommittee is that you advised Secretary of the Treasury, 
Lloyd Bentsen and Bob Ruben, and other Clinton Administration 
officials on financial services issues. You led the 
Administration's successful efforts to secure legislation in 
several fields including clean-up of the savings and loan 
industry, authorize interstate banking and branching, resolve 
problems with the FDIC's SAIF Fund, and many other things. You 
were actually senior counsel in the U.S. Senate Committee on 
Banking, so you certainly understand how we function here, and 
on the Board of Governors of the Federal Reserve System from 
1984 to 1987. And were a practicing attorney at one time in San 
Francisco, a graduate of Harvard Law School and Yale 
University. We've not heard of those institutions, but I'm sure 
they are credible.
    Our next panelist, Nolan North, is Vice President and 
Assistant Treasurer of T. Rowe Price Associates. Anybody that 
watches CNBC knows about T. Rowe Price. Responsible for the 
overall management of bank relations for T. Rowe Price 
including credit facilities and banking services, and also 
responsible for the implementation of modern cash management 
techniques. You've got a wide range of experience in banking 
and treasury management. Before you joined T. Rowe Price, you 
were a bank relations manager, assistant treasurer of a major 
insurance company, a sales manager for a leading treasury 
management bank, and department head of a marketing research 
firm specializing in treasury management. Past Chairman of the 
Board of Directors of the Association of Financial 
Professionals, Member of the Government Relations Committee, 
you currently serve NACHA as a member of the board of 
directors, you're on the Next Generation ACH Task Force, and 
various other activities.
    And the reason I'm reading these is because our panel is 
all quite distinguished and have tremendous experience behind 
them, a very esteemed panel.
    Dr. Kenneth Thomas, Lecturer in Finance at the Wharton 
School, University of Pennsylvania since 1970. Teaches banking, 
monetary economics at Wharton. You received--this is quite 
impressive here--an Excellence in Teaching Award in May, 2001. 
Congratulations for that. You've been a bank consultant since 
1969, working with several hundred banks and thrifts throughout 
the country on a CRA, also on fair lending and regulatory 
issues. Your first book on CRA, ``Community Reinvestment 
Performance'' was published in 1993. Many of the book's 
recommendations were directly implemented in the revised CRA, 
and you won an award of excellence for that book. Your most 
recent book ``The CRA Handbook'' contains the most 
comprehensive evaluation of CRA exams ever conducted, including 
a new technique for evaluating and quantifying CRA grade 
inflation. You received your BSBA degree with high honors in 
Finance from the University of Florida, who lost this past 
weekend in football to where I got my undergraduate degree, 
Auburn University. Put a real licking on the Florida Gators.
    Chairman Bachus. You have an MBA in finance from the 
University of Miami, and an MA and PhD in finance from the 
Wharton School. You are a regular speaker and writer in the 
banking and thrift industries, frequently quoted in articles on 
these topics. I've seen you on CNBC. It also says here you 
appeared on CBC, CNN, Nightly Business News, and NPR. I 
probably saw you on those too. But you're a biweekly 
commentator on the net financial news.
    Finally, advised Federal bank regulators on public policy 
issues, testified before Congress on several occasions on 
various bank regulatory issues. Are you at the University of 
Pennsylvania or are you in Miami?
    Dr. Thomas. I live in Miami, but I commute once a week to 
Philadelphia to teach at Wharton as I've been doing for the 
last 30 years.
    Chairman Bachus. Wow, boy, you need to testify to us how 
you can live in Miami and work at Wharton. That's great. But, 
no, I understand that.
    And we welcome all you gentlemen and look very much forward 
to your testimony. The Members, or most of them, are on the 
floor on a money laundering bill which is legislation. Having 
worked on the Hill and testified on the Hill, you know we don't 
sometimes set the agenda, and they actually put that bill on 
the floor at 10 o'clock this morning, because it's part of the 
Administration's and the Congress' ways to address terrorism 
and the events of September the 11th. Those are high priority 
items at this time.
    Your testimony, though, will be distributed to the Members, 
will be read by the Members, and has already been read by this 
Member, so I appreciate your testimony and at this time, we 
will start with you, Dr. Carnell.


    Dr. Carnell. Mr. Chairman and Members of the subcommittee, 
I'm pleased to have this opportunity to discuss deposit 
insurance reform. Federal Deposit Insurance does many good 
things, but it also impairs market discipline. Without proper 
safeguards, deposit insurance can----
    Chairman Bachus. Let me interrupt something, and I don't 
know how there's a good way to do this. We've got a floor vote 
right now. Instead of doing part of this and then coming back, 
it's just one vote, and I beg your indulgence.
    Dr. Carnell. I'm glad to wait, Mr. Chairman.
    Chairman Bachus. If we could recess, I will go vote. I 
think it would give other Members an opportunity to hear your 
testimony, in fact. So we're going to recess, and Dr. Carnell, 
I very much apologize for not knowing that before you started. 
I apologize for interrupting you.
    I'm going to go vote, we'll recess for 10 minutes, come 
back here and have your testimony. And I hope in your travel 
plans, is this going to prejudice any of you in making 
    [No response.]
    Chairman Bachus. OK, great, we will be 10 minutes.
    Chairman Bachus. The hearing is now called to order.
    Dr. Carnell.
    Dr. Carnell. Mr. Chairman, Federal Deposit Insurance does 
many good things, but it also impairs market discipline. 
Without proper safeguards, deposit insurance can encourage 
banks to take excessive risks, for safe banks to subsidize 
risky banks, and saddle the taxpayers with large losses. To 
avoid such problems, we need risk-based premiums as well as 
effective supervision.
    Risk-based premiums are fair and they help give insured 
banks a healthy set of incentives. Banks with less capital, 
banks with weak management, and banks that take big risks will 
pay more than safe, well-managed banks with lots of capital. 
This gives banks incentives compatible with the interests of 
the Insurance Fund.
    But a 1996 Amendment has undercut risk-based premiums. I'll 
call this the Zero Premium Amendment. If a deposit insurance 
fund meets its reserve target, the FDIC can charge premiums 
only for banks that are not well capitalized or have other 
obvious and significant problems. The zero premium amendment 
currently covers 92 percent of all FDIC insured institutions. 
These institutions differ greatly in their riskiness. The 
amendment hinders the FDIC in refining risk-based premiums to 
take proper account of these differences.
    The amendment has also given rise to a serious free rider 
problem. Note that if banks paid premiums according to their 
riskiness, no bank would get a free ride. The zero premium 
amendment is like a law regulating automobile insurance 
companies that would require every company with adequate 
reserves to insure safe drivers free of charge, and would allow 
any company with inadequate reserves to charge safe drivers 
only to the extent necessary to rebuild its reserves. No 
private company would provide auto insurance under such 
circumstances, nor should the Government continue to provide 
deposit insurance under such constraints.
    The zero premium amendment is unsound policy, it's had 
adverse results, and it should be repealed so that risk-based 
premiums can work as intended.
    I also support easing the minimum premium requirement that 
would now apply if a deposit insurance fund missed its reserve 
target for more than a year. The FDIC would have to set 
premiums very high even for safe institutions. That would 
undercut risk-based pricing and it would also put additional 
stress on banks at just the wrong time, during an economic 
    Mr. Chairman, many years ago, I lived in a house with an 
oven that had only two temperatures; off and 600 degrees. The 
current premium rules are like that oven. The zero premium 
amendment is off and the minimum premium requirement is 600 
degrees. Reform here makes sense. I suggest lowering the 
minimum and narrowing the circumstances when it would apply. 
And I spell out the details of that in my written statement.
    I recommend against paying rebates from the insurance funds 
or capping the fund's reserves. We don't know what reserve 
levels will end up being needed in the future. Bank failures 
are hard to predict accurately. They don't come neatly spaced 
out like deaths from old age; they come in clusters during hard 
times. So a deposit insurance fund can look fat and flush one 
year, and be in serious trouble just a couple of years later.
    Although I oppose caps or rebates, I see possible merit in 
letting the FDIC grant risk-based assessment credits if an 
insurance fund's reserves exceed 1.5 or 1.6 percent. Banks 
could use these credits to reduce their future premiums. The 
FDIC would award such credits based on a combination of a 
bank's past premium payments and the bank's past and present 
risk to the FDIC.
    Properly constructed, a system like this could help solve 
the free rider problem. It could also help the FDIC deal with 
the difficulty of measuring a bank's risk ahead of time, which 
is one of the greatest challenges in operating a risk-based 
system. But if you can do the credits after-the-fact, you can 
make an adjustment based on risk; then you won't have to guess. 
By the time you award the credits, you'll know which banks were 
riskier than others. So if a particular bank's premium ended up 
being higher or lower than it should have been, given what the 
FDIC later knows about capital management and other aspects of 
riskiness, the FDIC has the opportunity to make an appropriate 
adjustment when awarding credits.
    I urge Members to take a skeptical view of proposals to 
index or otherwise limit the $100,000 insurance limit. Adjusted 
for inflation, it was the highest level in the FDIC's history 
and even if you adjust it for inflation between 1980 and now, 
it's still relatively high by historic standards. And also I 
believe that raising the $100,000 limit would do little to 
resolve community banker's complaints about losing deposits to 
other institutions.
    As the FDIC works to make the risk-based system better 
reflect banks' riskiness, I would urge Congress to resist any 
temptation to micromanage the FDIC. I have a thought, 
incidentally, Mr. Chairman, on the issue of municipal deposits. 
And that is it might be possible to provide insurance beyond 
the $100,000 amount, but not to insure the full amount of the 
deposit, that is, rather to provide insurance for 90 percent of 
the deposit. The risk to the local government would still be 
small, because they'd be 90 percent insured, and then on top of 
that, the bank's going to have some good assets, so even if 
there's a loss, uninsured depositors won't lose a hundred cents 
on the dollar; they might lose ten cents on the dollar. So you 
could provide insurance up to a reasonable amount that would go 
above $100,000.
    Mr. Chairman, Congress has opportunities to achieve 
important deposit insurance reform. I very much hope that it 
does so, but I urge caution in dealing with demands for 
tradeoffs, like raising the $100,000 limit across the board. It 
would be better to postpone reform than to enact flawed 
legislation now.
    Thank you and I'll be pleased to respond to questions at 
the appropriate time.
    [The prepared statement of Richard S. Carnell Ph.D., can be 
found on page 45 in the appendix.]
    Chairman Bachus. Mr. North. One thing we're going to do, 
we're not limited by the 5 minutes so, you know, if it's 7 
minutes or 8 minutes, feel free to do that.


    Mr. North. Good morning, Mr. Chairman, Members of the 
subcommittee. I am here representing the Association for 
Financial Professionals, AFP, and its Government Relations 
Committee. Our comments today address why deposit insurance 
reform is important to corporate America.
    AFP represents about 14,000 finance and treasury 
professionals who on behalf of over 5,000 corporations and 
other organizations, are significant participants in the 
Nation's payment system and have a sizable stake in any 
proposed changes in the deposit insurance assessment system. 
The stake of corporate America in deposit insurance is based on 
the premise that deposit insurance coverage is intended for 
depositors, not bankers. Yet, the voice of bank depositors is 
not often heard in this debate.
    In your invitation to these hearings, Mr. Chairman, you 
asked if deposit insurance should be reformed, and we certainly 
agree it should. You also asked if the FDIC options paper had 
raised the correct issues, and we do think the right issues 
have been raised with one significant exception. That exception 
is, there has been no attempt to resolve the disparity between 
the balances covered by insurance and the balances on which 
assessments are based. We believe assessing only insured 
balances, instead of total balances, is fundamental to fair 
reform of the deposit insurance system.
    Our members believe that their organizations are the 
dominant funders of the bank insurance fund, because banks pass 
through the deposit insurance costs to their corporate 
customers directly on the basis of total balance size, which is 
customarily well in excess of the $100,000. As a result, many 
businesses must both self-insure their deposits in excess of 
$100,000 and pay insurance premiums for those uninsured 
    In effect, large corporate depositors subsidize the BIF 
through premium costs for deposits which are not insured by the 
fund. As with any insurance arrangement, the premiums should be 
based on what is insured.
    As to the issues raised in the options paper, we do support 
the merger of BIF and SAIF. Regarding the coverage level, the 
deposit insurance coverage level should remain unchanged at 
$100,000. Some financial institutions feel that higher coverage 
limits would solve funding problems. However, deposition 
insurance coverage is not a competitive issue. Coverage is 
intended to cover depositors and benefit depositors, not 
benefit bankers.
    The FDIC should be given discretion to set and adjust a 
range within which the reserve ratio may fluctuate in response 
to changes in industry risks and business conditions. Within 
that range, premiums should not be charged to well-managed and 
highly capitalized banks, because it would be our members who 
would end up paying that charge, even though they have decided 
to deal with well-capitalized and well-managed banks.
    In other words, the deposit insurance system should retain 
the risk-based variable premium approach, based on meeting a 
range of required reserves. This is perhaps the most important 
reform being proposed. It would, among other benefits, allow 
the FDIC to mitigate the cyclical effects of deposit insurance 
pricing by not being tied to the 1.25 percent floor.
    We oppose rebates on the basis that an equitable rebate 
method cannot be constructed. The entity bearing the premium 
cost, the bank customer, is unlikely to receive the value of 
any rebate. Among the benefits of moving to a reserves ratio 
system is that instead of rebating what are now seen as excess 
reserves, these reserves would just tend to move overall 
reserves toward the higher end of the reserve ratio range.
    Chairman Powell has suggested a method of providing 
assessment credits instead of rebates. This proposal is 
certainly better than rebates, and it deserves more review, 
because it could reduce the amount of assessments that are 
being passed through by a bank to its customers.
    We absolutely oppose full coverage for any special category 
of depositors, municipal deposits or IRA accounts. Having any 
protected class of depositors is not good public policy. Full 
coverage of certain types of deposits reopens the moral hazard 
issue. Also a practical effect of this approach would be to 
chase away other types of depositors. It would not take long 
for corporations, as well as consumer advocacy groups, to 
understand that in banks with large municipal or IRA or other 
special interest deposits, their deposits would be subordinated 
in the case of bank failure.
    Regarding de novo and rapidly growing banks, we do not feel 
that any well-managed and well-capitalized banks, regardless of 
how fast they are growing, should be expected to pay FDIC 
assessments when the BIF reserve is sufficiently funded.
    Our written statement covers these issues in greater detail 
and we appreciate the opportunity to exchange these views.
    [The prepared statement of Nolan L. North can be found on 
page 55 in the appendix.]
    Chairman Bachus. I thank the gentleman.
    Dr. Thomas.


    Dr. Thomas. Thank you, Mr. Chairman.
    In past hearings, you've heard the views of the regulators 
and the industry on deposit insurance reform, specifically the 
April 2001 FDIC Report titled ``Keeping the Promise . . .''.
    This morning, I bring to your consideration the views of a 
third party, the bank depositor. The 20 principles underlying 
the view of bank depositors are found in my testimony. The 
depositors' view is the most important view. Why? Because the 
FDIC established in 1934--and this is one of my collectibles, a 
hard copy of the original 1934 annual report, the very first 
one--states on the very front that depositor insurance was for 
the depositors. The FDIC was to protect depositors, not to 
insure banks, but to insure depositors. And that's where the 
focus must be.
    In other words, the only promise to be kept in ``Keeping 
the Promise'' is that to the depositor to insure deposits and 
maintain confidence in the system. I will also argue that the 
first two of the FDIC's five recommendations do exactly that; 
keep the promise to the depositors. But their last three 
recommendations do not, and in my opinion benefit the industry 
at the expense of the taxpaying depositor.
    I should mention that I have nothing but the greatest 
respect for the FDIC, the former Chairman, and the current 
Chairman Powell and their excellent staff. In fact, back in the 
early 1970s, I was recruited by them and almost went to work 
for the FDIC; so I think it's a great organization, they've got 
top people there.
    Now in terms of their five recommendations, their first 
recommendation on the merger of the funds. Everyone agrees 
that's a no-brainer, and from the perspective of a depositor, 
this eliminates any unnecessary confusion. For example, if I 
deposit money in Washington Mutual, primarily insured by SAIF, 
is it going to be stronger than money I might deposit at Bank 
of America primarily insured by BIF, because, in fact, SAIF has 
a stronger DRR ratio than BIF? That confusion should not exist; 
there should be just one fund.
    The second recommendation with the FDIC, which I agree 
with, is that every bank and thrift should pay deposit 
insurance based on their risk profile. Depositors want a strong 
fund where there are no free riders, especially the high flying 
Wall Street types like Merrill Lynch and Salomon Smith Barney. 
The two of them alone were responsible for a $20 billion 
increase in insured deposits in the first quarter of this year.
    Now for the three FDIC recommendations that I feel are 
counter to depositors' perspectives. The third recommendation 
on ceilings: There should be no ceiling for the fund; it should 
be a capless fund. Like all funds, it should continue to grow 
without a cap for a rainy day, which may be sooner than we 
think with the current recession. If anything, the minimum 1.25 
percent DRR, designated reserve ratio, should be increased to 
1.5 percent. These ratios ensure discipline and accountability 
at the FDIC.
    And again, from the depositors' perspective, they want a 
strong fund, run in a common sense manner, like any private 
insurance company would be run. And that gets to the fourth 
recommendation. There should be no rebates or no credits. I 
believe this is an unnecessary accommodation to the industry, 
apparently to win their support for deposit insurance reform. I 
lived through Hurricane Andrew, and I can tell you from the 
perspective of a major disaster like that, companies like 
Prudential, State Farm, Allstate, they do not give rebates if 
there was no accident or illness. Certainly they may give a 
better risk adjusted premium if you're a better driver or a 
better risk, but they do not give rebates.
    And can you imagine going years, as the banks have been 
doing, without being charged for premiums, as has been the case 
for 92 percent of the industry. It doesn't happen in the 
private sector and it shouldn't happen in the public sector. 
With today's volatile and uncertain stock market, and in my 
opinion, certain recession, depositors want to know that the 
fund behind their deposits is growing as much as possible with 
no cap, with no rebates, and with no credits.
    Finally, on the recommendation of increasing the amount of 
deposit insurance: depositors do not want, do not need, and 
have not asked for any increase in deposit insurance coverage, 
whether it be doubled or just increased by inflation. 
Depositors don't want to be potentially confused with different 
coverage levels for different types of deposits.
    According to the Federal Reserve, less than 2 percent of 
all depositors would benefit from a doubling of the insurance 
from $100,000 to $200,000, and now they have adequate 
alternatives. In fact, one Fed analyst has argued that we 
should be talking about reducing the coverage instead of 
increasing it or adding in some inflation adjustment.
    In fact, on the issue of inflation, it's important to 
realize that the current level is actually in excess of the 
level from 1934 to 1969. It's only the artificially high level 
in 1980 of $100,000 that caused the problem.
    Finally, Mr. Chairman, the Federal safety net is 
unfortunately getting bigger day by day. Much of this of course 
is in response to the September 11th terrorist attacks. First 
we had the $15 billion bailout, the $5 billion pure bailout and 
the $10 billion guarantee. Now we've got the insurance 
companies, and who knows who will come next to the Federal 
Government for a bailout? This is just not the time we should 
be thinking about increasing the Federal safety net, whether it 
be by doubling insurance coverage or adjusting for inflation.
    The FDIC only had five recommendations in their report. The 
depositors' view of bank reform also makes some additional 
recommendations not made by the FDIC. These are covered in my 
    For example, I would recommend a special assessment for the 
25 largest banks those deemed too-big-to-fail, because of the 
additional risk they pose to the system. Also I would argue for 
expanded market discipline by regulators starting with the 
public disclosure of a safety and soundness rating and a 
portion of that exam.
    I would merge the OTS into the OCC and consider even 
further consolidation among the regulators. And finally there 
should be better disclosure of non-FDIC insured products so 
depositors are not confused, especially many of our seniors, 
who cannot see some of the very small print in the 
    In conclusion, two of the five of the FDIC's deposit 
insurance reforms keep the promise from the depositor insurance 
perspective. But, the other three are apparent accommodations 
to the industry for which the FDIC's only promise should be to 
be a fair regulator and supervisor in the public interest.
    Thank you very much for the opportunity to present this 
depositor perspective.
    [Written statement of Dr. Kenneth H. Thomas can be found on 
page 67 in the appendix.]
    Chairman Bachus. Thank you. We've got about 4 minutes left 
on a vote. I am going, what I would like you all to do is your 
testimony you've given here today, if you have that in writing, 
you know, your written testimony, I would like to also have a 
copy of that, have an opportunity to maybe call you on some 
these aspects.
    I'm going to adjourn the hearing now and let you be 
available for some of the reporters, the press, and not ask 
questions because I'm told it'll be 25 minutes before we are 
able to come back.
    But I appreciate your testimony. I thought it was all easy 
to understand, easy to follow, had some differences of opinion, 
but it's been very helpful.
    At this time, the hearing is adjourned.
    [Whereupon, at 11:56 a.m., the hearing was adjourned.]

                            A P P E N D I X

                            October 17, 2001