[Senate Hearing 107-659]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 107-659
 
                     PROTECTING RETIREMENT SAVINGS:
                   FEDERAL DEPOSIT INSURANCE COVERAGE
                        FOR RETIREMENT ACCOUNTS
=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                   ON

 PROTECTING RETIREMENT SAVINGS: FEDERAL DEPOSIT INSURANCE COVERAGE FOR 
                          RETIREMENT ACCOUNTS

                               __________

                            NOVEMBER 1, 2001

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs






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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut     PHIL GRAMM, Texas
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia                 CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware           RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan            JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey           MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii              JOHN ENSIGN, Nevada

           Steven B. Harris, Staff Director and Chief Counsel

             Wayne A. Abernathy, Republican Staff Director

                  Martin J. Gruenberg, Senior Counsel

                       Dean V. Shahinian, Counsel

           Sarah Dumont, Republican Professional Staff Member

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                 ______

                 Subcommittee on Financial Institutions

                  TIM JOHNSON, South Dakota, Chairman

                ROBERT F. BENNETT, Utah, Ranking Member

ZELL MILLER, Georgia                 JOHN ENSIGN, Nevada
THOMAS R. CARPER, Delaware           RICHARD C. SHELBY, Alabama
DEBBIE STABENOW, Michigan            WAYNE ALLARD, Colorado
CHRISTOPHER J. DODD, Connecticut     RICK SANTORUM, Pennsylvania
JACK REED, Rhode Island              JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
JON S. CORZINE, New Jersey

                  Naomi Gendler Camper, Staff Director

         Michael Nielson, Republican Professional Staff Member

                                  (ii)







                            C O N T E N T S

                              ----------                              

                       THURSDAY, NOVEMBER 1, 2001

                                                                   Page

Opening statement of Senator Johnson.............................     1
Opening statements, comments, or prepared statements of:
    Senator Bennett..............................................     3
    Senator Miller...............................................     4
    Senator Allard...............................................     4
    Senator Stabenow.............................................     4
        Prepared statement.......................................    25
    Senator Carper...............................................    21

                               WITNESSES

L. William Seidman, Chief Commentator, CNBC-TV, and Former 
  Chairman, Federal Deposit Insurance Corporation and Resolution 
  Trust Corporation..............................................     5
    Prepared statement...........................................    25
        Response to a written question of Senator Miller.........    40
Howell E. Jackson, Finn M.W. Caspersen and Household 
  International Professor of Law and Associate Dean for Research 
  and Special Programs, Harvard Law School.......................     8
    Prepared statement...........................................    26
Glenn C. Dahlke, President, Dahlke Financial Group...............    12
    Prepared statement...........................................    33

              Additional Material Supplied for the Record

Prepared statement of America's Community Bankers................    37
Letter to Senator Tim Johnson from Fred R. Becker, Jr., President 
  and CEO, National Association of Federal Credit Unions, dated 
  October 29, 2001...............................................    41
Letter to Senator Tim Johnson from Daniel A. Mica, President and 
  CEO, Credit Union National Association (CUNA), dated October 
  29, 2001.......................................................    42

                                 (iii)


                     PROTECTING RETIREMENT SAVINGS:



                   FEDERAL DEPOSIT INSURANCE COVERAGE



                        FOR RETIREMENT ACCOUNTS

                              ----------                              


                       THURSDAY, NOVEMBER 1, 2001

                               U.S. Senate,
  Committee on Banking, Housing, and Urban Affairs,
                    Subcommittee on Financial Institutions,
                                                    Washington, DC.

    The Subcommittee met at 2:32 p.m., in room SD-538 of the 
Dirksen Senate Office Building, Senator Tim Johnson (Chairman 
of the Subcommittee) presiding.

            OPENING STATEMENT OF SENATOR TIM JOHNSON

    Senator Johnson. The Subcommittee on Financial Institutions 
is called to order.
    I am pleased to convene the Financial Institutions 
Subcommittee for this second in a series of hearings to 
consider comprehensive deposit insurance reform. It is critical 
that we continue on with the business of America, and I would 
like to thank my colleagues here in the Senate for their 
commitment to this work.
    Today, we will consider the topic of protecting retirement 
savings. So many of our retirees have spent their lives saving 
to make sure that they can remain independent in their later 
years, especially given some uncertainty about the long-term 
viability of Social Security. Many have put those savings to 
work for them in a variety of investments through tax-deferred 
accounts and have watched their balances mount.
    Over the past few months, however, we have been reminded 
that while equity markets can provide unparalleled 
opportunities for economic growth, those opportunities do come 
with volatility. And while many younger investors have enough 
time to ride out the ups and downs, those of us who are closer 
to retirement age have to make sure that we have enough savings 
in secure investments to ensure a comfortable retirement.
    Yet while Congress has created significant incentives to 
encourage Americans to save for their retirement, we have not 
taken the necessary steps to let our retirees keep their life 
savings safe in their local communities. We are just waking up 
to the fact that our current deposit insurance coverage of 
retirement savings is simply inadequate to support the cost of 
retirement in the year 2001.
    As many of you know, I have been very interested in 
comprehensive deposit insurance reform and I am convinced that 
this issue continues to grow in importance. The current deposit 
insurance reform system is dangerously procyclical, and in a 
softening economy, banks are at real risk of having to absorb 
severe insurance premiums. Those who resist a comprehensive 
reform package assume that the funds will never dip below the 
1.25 percent range. To those individuals, I would simply point 
them to the latest FDIC Review Board report, which projects the 
BIF ratio possibly dipping to 1.23 percent for the first time 
since 1996.
    The Senate Banking Committee, under the able leadership of 
Chairman Sarbanes, recently looked into the failure of Superior 
Bank of Illinois, which the FDIC projects will cost somewhere 
in the $500 million range and could cause fund ratios to dip 
still 
further. And we see daily reports of softening loan portfolios 
among our financial institutions, which provide the lifeblood 
of our economy.
    Deposit insurance provides the rock-solid foundation that 
keeps our financial system healthy by giving depositors the 
confidence they need to keep their money in the bank. And those 
deposits, in turn, fund lending activities that finance our 
Nation's commerce. We must take great care to ensure that our 
system remains healthy and make any revisions proactively, so 
that we do not find ourselves in the position of having to act 
in a crisis mode.
    Today, we will be looking at a very narrow slice of what I 
hope will be a comprehensive deposit insurance reform package. 
We are privileged to have a distinguished panel of experts who 
will help this Subcommittee think through the issues related to 
deposit insurance coverage of retirement accounts.
    We have heard a great deal of discussion about the 
appropriate level of Federal deposit insurance coverage, and 
that debate continues. But I was struck at our August 2 hearing 
by a question that Chairman Sarbanes put to our witness panel. 
Senator Sarbanes asked how it is we should approach the 
question of what the ``right'' level of coverage is?
    Senator Sarbanes' question, I believe, can be answered in 
the context of retirement savings, and judging from the very 
thoughtful written testimony that we have received from today's 
witnesses, I am hopeful that we will leave this hearing with 
some real insight into the matter.
    Retirement accounts constitute a small proportion of 
deposits in FDIC-insured institutions. According to FDIC data, 
as of June 30, 2001, insured banks and thrifts held $219 
billion in retirement accounts, 72.9 percent of which are 
insured. The remaining $59.3 billion of these retirement 
account deposits are uninsured, and this Subcommittee should be 
concerned. The safety of our retirees' savings should be a top 
priority for this Congress, especially as our citizens live 
longer and want to remain independent of outside assistance.
    I had a chance to visit yesterday with FDIC Chairman Don 
Powell, who has earned his very distinguished reputation. He 
told me he strongly supports the recommendations the FDIC 
issued earlier this year with respect to comprehensive deposit 
insurance reform. And directly related to today's discussion, 
Mr. Powell urged me yesterday to consider raising deposit 
insurance coverage of retirement accounts to $250,000. My 
understanding is that such an increase would have a relatively 
small impact on the ratio of a combined insurance fund, in the 
neighborhood of two to three basis points.
    I am sure the Banking Committee will have the occasion to 
hear directly from Mr. Powell on this topic. But today, we turn 
our attention to our distinguished witnesses, and I would like 
to take just a moment to introduce them.
    It is a great privilege to introduce Bill Seidman, who is 
so well known he probably doesn't need much introduction. Mr. 
Seidman is perhaps best known for his Chairmanship of the FDIC 
from 1985 to 1991, as well as his Chairmanship of the 
Resolution Trust Corporation. He has seen our financial system 
through some of its darkest hours, and he brings an important 
historical perspective to this discussion. Mr. Seidman has also 
found time to participate very successfully in the private 
sector, and we have all appreciated him in his current role as 
Chief Commentator on CNBC-TV.
    Mr. Seidman, welcome.
    Mr. Seidman. Thank you.
    Senator Johnson. Our next witness is Mr. Howell E. Jackson, 
who is the Finn M.W. Caspersen and Household International 
Professor of Law at Harvard Law School. Professor Jackson has 
expertise in the areas of regulation of financial institutions, 
secur-
ities regulation, investment companies, and pensions and Social 

Security.
    Professor Jackson received his bachelor's degree from Brown 
University, followed by a JD and an MBA, both from Harvard. He 
joined the faculty of Harvard Law School in 1989, and just last 
week was appointed Associate Dean for Research at the Law 
School. It is an honor to welcome him before the Subcommittee.
    Finally, I would like to introduce Mr. Glenn Dahlke, 
President of the Dahlke Financial Group of Glastonbury, 
Connecticut, a family-owned sales and asset management company.
    Mr. Dahlke began his career in 1977 as a representative of 
the Connecticut General Life Insurance Company in New Britain. 
In 1990, he went into partnership with his father, Gerald 
Dahlke, also a Connecticut General representative. Together 
they formed an independent sales and asset management company 
in Glastonbury that became the Dahlke Financial Group. Mr. 
Dahlke represents a critical sector of our Nation's economy, 
the family-owned business. It is a privilege to have him before 
the Subcommittee today.
    I now turn to our very distinguished Ranking Member, 
Senator 
Bennett, for any opening comment that he may wish to make.

             STATEMENT OF SENATOR ROBERT F. BENNETT

    Senator Bennett. Thank you very much, Mr. Chairman.
    I do not have a great deal to add to your comments. I 
appreciate the witnesses and appreciate your holding this kind 
of a hearing. It is not as glamourous or sexy as some of the 
things that we do, but, in the long run, it may be more 
important than some of the things that have a higher profile.
    The financial services industry and the underlying economy 
have both changed dramatically since the last time Congress 
addressed the deposit insurance system. Fortunately, we are in 
a position where we are not talking about trying to save the 
system. There have been hearings on that subject in the past.
    We have seen the system get healthy enough that, over the 
past several years, highly-rated institutions that were 
assessed very high premiums in the 1990's to help recapitalize 
the insurance funds have not been required to pay any premiums 
at all over the last several years.
    We are talking about examining the system to see whether it 
needs just a technical fix, all the way to a complete 
restructuring. A hearing of this kind that is more 
informational and less adversarial is a very logical thing to 
do in that kind of an atmosphere.
    I congratulate you for pursuing your interest in this and 
for putting together the kind of panel that we have before us 
today.
    Thank you.
    Senator Johnson. Thank you, Senator Bennett.
    Senator Miller.

                 COMMENT OF SENATOR ZELL MILLER

    Senator Miller. I do not have an opening statement. I am 
looking forward to hearing from the witnesses.
    Senator Johnson. Senator Allard.

                COMMENTS OF SENATOR WAYNE ALLARD

    Senator Allard. Mr. Chairman, just a brief comment. I want 
to thank you for holding this hearing on deposit insurance for 
retirement accounts.
    I am a cosponsor of legislation to increase deposit 
insurance on accounts and I am therefore very interested in 
this topic. Unfortunately, I won't be able to stay here during 
the entire testimony because I have a Conference Committee I 
would like to attend, but I will stay as long as I can.
    The $100,000 per account level was set in place in the 
early 1980's and has not been increased since that time. I 
think we should take a look at a variety of approaches on this 
issue. These include an increase in the level of deposit 
insurance, indexing the level, so that it at least keeps up 
with the level of inflation or simply increasing the level of 
insurance on retirement accounts.
    This last option is the topic of today's hearing and I look 
forward to hearing from our witnesses.
    Senator Johnson. Thank you.
    Senator Stabenow.

              COMMENTS OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman. I want to thank 
you first for your leadership on this very important issue and 
welcome all of our panelists that are with us today. I think 
this topic is extremely important and I will submit my opening 
comments in their entirety, Mr. Chairman, if that is 
permissible.
    But I would just indicate that I agree that we need to 
reform the Federal deposit insurance coverage for retirement 
accounts. There is ample evidence that the current system does 
not promote adequate savings for retirement. And indeed, there 
are structural barriers that unnecessarily complicate and 
impede effective planning for retirement.
    When the deposit insurance coverage for retirement accounts 
was last raised, as everyone has indicated, about 23 years ago, 
$100,000 went a little bit farther than it does today. No one 
today could credibly contend that such an amount would be 
sufficient to provide for the long-term needs of retirees. It 
is past time for us to review this coverage level.

    And so, I want to thank the Chairman again and I look 
forward to working with you and I believe that we can come to a 
consensus and move this important policy issue forward.

    Thank you.

    Senator Johnson. Well, thank you, Senator.

    Without objection, the written testimony from the three 
witnesses, along with written submissions from America's 
Community Bankers and the National Association of Federal 
Credit Unions, will be included in the record.

    Welcome to the panelists. Because we have focused on three 
panelists who are among the leading experts in the Nation on 
this issue and have simply the one panel, I think we can take 
the luxury of affording each of them a little more time than is 
sometimes the case.

    The Chair would suggest a 10 minute period of time to 
either read or summarize your statement would be available to 
each of you. And then, at the conclusion of the discussion from 
all three of the panelists, we will open it to the Committee 
for any discussion and questions that would follow.

    Welcome, Mr. Seidman, and why don't you begin.

                STATEMENT OF L. WILLIAM SEIDMAN

        CHIEF COMMENTATOR, CNBC-TV, AND FORMER CHAIRMAN

           FEDERAL DEPOSIT INSURANCE CORPORATION AND

                  RESOLUTION TRUST CORPORATION

    Mr. Seidman. Thank you, Mr. Chairman, and Members of the 
Subcommittee. It is nice to be back here after all these years. 
It is always a real privilege to testify.

    I have here an editorial on this subject that I wrote for 
Bank 
Director magazine, of which I am the publisher. So, I have that 
as a written statement.

    The essence of my view is that I believe that deposit 
insurance coverage has been reduced during the last 20 years by 
inflation and it clearly ought to at least keep up with 
inflation.

    We have just seen another demonstration in recent tragedies 
and strain that the system has been under that deposit 
insurance prevented the kind of runs on banks and so forth that 
sometimes take place when there is potential for panic. I think 
we have once again seen the value of deposit insurance.

    As far as increasing the amount is concerned, as I say, it 
ought to at least keep up with inflation, if not more than 
that, and that goes a fortiori for retirement accounts, which 
have a special benefit to those who use them.

    I would like to start by saying that when this kind of 
thing was suggested, there were immediate arguments by some of 
our leaders that any kind of increase was a very bad idea, 
including the Chairman of the FED, the then-Chairman of the 
Senate Banking Committee, and others.
    As I read their arguments, one was, it seemed, that there 
was a potential for great increased cost to the Government by 
increasing the amount of insured accounts.
    First, I would like to point out that deposit insurance for 
banks has never cost the taxpayer a penny. The deposit 
insurance fund of the bank has been totally, since 1933, funded 
by the banks and taxpayers have never been asked to pay any 
amount of money.
    Now, you all know that we had large losses back in the 
1980's on deposit insurance. That was in the S&L industry. The 
losses there, I think we cannot go into the total analysis, but 
resulted from all kinds of mistakes, bad regulation, and other 
things, which I will be happy to talk about if you would like. 
But a well-administered bank insurance fund handled over a 
thousand bank failures and the taxpayer did not have to pay a 
penny.
    I think, while there is always the potential when you 
guarantee something that you will have to pay, we have now an 
almost 70 year history that says that this fund can be self-
supporting if it is properly administered.
    A second thing that was raised was that this would be 
another distortion of the free market, would create moral 
hazard, and therefore, was undesirable. My response to that is 
that almost everything the Congress does distorts the free 
market. That is their purpose, which is to make the free market 
work better by providing the kind of distortions which allows 
it to operate.
    And I have always said the difference between a regulated 
market and a nonregulated market is like the difference between 
a prize fight and a barroom brawl. In a prize fight, you have 
competition, but it is under rules, and even though you can 
slug the guy, you cannot pick up the chair and you cannot hit 
the referee and so forth. In a barroom brawl, you can do 
whatever you want and the whole place gets destroyed.
    So the free market is wonderful. I am one of its strongest 
supporters. But if you look at what the Congress does, it is 
continually trying to adjust things to make the free market 
work better.
    I must say that Chairman Greenspan runs probably the 
biggest intrusion in the free market in the financial area in 
the operation of the Federal Reserve System.
    I simply take that argument and say, that cannot be the 
real question. The question is whether this intrusion in the 
free market will benefit the system or not. And the argument 
that it, per se, is wrong because it is a further intrusion in 
the market I do not think is going to carry the day.
    So, we get to the question of is it good for the system to 
increase deposit insurance, at least keep it even with 
inflation and especially provide for retirement accounts? And I 
think it is good on several grounds.
    First, having a sound banking system and one that is 
supported by deposit insurance is probably the single biggest 
base that we could have for a sound economy. And one only needs 
to go to Japan where I have been working for the last few years 
to see how true that is. They have a banking system which is in 
real trouble. They have no real deposit insurance, and they 
have, as a result of that and other things, a very sick 
economy.
    So, I think a soundly-based banking system, and one of the 
things you have to have in a soundly-based banking system is 
some protection against losses and particularly by those people 
who have no real way to judge the financial strength of a bank.
    For the average citizen, judging the financial strength of 
a bank is probably beyond any training that he or she has. 
Maybe in the biggest banks, they can look at the rating system 
and get ratings from big agencies. But for our community banks, 
even the regulators have some trouble knowing when banks are in 
trouble, as we have seen many times over history. I think that 
the idea that the citizen will regulate the system through 
judging the strength of banks is one that is not supported by 
the real facts. Therefore, you have to rely upon regulation 
rather than the consumer to regulate the system. And that is, 
of course, what we have done.
    I would also point out that for the small depositor, and in 
today's world, $100,000 is certainly not a big depositor, the 
ability to get a Government-guaranteed deposit, this is about 
the only way that they could do it. They could go out and buy 
Government bonds. That is more difficult. It is not as liquid. 
They cannot use it for other things. So for the small 
depositor, let's just say the average citizen, it is a great 
benefit to their personal finances.
    It is also of great benefit to small banks. Deposit 
insurance was not put in for the benefit of small banks. It is 
very clear it was for depositors. But it has become, in my 
view, essential for the survival of small banks, community 
banks as they are called, because the very large banks, no 
matter what you say and whatever legislation we have, have 
always been too big to fail as far as depositors are concerned.
    They can fail, and they do fail, but all depositors have 
been covered in every major bank failure that we have had in 
the United States and that any of the developed countries has 
had anywhere in the world.
    The day that the regulator is born who will see one of 
these major banks about to fail and announce that he is going 
to clip all depositors, I do not think the regulator is yet 
born that will be willing to do that when he has to face the 
issue.
    Too big to fail is out there. That gives the big banks a 
tremendous advantage over small banks because small banks not 
only have failed, but also we have in many, many cases had to 
penalize the depositors for their over $100,000. I think that 
it is almost, you might say, essential for small banks to have 
deposit insurance, to have it at least keep up with the present 
levels for their safety and soundness. And I would put to you 
that small banks are a very essential part of this Government's 
economic system. They decentralize the decisionmaking, and I 
think they are very important to maintain. So, I come to the 
conclusion that it is important to increase deposit insurance, 
at least with inflation, and to have some special provisions 
beyond that for retirement accounts.
    Thank you.
    Senator Johnson. Thank you, Mr. Seidman.
    Professor Jackson, welcome, and why don't you proceed with 
your testimony.

                 STATEMENT OF HOWELL E. JACKSON

        FINN M.W. CASPERSEN AND HOUSEHOLD INTERNATIONAL

            PROFESSOR OF LAW AND ASSOCIATE DEAN FOR

                 RESEARCH AND SPECIAL PROGRAMS

                       HARVARD LAW SCHOOL

    Mr. Jackson. Thank you.
    Chairman Johnson, Ranking Member Bennett, Members of the 
Subcommittee, I am pleased to be here with my copanelists to 
continue the discussion of reforming deposit insurance that 
began, I would say, more than a year ago with the FDIC staff 's 
release of their quite excellent Options Paper.
    I thought I would begin my comments by saying a few words 
about deposit insurance in general, and then turn to the 
particular topic of today's hearing, which is retirement 
accounts. As Bill Seidman indicated, there are really three 
reasons why we have Federal deposit insurance.
    First, is that there is a certain group of depositors who 
need 
to have a certain amount of assurance that there is a risk-free 
investment vehicle that they can take advantage of. This is a 
paternalistic consideration, I think it is a valid one, and it 
is one that has justified deposit insurance in the United 
States and many other countries. Without deposit insurance, 
individuals would have to make this inquiry that Mr. Seidman 
referred to, trying to distinguish between banks and would 
often make mistakes in deciding where to make their 
investments. So that is one valid purpose.
    Second, another traditional purpose of deposit insurance is 
to prevent macroeconomic consequences, such as runs or other 
irrational behavior in times of financial panic. That has been 
a justification and I think it is a valid one.
    Third, I think is regarding issues of political economy, a 
desire to have a certain kind of financial services sector, 
including a large number of smaller institutions that might, in 
the absence of deposit insurance, not be able to compete. So 
three different considerations. All have been mentioned so far 
this afternoon.
    The debate over expanding deposit insurance at this point, 
as I understand it, is largely proceeding under the assumption 
that it is the first and third of these considerations that 
have changed.
    There are not arguments about macroeconomic considerations 
and I think evidence of the last month shows that we did not 
experience runs on banks when the events of September 11 
occurred. In fact, there was probably money flowing into the 
depository institutions as opposed to out of the institutions.
    What we really have now is a set of arguments about the 
need for insurance being increased to protect individuals, and 
I think in a lot of the testimony you have heard before, 
arguments that small banks need to have higher levels of 
coverage in order to compete effectively in the current 
marketplace.
    Now in terms of these general arguments, I guess I would 
say that one should be cautious about expanding deposit 
insurance in general for a variety of reasons. It is a costly 
program. There are potentially moral hazard problems. I think 
it is possible to make a case for expanding coverage and I 
think, actually retirement savings is a good example of a case 
for that. But I think the burden should be on the proponents to 
increasing the levels. In terms of the political arguments, I 
think there are also valid arguments and they have been made 
effectively in a number of forums.
    It is not entirely clear to me that we need to freeze the 
structure of the financial services sector the way it was in 
1980, for example. So the mere fact that deposits have declined 
in relative proportion in the financial services industry is 
not compelling evidence in my mind that we need to increase the 
level of insurance.
    But, still, I think, the concerns of the small bankers are 
a valid consideration and one that I think should be factored 
into this Subcommittee's analysis.
    In terms of the underlying ultimate question of the 
appropriate level of insurance coverage, this is a hard 
question and a difficult question and one that has been taken 
up earlier.
    I do not have much to add to that, except to say that I 
think near reference to levels in 1980 or 1970 or 1933 is not 
particularly helpful. It is better to have a normative baseline 
of some sort.
    The IMF has recently done a study which I cite in my 
written testimony, that suggests two times GDP per capita is 
one benchmark. That would suggest a level of $70,000, $75,000 
in the United States today. We are at or above that level right 
now. And if one looks comparatively around the world, most 
countries are either below or just at that level. Very few 
countries are ahead of where we are in the United States.
    That does not mean that we do not want to have higher 
coverage in the United States. There may be reasons about our 
political economy that argue for higher coverage. But it would 
give me pause to have a general increase much above the current 
levels, or at least I think the burden would be very much on 
proponents.
    Now today's hearing is about retirement savings. And I 
think if there is an area that justifies potentially increasing 
coverage, it is the area of retirement savings.
    There have been changes in the United States. The 
demographics have changed. Life expectancy has changed, length 
of time in retirement has changed. There is clearly a demand 
for retirement savings or a need for retirement savings.
    And if one accepts the premise that the Government has a 
role in creating a safe vehicle for certain individuals who 
want a risk-free investment vehicle, then I think expanding 
deposit insurance in this area can be supported as a 
theoretical matter and as an 
equitable matter. So, in general, I think the idea of a higher 
level for retirement savings is appropriate.
    The difficulty, of course, is figuring out what that level 
would be. And in my written testimony, I tried to take a stab 
at how I would set it. I started with a similar assumption that 
it should somehow be tied to GDP per-capita or household 
income, that we should be thinking in terms of replacement 
rates for income, which is how financial planners think.
    The usual rule of thumb is that one should have 70 to 80 
percent of preretirement income as your base in retirement. So 
if one takes the median income, household income in the United 
States, that is about $42,000 today. That is the middle. Half 
are beneath, half are above that. I think it would be plausible 
to think about that as the person to protect. Individuals who 
are wealthier than that, have more income than that, will have 
retirement savings needs, but 
I think we should be focused on the bottom end of the spectrum, 

people who are not sophisticated, in all likelihood, and need 
our 
assistance.
    I worked through the calculations of what you might 
reasonably expect such a person to require for retirement 
savings and if you factor in Social Security coverage under 
existing levels, or more or less existing levels, it works out 
that someone at the median income would need about $250,000 of 
retirement savings on the eve of retirement to fund their 
retirement at the sort of target level of 80 percent.
    Now there is a lot of heroic assumptions that I have made 
in coming up with that number. But it gives you a rough cut of 
what a plausible level would be, if you accept my assumptions 
that we should be shooting not for Bill Gates. We are not 
trying to insure his retirement savings, or people at the 95 
percentile. But if we take the middle-income person, this is a 
reasonable amount of retirement savings and you might think in 
terms of setting the coverage level at that amount.
    It is 2\1/2\ times the $100,000 level. Coincidentally, I 
did not do this. This overlaps with what Chairman Powell 
suggested a few days ago. And it also is the same ratio we saw 
in the 1970's when we had special coverage higher levels for 
retirement savings. So there is a precedent for this that you 
could see historically and I think it could be justified 
empirically.
    Having sort of thrown out this $250,000 level, I think 
there is a couple of points that I should make aside from the 
fact that it is based on some debatable assumptions. The main 
point to make is that this is an aspirational level which the 
vast majority of Americans currently do not reach.
    If you look at the information about the savings, the 
financial assets of most Americans, it is not close to $250,000 
in retirement savings. In fact, the median net worth in 1995, 
according to census data, was something like $110,000 total net 
worth. And most of that net worth was in household equity, home 
equity, not in savings accounts or any other kind of financial 
asset. So there is a gap between the reality of where Americans 
are with their retirement savings today, especially if you are 
talking about the median and lower income individuals in this 
aspirational level of $250,000. Now that is not to say that we 
shouldn't set it at $250,000, and my testimony suggests that I 
think this is plausible. But it is well above where most people 
are, and I think that that should factor into the analysis.
    In my testimony, there are a number of other points that I 
mention, technical points. Just let me quickly run through them 
today.
    We have been talking generally about retirement savings. It 
is not clear what that concept means. The term that we use, a 
lot of the discussion has been IRA's and Keogh plans. But that 
is a special subset of retirement savings. There are many other 
kinds of plans, employer-based plans, like 401(k) plans. There 
are more assets in these other plans.
    It is not clear to me that if you are trying to make a 
risk-free vehicle, you wouldn't want to use a broader category 
of retirement savings than just IRA's and Keogh's. In fact, 
when you begin to think about what the real retirement savings 
of many individuals is, it is not the tax-preferred vehicles 
like IRA's and Keogh's. It is home equity and other sources of 
wealth.
    It creates a little bit of a dilemma if you think of a 
retired couple that has most of their wealth in a house, they 
sell their house at 65, they put the proceeds in a bank account 
to fund their retirement in a nursing home or in a smaller 
apartment.
    Are we going to say that those people who did not take 
advantage of tax-preferred savings are not going to have a 
higher limit for their bank account. But a wealthy person who 
will have a roll-over IRA is going to get the higher level. I 
do not have a solution to this problem, but I think we need to 
think a little bit more about the definition of what a 
retirement savings account is, rather than just picking up the 
old IRA and Keogh definition.
    In my testimony, I make two other points. One is 
controversial, so maybe I should say it out loud so it doesn't 
slip by. If you look at the testimony of the banking industry, 
they are very interested in getting retirement savings 
accounts. And one of the things that they say about these 
accounts is they are stable accounts. They do not move around. 
They are very good funding sources.
    If you think of the reason why we want to expand coverage 
for retirement savings, it is because certain borrowers are not 
sophisticated. They do not shop around. They cannot evaluate 
things.
    This group of people are potentially subject to 
exploitation and a banker could be tempted to lower the 
interest rate paid to these IRA accounts and elderly 
individuals may not move their money.
    And so, I think one of the things the Subcommittee should 
think about is if you are going to give a benefit to the 
banking industry in the form of a higher retirement savings 
level for these kinds of accounts, to wonder whether there 
should not be some obligation on the banking industry's part to 
pay at least some minimum rate of interest.
    I would not propose rate regulation, but tieing the rate of 
interest to inflation-adjusted bonds or some market rate, is 
something that I think you should consider. Otherwise, there is 
a possibility that some of these banks trying to improve the 
bottom line, could give below-market rates, and I think that 
would be unfortunate and certainly not help the goal of 
retirement savings.
    Finally, I think that one of the advantages of setting a 
higher goal for retirement savings is the message it will send 
to American citizens about the need to save for retirement.
    As the Chairman mentioned in his opening comments, there is 
inadequate retirement savings today. Social Security may not 
cover that need as it has in the past. And it is very important 
to send a message that more retirement savings is necessary.
    And this notion of $250,000, which is six times final 
income, is an important target for Americans to begin to think 
about. And one might think of including an educational 
component in this legislation, as well as coverage increases.
    Thank you very much.
    Senator Johnson. Thank you, Professor.
    Mr. Dahlke.

                  STATEMENT OF GLENN C. DAHLKE

               PRESIDENT, DAHLKE FINANCIAL GROUP

    Mr. Dahlke. Chairman Johnson, Ranking Member Bennett, and 
Members of the Subcommittee, I too would like to thank you for 
inviting me here to testify.
    Mr. Chairman, it is my strong recommendation that Congress 
should substantially increase the value of Federal deposit 
insurance for retirement accounts.
    You have heard today, and I will be somewhat repetitious 
here, in saying that, obviously, the cost of retirement has 
skyrocketed since the last time limits have been set.
    But also, I would like to talk a little bit today about a 
system that has been created for some elderly Americans who 
want to remain self-sufficient in their later years and how the 
limitations to some extent has forced them through some 
complicated and some potentially costly hoops just to protect 
these savings. This afternoon, I want to make four points.
    First, and again, this is going to be somewhat repetitious, 
$100,000 in retirement savings is simply insufficient to 
support most retired individuals, especially when we look now 
at the increased life expectancy that we enjoy and overwhelming 
medical costs, including the cost of convalescent care.
    Second, it is rational for retirees with low-risk 
tolerance, and those who need a predictable income stream to 
invest savings in excess of $100,000, I think primarily, or 
even perhaps exclusively, in insured deposits.
    Third, many retirees who invest in insured deposits are 
ill-equipped to cope with the Federal distribution 
requirements--these are the required distributions past age 
70\1/2\--that can become more complicated in figuring what your 
minimum distribution might be when the accounts would be spread 
across many different institutions.
    And finally, I believe it is inappropriate to require 
retirees to choose between the safety of their life savings and 
banking with someone who perhaps they have had a relationship 
with for many years and who they have learned to trust over 
those years.
    Over the years, Congress has created important tax 
incentives to encourage people to set aside money for 
retirement, recognizing the benefits to our society of 
individual self-sufficiency.
    I applaud Congress for recently increasing the amount that 
Americans may save through tax-deferred programs such as the 
IRA's, the ongoing increases in 401(k)'s, et cetera, which 
recognizes, obviously, that the costs of retirement are going 
up.
    However, even without these higher contributions, if we 
look at what used to be called the rank-and-file individual who 
has put 20 or 30 years into a single company, has taken 
advantage perhaps of their 401(k), the company match, the 
profit-sharing plan, and has put money away in a disciplined 
manner, you can easily amass over $100,000 in retirement 
savings.
    Up in Hartford, we have United Technologies, which was one 
of the first companies to get involved in 401(k)'s. And it is 
not unusual now to see several hundreds of thousands of dollars 
coming out of their 401(k) plan.
    Now in a lot of cases, what is being rolled over? And I 
think Professor Jackson said it. This is not coming from IRA 
money. This is coming from qualified plans that people have 
taken out of their qualified plans at retirement.
    But this is a major source of income other than Social 
Security, and what we are seeing here is it becoming a major 
asset of theirs, even a greater asset than their residence. And 
$100,000 is just barely sufficient to cover basic living needs.
    For example, if we take a 72-year-old widow, a woman who is 
in the time period where she must now be taking required 
minimum distributions, she has $100,000 in an interest-bearing 
IRA account. Plus $10,000 of Social Security. Well, if you look 
at the IRA earning her minimum distribution of the 5 to 6 
percent range, she is living at an income of $15,000 a year.
    This is not a lavish lifestyle. And she also is not in a 
position where she can afford to take a lot of risk. She cannot 
replenish this money, and she cannot take on the financial 
shock she might get if she needs a new roof or she has some 
kind of uninsured medical procedure. So she needs to save this 
money.
    I think this is a crucial point because there has been some 
argument that $100,000 is a lot of money. Well, $100,000 simply 
is not a well-off person at all. I think, on the contrary, 
Congress should insure that those workers who have saved in a 
disciplined and responsible manner for their retirement have a 
completely secure investment option. Now there is a lot of 
options here. But they should have a secure investment option 
for an amount adequate to support themselves. I think that is 
fair and I think, frankly, that is good public policy.
    First, it is rational for retirees who have a low-risk 
tolerance and need a predictable income stream to invest 
savings in excess of $100,000, primarily or, again, 
exclusively, in insured instruments such as certificates of 
deposit. I do not think Congress should create disincentives 
for this investment strategy.
    Insured deposits are appropriate investments for retirees 
who may be able to live comfortably off their interest on their 
savings, but cannot afford to lose any of the principal. There 
is also the point here of retirees who prefer these kinds of 
instruments because they provide a predictable fixed income.
    When we look at how IRA's are distributed and the method 
you use, which, for somebody over 70\1/2\, is to take the 
balance of 
their IRA accumulations on December 31 of the preceding year, 
apply a divisor for it, and that now determines the required 
minimum distribution.
    If we are sitting in front of a client and they want 
predictable income, we have to then predict what these balances 
are going to be from year to year. The only predictable 
instrument that you can really use pretty much are certificates 
of deposit. It is not going to happen with stock. We have seen 
what has happened with stock balances and IRA's over the last 
few years.
    And even with Treasuries and any other interest-sensitive 
vehicle, that will affect the December 31 balance, which will 
affect the issue of predictable income. So I think that is a 
crucial point here.
    Finally, a lot of retirees prefer to keep their money with 
people they know and trust, especially in small towns. I live 
in Connecticut, which is supposed to be a populated town, but I 
live in a town of 2,500 people and we do not have any banks. We 
have a car dealership. We have a marina. We have a grange. But 
we do not have any banks.
    Personal relationships can develop between bankers and 
their clients and this may be hard to believe for people that 
live in an urban environment. These local relationships remain 
an important feature of the community banking system that we 
have heard about today.
    Higher coverage levels for retirement accounts would 
significantly reduce the risk that a retiree with over $100,000 
in insured deposits would become subject to the 50 percent 
penalty for undistribution of IRA savings. Again, the way you 
make distribution from an IRA account, you do not have to take 
it from IRA from IRA. You must take the distribution from the 
aggregate among all the retirement accounts.
    People with CD's tend to take the money from the CD with 
the lowest-paying interest. So people who are in CD's tend to 
play the shell game of where their money's coming from.
    Well, with someone with, say, $250,000 of IRA savings who 
want to be insured, being forced now to three different 
institutions have to make this calculation and have three times 
the chance of screwing up the calculation. And if they screw up 
the calculation, that is fine. The IRS says, you owe me 50 
percent of what you did not take for your minimum distribution. 
And these are for people who haven't managed money in their 
life, and just trying to hold on to what they have.
    The risk is enhanced, obviously, as I said, when this 
individual has to spread between institutions, and this is what 
the $100,000 is doing. It is forcing them to spread their 
$100,000 to different institutions. And again, there is the 
talk of, well, you go to a bank that is $5,000--we are talking 
about IRA's. That does not exist. You cannot have joint 
accounts, et cetera. It is limited to the $100,000.
    I have gone over the point that the retirees are, again, 
forced to choose between the insured deposits and banking with 
someone that they have had the relationship.
    We in the financial community drill into our clients the 
sanctity of diversification of their investments. But we do not 
like them to get diversification of financial advice. We prefer 
that they get that at one place, hopefully, our own office. 
Again, moving the people to different banks again forces them 
to different advice.
    I think that Chairman Greenspan has wisely noted that 
deposit insurance coverage limit is designed to accomplish 
exactly this objective of spreading money across banks to 
reduce the Government's risk at any institutional failure.
    But in the retirement context of real people with real 
money, it is my strong belief that this is really a bad trade-
off. The benefits from maintaining an adequate level of 
insurance retirement savings pale in comparison to the 
potential costs to retirees, like the under-distribution, 
forced to maintain multiple accounts.
    For these reasons, Mr. Chairman, I strongly urge Congress 
to increase coverage levels that have not been touched in I 
guess over two decades, and to take measures to ensure these 
limits keep pace with the true costs of retirement.
    And I thank you for the opportunity to present my views to 
the Subcommittee.
    Senator Johnson. Thank you, Mr. Dahlke.
    I will lead off with questions. And I direct this in 
particular to Professor Jackson, I believe.
    Bank holding companies which permit a single corporate 
family to maintain multiple bank charters appear to me to be at 
a significant marketing advantage in offering clients more than 
$100,000 in deposit insurance coverage, especially with respect 
to retirement accounts.
    As Mr. Dahlke has pointed out in his testimony, higher 
coverage that could be structured within a single institution 
with respect to general deposits is not possible with 
retirement accounts, or is not advisable, because of 
restrictions in the tax code.
    According to the information provided by the Federal 
Reserve Board, 21 bank holding companies have 10 or more bank 
and thrift subsidiaries, 106 have five or more bank and thrift 
subsidiaries. And so two questions occur to me in particular.
    First, other than bank holding companies, is there any 
other structure that would allow a bank to offer any given 
individual more than $100,000 in retirement account coverage?
    Professor Jackson.
    Mr. Jackson. The coverage is limited to $100,000. There are 
a variety of different ways that other accounts, joint 
accounts, can be offered to increase the effect of coverage for 
individuals at a particular institution, and the FDIC has 
documented the rules there. They are quite complicated.
    I have heard from some bankers that occasionally, they will 
send deposits down the road to a sister bank or something, but 
it is not nearly as effective as a bank holding company with 
multiple sister banks to whom the deposits can be farmed out 
sort of at will. I think you are absolutely right, that this 
does put the single bank unit at a disadvantage with respect to 
the holding companies.
    Senator Johnson. Let me ask Mr. Dahlke and Mr. Seidman, 
when we talk about retirement savings, there are clearly 
different combinations of what could fall under that definition 
for purposes of a different retirement amount coverage.
    Today, we have been talking about IRA's and Keogh accounts 
in which the FDIC maintains data. But Professor Jackson has 
suggested that we should perhaps include more in the retirement 
account category.
    I wonder if you would share any thoughts that you might 
have about the appropriate scope of retirement savings that 
Congress should consider for this higher deposit insurance 
coverage if we go down that road.
    Mr. Seidman.
    Mr. Seidman. Well, first, I think this discussion 
highlights the problems you get into when you try to take a 
particular kind of account and have that account have 
additional coverage. If I had my choice, I would rather have 
$200,000 across the board and let that handle at least a good 
part of the retirement account privilege and it would make life 
a lot simpler.
    I think the last time I looked at the figures, about 80 
percent of the uninsured deposits were by depositors who were 
over 65 years of age. This amount is very much concentrated in 
that group.
    So, I would like to have the broadest definition you could 
find. Let's just say, to start an argument, that anybody who is 
over 65, his account is a retirement account, and given 
whatever amount we decide upon.
    I would like to just make a comment on the idea that we 
ought to use the median as a way to judge what the size could 
be. That seems to me a little bit like telling a nonswimmer to 
go across a lake that has an average depth of 2 feet. But it is 
10 feet deep in the middle.
    We have a lot of people in this group that really need more 
coverage. And I do not think we ought to be tailoring it for 
just the median person.
    It seems to me that we ought to be covering at least, let's 
say, 75 percent of the population, would be a better way to 
look at it, than the median group.
    Senator Johnson. Mr. Dahlke, any thoughts about the scope 
of retirement account coverage?
    Mr. Dahlke. I think we have to distinguish between 
individual accounts--the IRA's, the traditional Roth, what have 
you--and money that is held within qualified plans with 
companies, the 401(k)'s, profit-sharings.
    But you start to get a little complicated, and I do not 
have an answer for this, but many of these companies have so-
called pool accounts, where all the employees may be pooled 
into, let's say, a stable value account as they might be 
called. You might have thousands of employees into this one 
account.
    Well, what do you do with the coverage there, as opposed to 
the company that has self-directed accounts and every employee 
has their own stable value account?
    I think if you are going to talk about raising this for 
IRA's or individual plans, you have to build a bridge over to 
the profit-sharing, 401(k) sector as well.
    Senator Johnson. Thank you.
    Senator Bennett.
    Senator Bennett. Thank you, Mr. Chairman. Thank you to the 
panelists. This has been very helpful, and I do not have a 
whole lot of really penetrating questions. I am just going to 
go over your testimony with great interest.
    Do I catch the flavor that there should be a difference 
between the deposit limits on a checking account that is held 
by somebody who happens to have that much money, but is 35 
years old and moving around, and somebody who is clearly using 
this as a retirement vehicle? Are you saying that there should 
be two tiers of deposit insurance?
    Mr. Jackson. I think that is the weight of what I am 
saying. There may be some disagreement on the panel on this 
issue.
    Senator Bennett. I picked that up, and so I wanted to focus 

on that for just a minute because I had not heard that 
suggestion 
before.
    Mr. Seidman. Well, having been an administrator of some of 
these things, I am against complications. And every time you 
get into that kind of tiering and so forth, it is remarkable 
how much it costs to make it work and how many problems you get 
into. I wouldn't think that we would try to distinguish between 
checking accounts and CD's or any other kind of deposit.
    Mr. Jackson. My reaction is this. It is a little bit 
different. I certainly understand the point and I think 
complexity is a problem. But I think the most powerful argument 
for increasing the coverage, if you look at the discussions, it 
focuses in on retirement savings. That is the really good case 
in point of why $100,000 is not enough. My view is, if that is 
the reason that $100,000 is lagging, deal with that and do not 
increase every corporate checking account, every commercial 
balance up to $200,000.
    You are bringing a whole lot up. And again, my assumption 
is coverage should not increase without a strong case. I think 
the case is here for retirement, but not for everything else.
    Senator Bennett. Okay. Now go back and reverse the 
question. What does it cost you if you increase it for all 
these other things? Is there increased risk? Increased 
exposure?
    Mr. Seidman. Well, I can tell you that we went back and 
studied what it would have cost us if we had covered $200,000 
instead of $100,000.
    Senator Bennett. Yes.
    Mr. Seidman. And the increased cost was minimal, very 
minimal, almost nothing.
    Senator Bennett. What about risk?
    Mr. Seidman. What about what, sir?
    Senator Bennett. Risk. Could you afford it, afford the 
increased exposure?
    Mr. Seidman. The cost in resolution, we took a bank that 
had failed and had $100,000----
    Senator Bennett. I see. That is factored in.
    Mr. Seidman. Yes, we factored that in.
    Senator Bennett. In your analysis.
    Mr. Seidman. As I remember it, and I am sure that the FDIC 
can dig this study out, but it was something in the 
neighborhood of 7 or 8 percent. Not doubled by any manner of 
means because when you handle these banks, by and large, you 
are trying to get all the deposits covered by selling them off 
and that is what happened in most of the cases. As a matter of 
fact, the increased cost was very small.
    Senator Bennett. All of the members of my family, including 
me, are now in the category that you are talking about. And I 
have been very interested to see one of my sisters who never 
struck me growing up as being that sophisticated an investor, 
now handling her money and watching the stock market with a 
great deal of sophistication, all of which she has learned 
since she has retired, or while preparing for retirement.
    Having your retirement entirely in an interest-bearing bank 
account strikes me as the most unsophisticated kind of 
retirement savings. Do we have any kind of studies as to what 
percentage of the retirees go that particular route, or how 
many of them are like my sister, who will sit down with me for 
the first time in our lives over dinner and talk about how her 
high-tech stocks are doing, as opposed to some of the basic 
manufacturing, and using words like diversification that she 
never used in her life until she turned 60. As I say, she is 
very sophisticated. Nobody taught her. She is entirely self-
taught.
    Mr. Seidman. That is due to the good work of CNBC, Senator.
    [Laughter.]
    Senator Bennett. I went over to her house for dinner one 
night expecting to have a polite, pleasant chat. She and her 
husband both started to get nervous around 8 p.m., and I could 
tell that she had something on her mind. She finally said, 
would you mind if we watched television? That is very unusual 
when we are getting together with family. And I said, no, I 
would be happy to. I was expecting their favorite sitcom or the 
basketball game. No, they watched Louis Ruckeyser for half an 
hour with great concentration.
    I am sorry for that little bit of family history, but I 
raise the question--what percentage of the retirees have their 
nest egg entirely in an interest-bearing bank account, for whom 
this kind of protection would be important?
    Mr. Jackson. Well, that is a good question. And I think one 
of the things that more study needs to be done on is this 
distribution of actual financial assets.
    The figure about IRA and Keogh assets at $218 billion is in 
banks, the total amount of IRA's and Keogh's is 10 times that. 
So roughly 10 percent, in that category, is in banks.
    In general, if you look at 401(k) plans--I should probably 
defer to my colleague here--but the mutual fund sector has 
been, I think, the most successful in attracting those. Of 
course, the insurance companies have also been successful.
    So, I think if you look broadly, particularly at the 
wealthier, you will see them distributed outside of the 
depository institution sector to a large degree.
    Mr. Dahlke. Yes, I would agree that the investment at risk, 
it takes a larger part, certainly, of the retirement plan 
scenario. But I also think that people should have the right to 
pick their own poison here, no matter what the percentages. And 
how big your bag of gold is, is a perception that only you can 
answer.
    People who generally have low-risk tolerances need to be 
protected against more sophisticated investors that put all 
their money in pets.com and e-toys, who now have no money in 
their retirement plans.
    Senator Bennett. I do not know how sophisticated those 
investors were.
    Mr. Dahlke. I guess I am trying to turn the word 
sophisticated on its head.
    Senator Bennett. Yes. Okay.
    Thank you, Mr. Chairman.
    Senator Johnson. Thank you, Senator.
    Senator Miller.
    Senator Miller. With Mr. Seidman's experience on and around 
Capitol Hill, and also the analogy you used and the difference 
between prize-fighting and barroom brawling, I am tempted to 
ask you to elaborate on your observations of what happens 
around here. But I won't. I want to ask you something else.
    Mr. Seidman and Mr. Dahlke, I would like you to respond to 
something that Professor Jackson had in his testimony, in which 
he raised various points about which tax-favored vehicles to 
cover, expanding the definition of retirement savings, and 
potential abuses with the retirement savings account.
    Mr. Jackson you gave us quite a bit to think about.
    I did not hear you say this specifically, but on the last 
page of your testimony, you say: ``Compelling theoretical 
arguments support the expansion of the FDIC insurance coverage 
for retirement savings. However, the task of structuring an 
appropriate extension--that is, an extension likely to reach 
low- and middle-income savers--is not trivial. And it is 
possible that the practical problems of implementing such a 
regime will prove so substantial as to derail the entire 
effort.''
    What do you think about that, Mr. Seidman and Mr. Dahlke?
    Mr. Seidman. Well, I think that is, Senator, what I was 
referring to when I said I prefer not to go the route of trying 
to specify accounts. And if I had my choice, I would much 
rather see the system go to $200,000, and let that 
substantially take care of the retirement program.
    And I think, as the Professor has pointed out, it will be a 
big technical problem to try to define retirement account, 
administer retirement account.
    Do not forget, when we go in to take over a bank, we have 
to do all of this right away because we have to get it some 
place else. So the more complicated it becomes, the more 
difficult it is to resolve the bank in a hurry. And to resolve 
the bank, you have to know what the insured amounts are.
    So, I have a lot of sympathy for the thought that it will 
be complicated, and that is why, if I could have a definition 
of anybody 65 or over, or something like that, it would be a 
lot easier and more practical and might do 90 percent of the 
job.
    Senator Miller. Mr. Dahlke.
    Mr. Dahlke. I like simple. I think the tax code is pretty 
clear on what is a qualified retirement account. And I think 
when you start to get away from that, and you get into 
nonqualified, deferred compensation, is that defined as a 
retirement account? They are set up for retirements accounts, 
but I think now you start to blur the line. I would leave this 
to the tax code. And if the tax code defines something as a 
qualified retirement account, the shoe fits.
    Senator Miller. Let me ask you this, Professor Jackson.
    In your statement, you suggest that if legislation is 
adopted to include a higher level of FDIC coverage for 
retirement savings, that the bill should include an educational 
component. Would you elaborate on what you are talking about 
there? Do you mean something like investor education, whereby 
the individuals would be counseled on how the program works? Or 
are you talking about something entirely different from that?
    Mr. Jackson. Well, I think that there is a lot of reason to 
believe that the private retirement savings in the United 
States is too low right now and individuals are not adequately 
saving for their 
retirement.
    And we are talking now about coverage levels, $200,000, 
that are greatly in excess of what most people are saving. 
There is a case to be made for doing it. But I think the more 
important thing for enhancing retirement security is not so 
much topping off the extra $150,000 that we are talking about, 
but encouraging people actually to save more.
    I think wrapped up with this increase, one could imagine 
some sort of educational program akin to the tobacco education 
that the Government sponsored back in the 1960's, to make 
people aware of the dangers of tobacco.
    One could here think about educating individuals about the 
need to save for retirement, with some specific recommendations 
about rough levels that are appropriate.
    That is how I got to the $250,000 number and I think that 
is what American savers need to know about. And I think the 
Government could have a role in doing that.
    Following up on one of the other points that has been made 
earlier, I do not think we should be saying to the American 
public that they should save for retirement exclusively in 
FDIC-insured banks. I think that would be not appropriate for 
many people. I wouldn't put this perhaps with the FDIC as being 
solely in charge of the message, even though it has been a very 
effective agency for many things. You would want to make it 
more broad than that.
    I think that is an important thing. And as I mentioned in 
my testimony, some other countries are taking that as a public 
charge for their regulators.
    Senator Miller. Can I ask Mr. Seidman one more question? My 
time is up?
    Senator Johnson. Time is up, but go ahead.
    Senator Miller. That is all right.
    Senator Johnson. All right. We will come back around.
    Mr. Seidman, perhaps more than just about anybody in the 
country, you had a front-row seat at the savings and loan 
crisis. Many opponents of increased deposit insurance coverage 
expressed concern about increased moral hazard that would be 
introduced into the system with higher coverage limits. And 
they point to the S&L crisis as evidence that increased 
coverage at that time exacerbated the costs of those failures.
    My understanding is that brokered deposits were 
particularly problematic during that time. Yet with an 
inadequate coverage limit for retirement accounts, it would 
seem to me that we are leaving some people with little choice 
but to find alternative depositories if they really want 
totally secure retirement savings.
    So, Mr. Seidman, or anybody on the panel, I would be very 
interested in hearing your analysis as to how an increased 
retirement coverage limit, for example, in the range of 
$250,000, how that relates, if at all, to brokered deposits and 
increased systemic moral hazard.
    Mr. Seidman. Well, first, the concept of brokered deposits 
as developed back there in those days has been substantially 
outmoded by the Internet.
    Now the whole country is, in effect, a broker and deposits 
are raised nationally on the Internet. So the limits on what 
can be raised and the work of the broker is really not much 
used any more, although some of it still is used.
    But the point is that if brokered deposits were a hazard, 
then the hazard today is much larger because deposits are 
raised on the Internet. And any bank can go in today and raise 
any amount of money they want within what the regulators will 
let them do, simply by paying an interest rate that is 
something higher than other banks are going to pay. That raises 
some very substantial issues in the regulatory world, much more 
difficult perhaps than the one we are talking about now.
    When I was the Chairman, I said that I wanted all the banks 
reviewed, and all of those that were paying an appreciable 
amount above, quote, ``the market rate,'' would have a system 
by which an electrical line would go to the seat of our chief 
supervisor and give him a jolt, so he would immediately go to 
those banks and find out how they could be paying these rates.
    So just to get back to the basic problem of brokered 
deposits, it is the problem of the Internet. How you handle 
that is dependent upon the regulatory system.
    Once you guarantee amounts and make them available 
nationally and internationally, although those are not 
guaranteed, but once you make them available, then the 
competition does not regulate. The regulators have to regulate. 
And therefore, it makes it a more difficult regulatory problem 
than it has been in the past and one that I am sure the FDIC is 
going to spend a lot of time looking at, because if they are 
paying higher interest rates, they have to get a return by 
taking riskier investments and that involves risking the whole 
system. That is where regulation comes in.
    Senator Johnson. I would simply observe that the higher 
limit, it seems to me, makes it less necessary for people to 
search out unfamiliar institutions if they can keep their money 
local. And that is one of the benefits that might come of this.
    Senator Miller.
    Senator Miller. I will yield my time to my good friend, 
Senator Carper, who has just come in, if he has any questions 
or observations. I have never known him not to have.
    [Laughter.]

              COMMENTS OF SENATOR THOMAS R. CARPER

    Senator Carper. I want to thank Governor Miller, my old 
compadre, for yielding. That is very kind.
    Mr. Seidman, great to see you.
    Mr. Seidman. Nice to see you again, Senator.
    Senator Carper. It is always great. In early life, he and I 
used to go back and forth. Actually, we had a real good 
relationship over when I was in the House and you were at the 
FDIC. It is good to see you, and we welcome each of our 
witnesses. Have you been over to Japan lately?
    Mr. Seidman. Yes, I just came back from there.
    Senator Carper. Have you talked about that already?
    Mr. Seidman. Well, I only mentioned it, in saying that it 
is clear proof of the fact that if the banking system is in 
trouble, the whole economy is in trouble. In their case, the 
banking system is in great trouble and their economy is in 
great trouble. They have not been able to fix the economy until 
they get the banking system fixed.
    Senator Carper. Just take a minute, if you would. What do 
they need to do, more specifically? What do they need to do to 
fix their banking system?
    Mr. Seidman. I have been going over there for 10 years. And 
I guess for 8 of the 10 years, my speech was, if you do just 
this, this and this, you will fix it. This time, it is so big 
and so tough, that I had much more difficulty coming up with 
the kind of statement that says, this is what will fix it, 
because it is so pervasive now.
    Nevertheless, what they have to do, in my opinion, is start 
somewhere to take the bad loans out of the banking system so 
that the banks can function as banks. In Japan, the banks do 80 
percent of financing. In the United States, they do 20 percent.
    So when their banking system is sick, they are really sick. 
They are going to have to get started by separating these 
things into good banks and bad banks and trying to put the good 
banks back into the private sector, or keep them in the private 
sector, and take the rest. And then the most difficult decision 
that they have to make is which loans should be restructured 
and which loans should be simply closed.
    This is a decision that we make every day, sort of like the 
doctor does, only in the financial world, who lives and who 
dies. And they are substantially unprepared to do that. We had 
10,000 people in the Government and 80,000 or 90,000 private-
sector people doing that. They essentially do not have any set-
up to do that.
    So my speech there, and I talked with, I guess, all of the 
people involved, was this is a huge task for which you are not 
yet prepared. And you have to do this task in a way that the 
citizens will support it, which means in public.
    You remember how much we did to try to keep everybody 
informed of everything we did, so we could get the support from 
you to use more money.
    So, they have a tremendous challenge. And when you combine 
that with the fact that their national debt is now 140 percent 
of GDP, or something like that, the highest in the civilized 
world, so they do not have the resources at the government 
level any longer the way they have had, it is a tremendous 
problem.
    Senator Carper. Right. Thank you for that candid 
assessment.
    Back to the subject of the hearing. Looking around the 
world, are there other countries that have really set the 
standard, maybe one that we ought to be emulating with respect 
to deposit insurance? Are we the model?
    Mr. Seidman. We are the model for the world. We send people 
all over the world. Every system in the world that I know about 
is modeled on the U.S. system, more or less. I do not think 
there are any models out there that we would follow because 
they have all followed us.
    Senator Carper. I have just come from another hearing and I 
apologize for missing your testimony. We were dealing with 
infrastructure, protecting our infrastructure from terrorists 
one floor down. But if you could each take 30 seconds and tell 
me, in a nutshell, what should we do, if anything, with respect 
to our current deposit insurance system as it pertains to 
retirement accounts?
    Mr. Dahlke, would you just kick it off ?
    Mr. Dahlke. I think we should raise it to adjust it for 
inflation. The cost of insurance, the cost of retirement is 
much higher than it was when the limits were set. And I think 
we have created a system for a lot of elderly Americans that 
makes it more complicated than it does, forcing them to go to 
numerous institutions to be fully covered for their retirement 
savings.
    Senator Carper. So, we ought to adjust the coverage for 
retirement accounts to $100,000 plus inflation?
    Mr. Dahlke. I do not have a number in mind. I would leave 
that to my other colleagues to come up with. I would pull it 
out of a hat.
    Senator Carper. Okay. Good. Thank you.
    Professor Jackson.
    Mr. Jackson. Well, I guess I did pull it out of a hat 
because I did recommend $250,000 as a level for retirement 
savings.
    I think the case is strong for increasing the coverage for 
retirement savings. I think the case is less strong for other 
kinds of 
deposits. So, I would keep the general level where it is today 
or 
indexed to two times GDP, which is an international standard, 
GDP per capita.
    So have them both float up, but have the retirement savings 
be higher. We were talking a little bit earlier about the 
problem of hot money and the moral hazard of deposit insurance.
    I think that is pronounced for general deposit insurance 
where there is a lot of different kinds of people. But I think 
the moral hazard problems or what trouble people about 
expanding deposit insurance, are not strong for retirement 
savings.
    It is implausible to think that a lot of people are going 
to put their IRA in a bank, which is kind of a cautious thing 
to do, and then run around the country looking for a hot money 
investment vehicle. I think the problems of expanded coverage 
are limited for retirement savings and the case for it is 
pretty strong. But I think that is the one area of increased 
coverage that I would support. Others I think are more 
problematic.
    Senator Carper. Good. Thank you.
    Mr. Seidman.
    Mr. Seidman. I generally support indexing from the last 
time that there was an increase.
    Senator Carper. Any idea of what that would take us to?
    Mr. Seidman. About $200,000.
    Senator Carper. And would that be just for retirement 
savings accounts or other accounts as well?
    Mr. Seidman. All accounts.
    Senator Carper. Okay.
    Mr. Seidman. And I base that, as much as anything else, on 
the fact that I am a strong advocate of trying to keep a 
diversified banking system with small banks. We can start a new 
bank in our country because we have deposit insurance. No other 
country can do that, unless there is deposit insurance.
    I think that is a very important part of the decentralized 
system that we have. And that allows our economy to get 
financing with decisions at the local level. I think it has had 
much to do with the great period of prosperity that we had in 
the 1990's.
    So if for no other reason than to help small banks compete 
with big banks, I would support the $200,000 figure. And on top 
of that, I think for our citizens, certainly $200,000 is not an 
exorbitant amount for people to be supported. It certainly has 
proven to keep us from suffering from panic and all the rest. 
And in the banking system, it has never cost the taxpayer a 
penny.
    I think that gets lost in all of this because of the S&L 
debacle, which was due to a lot of things like outlawing 
adjustable rate mortgages. We would never have had the S&L 
thing if adjustable rate mortgages had not been outlawed.
    So because there was a big cost there, I do not think it is 
appropriate to use that in looking at the banking system, where 
there has been a very good record of the banks paying for 
insurance. It is really not even a Government subsidy because 
the banks have paid for every bit of it.
    Senator Carper. Thank you for your perspectives and thanks 
for being here. And again, Mr. Seidman, it is great to see you 
again. Thank you.
    And thanks, Mr. Chairman.
    Senator Johnson. I would observe to the gentleman that the 
retirement account coverage has been at $100,000 since 1978, 
and $100,000 in general since 1980. So it has been over a 
generation now since we have dealt with these issues.
    And while there is a certain arbitrariness, I suppose, as 
to how high coverage ought to be increased if it is increased, 
it would seem to the Chair that if you subscribe to the notion 
that there ought to be a public policy which provides 
protection for a certain level of savings, then you necessarily 
almost have to follow that that level of coverage does 
periodically need to be adjusted, which is something that we 
have not done now for 20 years-plus.
    I think the discussion from this panel has been very 
helpful as we go through this.

    Senator Miller, anything else?
    Senator Miller. I do not have anything else except, Mr. 
Chairman, thank you and to thank the members of the panel for a 
very 
good hearing.

    Senator Johnson. Well, let me say, then, thank you to the 
panel. I think your testimony today has been very, very 
helpful. I am doubtful that, given all the circumstances the 
country faces right now, that we get to the floor with FDIC 
reform legislation this year. But I think you have helped us 
set the stage for, hopefully, what is a constructive 
legislative effort, if not this year, at least on into next 
year.
    I believe that there is a certain level of urgency relative 
to FDIC reform in general. And I think focusing on the 
retirement issues was a very useful exercise today.
    Thank you.
    Mr. Seidman. Thank you.
    Mr. Jackson. Thank you.
    Mr. Dahlke. Thank you, Mr. Chairman.
    Senator Johnson. This hearing is adjourned.
    [Whereupon, at 3:55 p.m., the hearing was adjourned.]
    [Prepared statements, response to written questions, and 
additional material supplied for the record follow:]
             PREPARED STATEMENT OF SENATOR DEBBIE STABENOW
    Thank you, Mr. Chairman, for calling today's hearing. I want to 
commend you for the leadership you have shown on the issue of deposit 
insurance reform. I know that there are a number of serious policy 
questions that we will be grappling with as we begin this discussion 
and I am looking forward to working closely with you.
    I believe today's hearing topic is extremely important and I am 
glad that in the midst of this challenging work environment that all of 
us are facing, we are moving forward with today's discussion.
    Mr. Chairman, I agree that we need to reform Federal deposit 
insurance coverage for retirement accounts. There is ample evidence 
that the current system does not promote adequate savings for 
retirement. Indeed, there are structural barriers that unnecessarily 
complicate and impede effective planning for retirement. When the 
deposit insurance coverage for retirement accounts was last raised 
approximately 
23 years ago, $100,000 went a lot further than it does today. No one 
today could credibly contend that such an amount would be sufficient to 
provide for the long-term needs of retirees. It is past time for us to 
review the level of coverage.
    Congress has shown wisdom in the past to create incentives for 
additional savings. Indeed, earlier this Congress, we increased the 
amount of money that individuals can save through IRA's. The current 
cap on insurance coverage is at cross-
purposes with this recent action.
    However, with that said, I want to be sure that we work through 
this subject carefully. We must be mindful of the impact any change to 
our deposit insurance would have on the insurance funds. It is also 
worth asking the question of how changes to insurance coverage may 
steer money from riskier, yet potentially much more profitable savings 
instruments. Nonetheless, I think we can proceed in a reasoned, 
methodical way and I think this is one area of reform where consensus 
can be reached relatively quickly.
    Mr. Chairman, I am looking forward to hearing from our witnesses 
today and to the ensuing discussion. I hope that as we move forward, we 
keep a few simple concepts in mind. First, we need to ensure that 
Government policies consistently encourage savings. Second, we need to 
remove illogical and artificial barriers that complicate financial 
planning. Third, we need to keep in mind that the public's savings 
needs evolve over time. And, fourth, we need to be sensitive to the 
fact that individuals, in planning for their retirement, have different 
tolerances for financial risk taking. I think if we keep all of this in 
mind we can come up with legislation that effectively updates our 
insurance coverage laws and serves the upcoming generations of 
retirees.
    Thank you, Mr. Chairman.
                               ----------
                PREPARED STATEMENT OF L. WILLIAM SEIDMAN
            Chief Commentator, CNBC-TV, and Former Chairman
               Federal Deposit Insurance Corporation and
                      Resolution Trust Corporation
                            November 1, 2001
    The battle is on--in one corner there is the proverbial David in 
the person of FDIC Chairman Donna Tanoue, and in the other corner, 
three giant Goliaths--
Senate Banking Committee Chairman Phil Gramm, Treasury Secretary 
Lawrence 
Summers, and Federal Reserve Board Chairman Alan Greenspan.
    Technically the conflict is over the FDIC's Deposit Insurance 
Option Paper--published in August--which suggested--some said 
foolishly--that deposit insurance coverage should be increased from 
$100,000 to $200,000 per depositor. As the paper pointed out, such an 
increase would compensate for the last 20 years or so of inflation 
since the insurance level was set at $100,000. The new ceiling might 
also help to meet an increasingly difficult problem for community 
banks--obtaining sufficient deposits to meet growing loan demand. Core 
deposits as a source of funding for community banks have steadily 
declined and largely are being replaced by loans from the Federal Home 
Loan Banking System.
    Once this idea was floated, Senator Gramm, an ever-pure free 
marketer, reacted with a resounding ``No way--not on my watch!'' At a 
recent Senate Committee hearing--on an unrelated subject--Gramm gained 
support for his position from the Secretary of the Treasury and the Fed 
Chairman. Treasury said it does not agree with the proposal because it 
increases risk taking and possible Government liability; Greenspan said 
``no'' because he feels it is a subsidy for the rich. I guess he has 
been in Government so long that anyone who has over $100,000 is really 
rich. Do these opinions nix the possibility for a change in the deposit 
insurance ceiling? I do not believe so. This is a complex issue that 
will require Congressional hearings and much research, because it 
relates to ``too big to fail'' policies and overall financial reform. 
Here are some of the important points to be weighed in this debate: Do 
these opinions nix the possibility for a change in the deposit 
insurance ceiling? I do not believe so.

    Increasing Deposit Insurance Brings More Financial Risk to 
Government--Possible, but unlikely, since the bank insurance fund has 
never cost the Treasury a penny--the thrift insurance fund is the one 
that went broke. Even Chairman Tanoue and Fed Governor Meyer have 
pointed out that the greatest risk to the fund is likely to be the 
failure of a large complex bank. Moreover, the risk is much greater to 
the Federal Government when it supports a huge home loan bank financing 
institution--another quasi-governmental agency such as Fannie Mae or 
Freddie Mac--where any trouble means big trouble.
    It Distorts the Operations of the Free Market--This is also 
referred to as creating a ``morale hazard,'' the idea being that FDIC 
depositors won't have to worry about the condition of the bank. Of 
course, the so-called free market is out of kilter anyway, what with 
the Federal Reserve's discount window and the Treasury's bailout of 
Mexico and half of Asia through the IMF. In fact, the Government seldom 
does anything that does not impact the free market--think environmental 
protection, antitrust, regulation of good drugs, bad drugs, and so on. 
The issue of whether to increase the deposit insurance ceiling has less 
to do with the distortion of the free market than it does with whether 
this particular action in total is ``good for the country.'' In the 
case of Mexico, for instance, the free marketers decided that a U.S. 
bailout of rich U.S. business leaders was good for the country and the 
world; bingo, the funds were granted.
    It Is a Subsidy for the Rich--It is debatable whether FDIC 
insurance is a subsidy at all. Most economists--though not Greenspan--
doubt that there is much of a subsidy because the banks have paid for 
all of the insurance and the insurance fund has covered any losses.

    Now that I have laid out the opposing views, here are several good 
reasons for approving the FDIC deposit guarantee increase:

    It Will Level the Competitive Playing Field--Historically, 
governments have protected all bank depositors when very large banks 
are in trouble, thus providing an implicit guarantee of unlimited 
insurance for those institutions--that is, Japan, Saudi, Korea, 
Thailand, and the United States Therefore, at the very least, the 
increase to $200,000 tends to give community banks a better chance to 
maintain their deposit base against a too-big-to-fail competitor.
    The Increase Will Reduce the Risk that Smaller Banks and the 
Communities They Serve Will Stagnate Due to the Banks' Inability to 
Obtain Funding at a Reasonable Cost--It could also reduce future FDIC 
insurance payments if these weak banks fail in the next recession. 
Incidentally, an FDIC study shows that if the insurance level had been 
at $200,000 during the problems of the 1980's and 1990's, it would not 
have materially increased FDIC insurance costs.
    The Increase Will Help to Maintain a Banking System that Is 
Decentralized and Diverse--This type of system helps the economy, 
boosts productivity, and promotes entrepreneurship--important factors 
in our present prosperity.
    It Provides a Savings Incentive--As more baby boomers retire with 
savings in excess of $100,000, the increased FDIC insurance coverage 
will provide a convenient and conservative savings option and will 
encourage savings, which all economists agree would be good for the 
U.S. economy.

    You may have guessed by now that I am rooting for the corner with 
little David (Chairman Tanoue) in this important policy showdown--and 
the battle is far from over. Why? I will simply use the litmus test 
that applies to all other proposed reforms: It is good for the country.
                               ----------
                PREPARED STATEMENT OF HOWELL E. JACKSON
  Finn M.W. Caspersen and Household International Professor of Law and
            Associate Dean for Research and Special Programs
                           Harvard Law School
                            November 1, 2001
    Chairman Johnson, Ranking Member Bennett, Chairman Sarbanes and 
Members of the Committee: I am very pleased to be here today to discuss 
the reform of FDIC insurance coverage for retirement savings and to 
join the expanding discussion of deposit insurance reform that the FDIC 
launched more than a year ago with the release of its Options Paper.
Justifications for Mandatory Federal Deposit Insurance
    Although the subject matter of this hearing is coverage levels for 
retirement accounts, I will begin my testimony with a few general 
comments about insurance coverage. In brief, mandatory Federal deposit 
insurance serves three distinct public purposes.
    First, deposit insurance provides individual borrowers a convenient 
way to save that, for all practical purposes, is risk-free. Without 
mandatory deposit insurance, members of the general public would have 
to expend time and effort ascertaining and comparing the current 
solvency and future prospects of particular depository institutions in 
search of low-risk depositories. At a minimum, this process would 
impose costs on many members of society. In addition, some 
individuals--most likely the least wealthy and the least well-
educated--would make mistakes in evaluating the creditworthiness of 
particular institutions and might expose themselves to unwanted risks. 
Mandatory Federal deposit insurance eliminates this problem by 
extending a Federal guarantee to effectively protect all deposits up to 
the current coverage limit of $100,000.
    Second, deposit insurance reduces the likelihood of irrational runs 
on healthy depository institutions. Before the advent of deposit 
insurance, financial downturns 
occasionally triggered liquidity problems for depository institutions. 
These panics caused problems for otherwise healthy institutions and 
also had adverse macroeconomic consequences, most notably a rapid 
contraction of the money supply. While other public programs also 
combat liquidity crises, deposit insurance ameliorates the problem 
because individuals with deposits of less than the FDIC coverage limit 
have no need to withdraw funds from FDIC-insured institutions even in 
the face of financial distress.
    Third, Federal deposit insurance can effect visions of the proper 
structure of our political economy. Throughout the financial history of 
the United States, public sentiment and political leaders have favored 
a decentralized and fragmented financial services industry. Federal 
deposit insurance can advance this preference by helping smaller, less 
diversified depository institutions compete with larger, national 
organizations. The presence of Federal deposit insurance coupled with 
many other legal rules--notably, historical restrictions on 
geographical expansion--explain why the banking industry in the United 
States is so much less concentrated than comparable sectors of the 
financial services industry in other industrialized countries.
The Case for Increasing Current Coverage Limits
    As I understand the current debate, proponents of higher coverage 
levels base their case on an assertion that the current coverage of 
$100,000 per deposit no longer satisfies the first--collective action--
and third--political economy--justifications for deposit insurance. At 
this point, few are arguing that macroeconomic considerations warrant 
higher coverage levels.\1\ The task of evaluating the two lines of 
argument being advanced by proponents of expanded coverage is 
complicated, and I cannot provide the Committee a definitive assessment 
of either claim. I would, however, offer the following preliminary 
thoughts.
---------------------------------------------------------------------------
    \1\ The absence of attention to the macroeconomic role is sensible. 
In modern times, similar 
liquidity crises have occasionally occurred at the State level when 
State deposit insurance systems run into financial troubles. However, 
in the past two decades, these State systems have disappeared, and 
almost all depository institutions are now insured at the Federal 
level. To the best of my knowledge, there have been no recent, system-
wide liquidity crises at Federally-
insured depositories, even during the thrift and banking crises of the 
1980's and early 1990's or the disruptions in stock markets after 
September 11 or October of 1987. Indeed, during periods of financial 
crisis, funds now tend to flow into depository institutions not out.
---------------------------------------------------------------------------
    First, as a general matter, I think the burden should be on the 
proponents of 
expanded FDIC coverage to make a compelling case for the extension of 
Federal 
protection. I would not understand this burden to be overwhelming--
indeed, as 
explained below, I believe that the burden may well be satisfied in the 
case of retirement savings \2\--but I do think that a sensible premise 
is that Government insurance programs should be maintained at the 
minimum level necessary to achieve specific public goals. Placing the 
burden of persuasion on proponents of expanded coverage helps effect 
this principle.
---------------------------------------------------------------------------
    \2\ Among other things, expanded Federal deposit insurance coverage 
tends to raise the FDIC's costs when banks fail and may also increase 
the moral hazard problems associated with Federal deposit insurance.
---------------------------------------------------------------------------
    Second, I would accept the political case for expanded deposit 
insurance coverage as a legitimate consideration. I would, however, be 
mindful that Government intervention to maintain existing industry 
structures can be costly--both in promot-
ing efficient financial services firms and in retarding innovation. In 
addition, it is 
possible that intervening developments--such as adoption of the 
Community Re-
investment Act of 1977, expanded access to capital markets for small 
companies, 
and improvements in antitrust oversight--now address concerns over 
monopolization of sources of credit that underlay public antipathy to 
large-scale financial in-
stitutions in the past.\3\ So before accepting the political case for 
expanding Federal 
deposit insurance, I would recommend that Members of Congress consider 
both the economic costs of such a decision and the possibility that 
other statutory regimes adequately address the concerns underlying our 
historical preference for local banking institutions.
---------------------------------------------------------------------------
    \3\ I would further distinguish arguments in favor of expanded 
deposit insurance that are based on a perceived need to offset the 
``too-big-to-fail'' policy said to support larger financial 
institutions. Enhancing deposit insurance coverage to counteract the 
effect of the ``too-big-to-fail'' policy is, in my view, a dubious 
proposition. First, there is considerable doubt that the policy remains 
in effect. In 1991, the FDIC Improvements Act established important 
procedural and political constraints on large bank bailouts. In 
addition, a number of substantive reforms--from prompt corrective 
action to heightened oversight of interbank lending--reduce the 
likelihood of Con-
tinental Illinois-style bailouts. Moreover, to the extent that larger 
banks are still implicitly 
supported by a lingering ``too-big-to-fail'' policy, Congress could 
consider addressing that pro-
blem directly rather than making a compensatory increase in deposit 
insurance coverage for 
small banks.
    I would be similarly skeptical of arguments for expanded deposit 
insurance coverage based solely on the fact that other sectors of the 
financial services industry have grown faster than depository 
institutions in the past two decades. It is by no means clear that 
maintaining the market share of depository institutions in 1980 is an 
appropriate goal of public policy. Indeed, growth in other sectors, 
such as money market mutual funds, could well indicate that these 
alternative forms of saving better suit the needs of an increasing 
number of consumers.
---------------------------------------------------------------------------
    Arguments that the current level of FDIC insurance is too low to 
provide an adequate amount of risk-free savings for individuals are, in 
my view, the most difficult feature of the current debate over expanded 
FDIC insurance coverage. For the most part, recent testimony has 
assumed that the coverage levels should be inflation-
adjusted, and then focused on selecting an appropriate historical point 
in time to accept for determining an inflation-adjusted baseline for 
future deposit insurance coverage.\4\ Analytically, this approach is 
unsatisfying, as it provides no explanation why one should choose one 
particular baseline as opposed to many plausible alternatives. As a 
theoretical matter, one could imagine a number of considerations that 
should influence the optimal level of deposit insurance coverage: the 
financial sophistication of the general public, the level and 
distribution of financial assets, the availability of reliable 
information about the solvency of depository institutions, and a host 
of other factors, including the cost and moral hazard impact of deposit 
insurance. Over time, one would expect that these factors would change 
and thus the optimal level of deposit insurance coverage would also 
rise and fall.\5\ Balancing these evolving features of our financial 
environment is a daunting task.
---------------------------------------------------------------------------
    \4\ For example, if the current level of coverage ($100,000 per 
deposit) were used as a baseline, the real level of coverage would be 
much lower than if the value of deposit insurance coverage back in the 
early 1980's were used. For a good review of the relative value of 
Federal deposit insurance coverage, see FDIC Options Paper 31-43 
(August 2000) (available at http://www.fdic.gov/deposit/insurance/
initiative/OptionsPaper.html). See also Alan S. Binder & Robert F. 
Wescott, Reform of Deposit Insurance: A Report to the FDIC (March 20, 
2001) (available at http://www.fdic.gov/deposit/insurance/initiative/
reform.html) (discussing indexing FDIC coverage levels to median 
income).
    \5\ For example, within the United States over the past 20 years, 
the assets of depository institutions as a percentage of GDP has 
increased from 56.6 percent in 1980 to 81.5 percent in 2000, suggesting 
that an increase in real FDIC coverage may be in order. On the other 
hand, financial sophistication of the general public and the 
availability of information about depository institutions--via the 
Internet among other sources--has probably also improved, suggesting 
the need for less governmental paternalism and perhaps even less 
deposit insurance coverage today than in the past.
---------------------------------------------------------------------------
    In lieu of offering the Committee any original analysis of this 
subject, I would propose instead to point Members and the Committee 
staff to a paper on deposit insurance recently written by Gillian 
Garcia, an economist with the IMF.\6\ In an effort to establish an 
international benchmark for deposit insurance coverage, Garcia 
recommends, as a rule of thumb, deposit insurance coverage equal to one 
or two times per capita GDP.\7\ (Two times per capita GDP for the 
United States would be approximately $70,138.80 in 2000).\8\ Elsewhere, 
Garcia reports ratios of deposit insurance coverage to per capita GDP 
for 66 selected countries, and finds that only 28 have explicit deposit 
insurance coverage greater than two times per capita GDP. Of these, 
only two countries have explicit deposit insurance coverage greater 
than the current United States level (Italy and Norway).\9\
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    \6\ See Gillian Garcia, Deposit Insurance and Crisis Management 
(IMF Working Paper, March 2000) (available at http://www.imf.org/
external/pubs/ft/wp/2000/wp0057.pdf ).
    \7\ Garcia also contends that the coverage limit may be set with 
more precision by examining the distribution of deposits by size, 
proposing that coverage limit should be set to include the majority of 
the total number of deposits (roughly 80 percent), but only the total 
value of deposits of a minority (roughly 20 percent).
    \8\ This figure is based on an estimated 2000 per capita GDP of 
$35,069.40 as reported in the 2001 World Economic Outlook Database, 
October 2001, available at http://www.imf.org/external/pubs/ft/weo/
2001/02/data/index.htm (last accessed 10/29/01). According to the WEO 
estimates, two times per capita GDP for the United States would be 
$67,953.60 in 1999, $72,024.80 in 2001, and $74,455 in 2002.
    \9\ Gillian Garcia, Deposit Insurance--A Survey of Actual and Best 
Practices (IMF Working Paper, April 1999).
---------------------------------------------------------------------------
    While there is nothing magical about the Garcia analysis of deposit 
insurance coverage, the work does suggest one informed analyst's view 
of the issue, and also offers a comparative dimension to the topic, 
suggesting that current FDIC coverage levels are at or near the top of 
explicit governmental insurance schemes. To be sure, Garcia's survey 
does not report implicit coverage levels--which may be substantial and 
even unlimited in some countries. Moreover, it is possible that 
considerations of political economy unique to the United States justify 
coverage levels higher than those found in other industrialized 
countries. Still, for me at least, the Garcia analysis raises questions 
about the appropriateness of raising general coverage levels at the 
present time.
Special Features of Retirement Savings
    The one area in which I think a strong case may be made for raising 
current FDIC coverage levels is the area of retirement savings. 
Numerous trends increase the importance of retirement savings for 
American citizens. Greater life expectancy, earlier retirements, 
potential shortfalls in our principal public insurance program (Social 
Security), all counsel for a greater importance of private savings for 
retirement. It is, moreover, quite reasonable to posit that some 
members of the general public will want to be able to place their 
retirement savings in a simple, safe, and familiar investment vehicle, 
such as a depository institution.\10\ Finally, if we accept the premise 
that the Government has a role in ensuring the availability of such a 
vehicle for amounts sufficient to provide adequate retirement security, 
then I think the case for raising the level of FDIC coverage for 
retirement accounts has been made. Essentially, the argument is an 
extension of the first (collective action) justification for deposit 
insurance in the special case of retirement savings.\11\
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    \10\ The triple requirements of simplicity, safety, and familiarity 
are essential to my argument because the general public already has 
safe alternatives--investments in Government bonds or bond funds--that 
are not familiar, as well as familiar investments--splitting retirement 
savings among a number of banks--that are not simple.
    \11\ Many experts agree that expanded coverage of retirement 
savings is unlikely to create additional moral hazard problems as the 
kind of person who is apt to invest retirement savings in bank deposits 
is unlikely to seek out high-risk, high-return institutions. See Letter 
from FDIC Chair Donna Tanoue (April 2001). See also Testimony of Jeff 
L. Plagge before the Subcommittee on Financial Institutions of the 
Senate Committee on Banking, Housing, and Urban Affairs 
(August 2, 2001).
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The Amount of Retirement Savings Coverage:
Theoretical and Practical Considerations
    But what level of coverage is appropriate for retirement savings? 
Clearly an unlimited support for retirement accounts seems 
inappropriate, both because there is no strong governmental interest in 
protecting all of the retirement savings of the very wealthy and 
because the extension of retirement savings coverage could distort 
competition among different sectors of the financial services industry. 
But is there a principled way to provide a benchmark comparable to what 
Garcia advances for general coverage levels? Recognizing that there is 
no clearly right answer, I offer the following rough cut at the 
question.
    I approach this problem with the premise that the Government should 
offer sufficient deposit insurance coverage so that a household with up 
to the median level of income should have access to an absolutely safe 
investment vehicle for retirement. I would implement this concept as 
follows. I start with the median household income in the United States, 
which was approximately $42,000 in 2000.\12\
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    \12\ For recent census data on median income of households in the 
United States, see http://www.census.gov/hhes/income/income00/
incxrace.html (avail. October 31, 2001). I use household income because 
retirement savings often must support a household rather than an 
individual.
---------------------------------------------------------------------------
    Within the financial planning industry, a typical target for 
retirement income is 80 percent of preretirement income. So, under this 
measure, a household at the median level of household income would need 
$33,600 of income per year during retirement. Although one could argue 
that FDIC insurance for retirement savings should be set to cover 
retirement savings sufficient to finance this full amount, I think it 
is important to recognize that Social Security provides substantial 
retirement savings for most Americans, particularly those at lower 
income levels. For current purposes, I think it would be appropriate to 
assume Social Security replacement rates of 40 percent of preretirement 
income,\13\ leaving only 40 percent to be covered by private savings or 
$16,800 of income per year.
---------------------------------------------------------------------------
    \13\ See C. Eugene Steuerle & Jon M. Bakija, Retooling Social 
Security for the 21st Century 06 (1994) (reporting Social Security 
replacement rates for different categories of workers).
---------------------------------------------------------------------------
    Formulated in this way, the question is how much retirement savings 
would an individual need to supply $16,800 of inflation-adjusted income 
in retirement? To answer this question, one must make assumptions about 
life expectancy and real rates of industry. Using what I consider to be 
plausible estimates of these factors, I have calculated that a 
retirement savings balance of approximately $250,000 would be an 
appropriate target level of coverage.\14\ To put this in relationship 
to median household incomes, a $250,000 coverage level would suggest a 
retirement savings coverage target of roughly six times median 
household income. In comparison, our current coverage level of $100,000 
is just a shade under 2.4 times median household income.\15\ The ratio 
between the level of coverage I propose for retirement savings 
($250,000) and current FDIC coverage ($100,000) is, coincidentally, the 
same 2.5 to 1.0 ratio that prevailed between 1974 and 1980, the only 
previous time that the FDIC has offered different coverage levels for 
retirement savings.\16\
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    \14\ For this purpose, I assume a real rate of return of 3.0 
percent--roughly the current payment rate on inflation-adjusted long-
term Government bonds--and a life expectancy of 20 years. Obviously, 
individual experience will vary, particularly on the dimension of life 
expectancies. But for purposes of setting targets, I think these are 
reasonable estimates. In addition, the use of the median household 
income--as opposed to some lower level--is probably a generous 
statement of the Government's obligation in this area.
    \15\ Note that the methodology proposed in the text assumes that 
deposit insurance coverage levels should be adequate to cover the 
maximum balance necessary to finance a targeted level of retirement 
income. For any particular savers, these balances would be present only 
on the eve of retirement--before the balances would still be in an 
accumulation phase and afterwards the balances would decline as 
withdrawals occurred. One could imagine a lower coverage level that 
would provide only partial protection of a $250,000 retirement savings 
account at its point of peak accumulation. If, for example, the 
coverage level were set at $200,000, much of the time, even our median 
household achieving the proposed savings targets would be fully 
covered, but for a certain number of years, up to $50,000 of savings 
would be uninsured. In practice, such a saver would not be exposed to a 
complete loss of this $50,000, as depositors typically only lose a 
relatively small fraction of the balances of uninsured accounts and 
legislative reforms of the past decade make it likely that these loss 
exposures will remain small--perhaps on the order of 10 percent of 
uninsured balances or less.
    \16\ At that point, the nominal coverage levels were $100,000 for 
retirement savings and $40,000 for general FDIC coverage. See Testimony 
of Jeff L. Plagge before the Subcommittee on Financial Institutions of 
the Senate Committee on Banking, Housing, and Urban Affairs 
(August 2, 2001). In real terms, however, the coverage level for 
retirement savings is quite similar to the one I propose.
---------------------------------------------------------------------------
    Having proposed a plausible target for retirement savings coverage, 
let me immediately add several caveats. This back-of-the-envelope 
calculation includes numerous assumptions about replacement rates, 
assumed life expectancies, rates of return, and Social Security 
coverage. All of these assumptions are subject to debate, and different 
assumptions would generate different target levels. What I have offered 
is my best guess of how a retirement savings coverage level might be 
justified based on my own notions of the Government's appropriate role 
in the field. Others--particularly those representing other sectors of 
the financial services industry--may well have different views.
    On a more practical dimension, I should stress that these coverage 
levels dramatically exceed the current levels of retirement savings of 
most Americans. According to recent Census Bureau data, middle-income 
American households do not now accumulate anything close to $250,000 of 
retirement savings. For example, the median net worth of householders 
in early retirement years (65 to 69) was $106,408 in 1995, but the 
largest median investment was in homeownership not financial 
assets.\17\ Accordingly, the theoretical case for retirement savings of 
roughly one quarter of a million dollars seems well beyond the current 
capabilities of most average Americans.\18\ To some degree, this 
unfortunate financial fact moots the debate over retirement savings 
coverage. However, some individuals will have accumulations at the 
level envisioned,\19\ and for others a governmental policy endorsing 
retirement savings on the order of six times median household income 
may offer some encouragement to increase retirement savings, 
particularly if financial institutions publicize the level of coverage.
---------------------------------------------------------------------------
    \17\ See http://www.census.gov/hhes/www/wealth/1995/wealth95.html 
(avail. October 31, 2001).
    \18\ See, e.g., FDIC Roundtable Discussion of Deposit Insurance 
Reform 22 (May 2000) (available at http://www.fdic/deposit/insurance/
initiative/transcript/index.html) (citing Federal Reserve Board study 
indicating that bank retirement accounts of people making more than 
$100,000 were typically only $2,400 and ranged up to only $93,000).
    \19\ For example, the FDIC Options Paper suggests that ``several . 
. . financially unsophisticated'' depositors in recently failed banks 
had retirement accounts in excess of the current $100,000, see FDIC 
Options Paper, supra note 4, at 36. The FDIC Paper does not, however, 
indicate the extent of the losses imposed on these accounts. See supra 
note 14 (discussing the relevance of loss rates on uninsured portions 
of retirement savings accounts).
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Issues of Implementation in Developing a Separate Coverage
Level for Retirement Savings
    To the extent that the Committee pursues the concept of adopting a 
separate coverage level for retirement savings, there are a number of 
additional issues of implementation that need to be addressed.
    Which Tax-Favored Vehicles to Cover? First, there is the matter of 
defining the concept of retirement savings. Most discussion of the 
subject refers to Individual Retirement Accounts (IRA's) and Keogh 
Plans, but it is not clear that these are the only categories to which 
expanded FDIC coverage should extend. Historically, these plans were 
individualized accounts, distinct from traditional defined benefit 
pension plans. But Keogh Plans are a relatively minor component of 
overall retirement savings. IRA's are much more important, but largely 
because they are the depositories of roll-overs from employer-based 
plans. (I would expect that the overwhelming majority of IRA accounts 
that exceed the current $100,000 FDIC insurance coverage levels are 
roll-over IRA's).\20\ If extended FDIC coverage is to reach these roll-
over accounts, it is not clear why it should not also extend to other 
tax-favored individual account plans--most notably 401(k) and 403(b) 
plans--that many employers maintain. After all, if the public needs a 
risk-free investment vehicle for roll-over IRA's, a similar argument 
\21\ should apply to extending such protections to comparable 
retirements accounts maintained through employers, as well as 
privatized Social Security accounts (should they ever be created).\22\ 
At a minimum, the Committee should carefully consider which tax-favored 
savings vehicles are to be eligible for supplemental FDIC coverage for 
retirement savings.
---------------------------------------------------------------------------
    \20\ Traditional IRA's have always been limited to relatively low 
annual contributions. Even if an individual had invested the full 
$2,000 annual contribution allowed for IRA accounts for most of the 
past 25 years, that individual's account balances would only recently 
have reached the current $100,000 threshold. Based on existing data 
about the actual size of IRA accounts, I would expect that very few 
individuals have been such active savings in IRA accounts. While recent 
changes in tax laws substantially loosen restrictions on IRA savings, 
it is unclear how many low- and middle-income savers will take 
advantage of these opportunities. For a median income saver to get to 
the $250,000 level proposed above, and annual contribution of roughly 
$3,300 a year over 40 years would be required. That level of savings 
assumes an annual contribution of approximately 8 percent of median 
household income per year. For most workers, who start their working 
careers with much lower levels of income, the savings rates would have 
to be higher. For these reasons, I am not sure that I can concur in 
FDIC Chair David Powell's assertion that ``middle-income families 
routinely save well in excess of [the current $100,000 FDIC] limit.'' 
See Statement of Donald E. Powell before the Subcommittee on Financial 
Institutions and Consumer Credit of the House Committee on Financial 
Services (October 17, 2001) (available at http://www.fdic.gov/news/
news/speeches/chairman/sp170ct01.html).
    \21\ One difference is that participants in employer-sponsored 
enjoy some protection under ERISA's fiduciary rules. However, these 
safeguards are limited, and do not ensure that employees will place 
their retirement savings in low-risk, cost-effective savings vehicles.
    \22\ To the extent that the Committee does consider extending 
expanded FDIC insurance coverage to other tax-favored retirement plans, 
some attention would have to be given to ensuring that the coverage 
levels applied to beneficiaries of these plans and not the plan 
trustees. Several years ago, after the failure of the Executive Life 
Insurance Company, a wave of litigation arose over comparable questions 
of coverage under State insurance guaranty funds. See Howell E. Jackson 
& Edward L. Symons, The Regulation of Financial Institutions ch. 7 
(1999).
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    Retirement Savings in Other Forms. An analogous question arises as 
to whether the extended coverage should even be limited to tax-favored 
vehicles. While tying coverage extension to categories of retirement 
savings already defined in Federal law and administered through the 
ERISA agencies has some appeal, there are also several drawbacks to 
this approach. To begin with, tax incentives are most important to 
wealthy Americans, who have higher marginal tax rates and greater 
proclivities to saving. If extended coverage is limited to tax-free 
forms of savings, the benefit will be skewed toward upper-income 
Americans, even though the justification for extending coverage is 
largely based on concern for the less advantaged and less 
sophisticated. Consider further that the principal source of wealth of 
middle class Americans is home equity. For elderly households that sell 
their homes upon retirement, this equity might easily be converted into 
a bank account and used to support the households in retirement. But 
retirement savings of this sort would not typically be covered through 
expanded FDIC insurance coverage limited to tax-preferred retirement 
accounts. Nor would it cover the proceeds from the sale of a small 
business or many other kinds of savings.
    Problems of Expanding the Definition of Retirement Savings. The 
problem with 
expanding the definition of retirement savings is that a liberal 
definition could 
threaten to convert extra coverage for retirement savings into an 
across-the-board increase in Federal deposit insurance coverage, at 
least for individuals. Particularly, if depositors could open 
``retirement savings'' accounts at multiple institutions, the potential 
for unlimited coverage would be real. One could imagine various ways to 
deal with this problem--i.e., limiting individuals to only one 
retirement savings account throughout the banking system or at least 
throughout networks of affiliated banks. Drafting such rules would 
require considerable care and likely delegation to the Federal Deposit 
Insurance Corporation for implementing regulations.\23\
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    \23\ The practice of financial conglomerates dividing deposit 
balances among two or more affiliated banks is a problem that goes 
beyond the issue of retirement savings coverage. To the extent that 
Federal banking law increasingly disregards the corporate separateness 
of affiliated banks, see Howell E. Jackson, The Expanding Obligations 
of Financial Holding Companies, Harv. L. Rev. (February 1994). I 
believe there are strong arguments for treating affiliated banks as a 
single unit for purposes of deposit insurance coverage. (The larger 
question of whether all insurance coverage levels should be based on 
total individual accounts or on the current bank-by-bank basis is 
beyond the scope of this testimony.)
---------------------------------------------------------------------------
    Potential for Abuses with Retirement Savings Account. On the 
assumption that the technical issues of designing a viable system of 
expanded FDIC insurance for retirement savings can be overcome and 
balances in these accounts grow over time, the Committee should be 
mindful that these accounts may become the subject of unscrupulous 
business practices. For a variety of reasons, bank-based retirement 
savings accounts are likely to attract less sophisticated individuals, 
who may be less inclined to keep track of prevailing interest rates or 
move accounts--particularly retirement savings accounts--to other 
institutions.\24\ Knowing these characteristics of bank-based 
retirement savers, bankers may be tempted to lower the interest rate 
paid on retirement savings accounts. To the extent that the Federal 
Government would be implicitly endorsing bank-based retirement savings 
through the expansion of FDIC coverage for retirement accounts, I think 
attention should be given to ensuring that these accounts offer an 
appropriate rate of return. While direct regulation of interest rates 
would be excessive, one could imagine a statutory requirement that, to 
be eligible for expanded FDIC insurance coverage, retirement savings 
accounts would have to pay an interest rate no lower than an inflation-
adjusted Government bond. Such a floating average would set a floor 
beneath with interest payment could not fall, but would leave ample 
room for free market competition above that level. Again, 
responsibility for implementing regulations to establish an appropriate 
minimum rate of interest could be delegated to the FDIC.
---------------------------------------------------------------------------
    \24\ As others have noted, holders of IRA and Keogh bank accounts 
are unlikely to engage in aggressive shopping for higher rates. This is 
the principal reason why experts believe that expanded coverage for 
retirement savings is not likely to increase moral hazard problems of 
deposit insurance.
---------------------------------------------------------------------------
    Educational Aspects of Expanding Retirement Savings Coverage. As 
mentioned above, an ancillary benefit of expanding FDIC coverage for 
retirement savings accounts is the possibility that such a reform could 
encourage the American public to save more for retirement--even 
suggesting a target level of six times preretirement income as an 
appropriate savings goal. Financial supervisors in other 
jurisdictions--most notably the new Financial Services Authority in the 
United Kingdom--have recently been given explicit charges to educate 
the general public on such matters. In my view, it would be desirable 
if legislation adopting a higher level of FDIC coverage for retirement 
savings also included an educational component--either to be conducted 
directly by Government agencies or through some public-private 
alliance. While expanded FDIC coverage may marginally strengthen 
retirement savings in the United States, the primary mechanism for 
solving the problem will have to come through personal decisions made 
by millions of individual savers. Government sponsored education can 
help Americans meet that challenge.
Retirement Savings and the Debate Over Deposit Insurance Coverage
    Let me conclude with a few words about the relationship between 
retirement savings and the broader debate over deposit insurance 
coverage. As explained above, compelling theoretical arguments support 
the expansion of FDIC insurance coverage for retirement savings. 
However, the task of structuring an appropriate extension--that is, an 
extension likely to reach low- and middle-income savers--is not 
trivial. And it is possible that the practical problems of implementing 
such a regime will prove so substantial as to derail the entire effort. 
At this point, I can offer no clear prediction as to how these 
tradeoffs balance.\25\ However, to the extent that the Committee can 
devise a sensible approach to extending FDIC coverage for retirement 
savings, I think the case for raising the basic coverage levels is 
greatly reduced. As I mentioned earlier, the strongest argument for a 
general increase in FDIC coverage is that the public's needs for 
deposit insurance have increased over time. The most compelling 
component of this argument relates to an increased need for risk-free 
investment vehicles for retirement savings. To the extent that expanded 
FDIC coverage addresses this concern, the need for a general increase 
in FDIC coverage is much diminished and the appropriate level for 
indexed general deposit insurance perhaps even somewhat reduced.
---------------------------------------------------------------------------
    \25\ An important area of future research is the actual 
distribution of current and potential bank-based retirement savings 
accounts. In my view, the best argument in favor of expanded insurance 
coverage for retirement savings is based on the notion that substantial 
numbers of unsophisticated and lower-income savers need this 
protection. As indicated above, relatively few such individuals appear 
to have retirement accounts at or in excess of current FDIC insurance 
levels. According to the testimony of industry representatives, some 
bankers believe that there are substantial amounts of retirement 
accounts in excess of $250,000 that will be attracted into depository 
institutions if insurance coverage increases. Most likely, however, 
these funds are from wealthy and more sophisticated individuals. 
Providing additional FDIC insurance coverage to such individuals does 
not advance the interests of low- and middle-income savers, although it 
might improve the competitive posture of certain depository 
institutions.
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    Thank you very much.
                               ----------
                 PREPARED STATEMENT OF GLENN C. DAHLKE
                   President, Dahlke Financial Group
                            November 1, 2001
Introduction
    Mr. Chairman, I appreciate the opportunity to testify today before 
the Senate Banking Subcommittee on Financial Institutions on the topic 
of Federal deposit insurance coverage of retirement accounts. I am 
Glenn Dahlke, President of the Dahlke Financial Group of Glastonbury, 
Connecticut, a family-owned sales and asset management company.
    Mr. Chairman, it is my strong recommendation that Congress should 
substantially increase the value of Federal deposit insurance for 
retirement accounts. Congress should recognize that the cost of 
retirement has skyrocketed since 1978, when retirement coverage was 
last increased.
    In addition, those Americans who take responsibility for remaining 
self-sufficient in their later years should not be forced to jump 
through complicated and potentially costly hoops to protect those 
savings. I urge Congress to increase deposit insurance coverage for 
retirement savings well in excess of the outdated $100,000 limit, and 
to ensure that coverage keeps pace with the true costs of retirement.
    This afternoon, I want to make four points:
    First, without other assets, $100,000 in retirement savings is 
simply insufficient to support most retired individuals, especially 
given increased life expectancy and dramatically rising medical costs.
    Second, it is rational for retirees who have low-risk tolerance and 
need a predictable income stream to invest savings in excess of 
$100,000 primarily or exclusively in insured deposits.
    Third, many retirees who invest in insured deposits are ill-
equipped to cope with Federal distribution requirements that are made 
vastly more complicated when accounts must be spread across 
institutions.
    And finally, I believe it is inappropriate to require retirees to 
choose between the safety of their life savings and banking with 
someone they trust.
Background
Getting Above $100,000
    Happily, America's ``retirement years'' are lengthening: we are 
living longer, and many Americans are retiring early to make way for a 
new generation of workers in a low-unemployment environment. As a 
result, however, careful planning is required to ensure self-
sufficiency during this period, although the amount needed to sustain a 
comfortable lifestyle must obviously be determined on a case-by-case 
basis.
    Over the years, Congress has created important tax incentives to 
encourage 
people to set aside money for retirement, recognizing the benefits to 
our society of individual self-sufficiency.
    Several different pension and benefit plans exist, the better known 
of which include Individual Retirement Accounts (``IRA's''), 401(k) 
plans, and Keogh plans, among others. Under these plans, individuals 
may invest pretax dollars, the earnings on which are tax-deferred until 
the funds are eventually withdrawn, in many cases subject to a lower 
tax bracket than when the money was earned.
    In a resounding reendorsement of the principle that Americans 
should save for retirement and a recognition that retirement costs have 
increased dramatically, Congress earlier this year significantly 
increased the amount that individuals may save through tax-deferred 
programs such as IRA's. Over the course of the next several years, 
annual contribution limits will increase from $2,000 to $5,000 for IRA 
and Keogh accounts, with subsequent indexing for inflation, and $10,500 
to $15,000 for 401(k) plans. Other defined benefit and contribution 
programs are based on a percentage of income, and permitted deposits 
often far exceed $5,000 annually.
    Even without taking into consideration these higher contribution 
limits, a middle class individual who works for 20 or 30 years and 
saves in a disciplined manner will easily amass over $100,000 in 
savings. According to the FDIC, a worker who sets aside $2,000 annually 
at a tax-deferred 6 percent rate of return will reach $100,000 in 
savings after 20 years. For those who set aside higher annual amounts 
of retirement money through 401(k) plans and roll those funds into an 
IRA, the time period required to exceed $100,000 in savings is 
drastically reduced.
    For purposes of this testimony, I focus primarily on IRA's, because 
that would be the most pervasive vehicle through which an individual 
would likely place retirement money into an insured depository.
Retirement Savings Vehicles
    It is useful to review the fundamental rules governing tax-
preferred IRA's. All single workers not covered by an employer-
sponsored pension plan or earning less than $25,000 ($40,000 for 
married filing jointly) are eligible to contribute to an IRA and deduct 
the contribution amount from taxable income. Workers earning above the 
$25,000/$40,000 limits are subject to a phase-out of deductibility.
    Below the income thresholds, workers may contribute up to $2,000 
per person or $4,000 per couple (or up to 100 percent of compensation, 
if less than $2,000) to an IRA and deduct that amount from taxable 
income. Those limits are set to rise to $3,000/$6,000 next year, 
$4,000/$8,000 in 2005, and $5,000/$10,000 in 2008, with indexation 
thereafter. Individuals over 50 years of age may take advantage of 
special ``catch-up'' provisions.
    Above income thresholds, individuals may contribute the same amount 
to IRA's; however, they may not deduct the deposits from taxable 
income. This may never-
theless be desirable because earnings on IRA's are not taxed until that 
money is 
eventually withdrawn, and accordingly savings compound more quickly 
than many investments.
    IRA's come with significant restrictions to ensure that these tax-
preferred vehicles are used to support people in their later years. 
Withdrawals--for any reason except disability or medical costs--from 
IRA's before an individual reaches the age of 59\1/2\, with some narrow 
exceptions, are charged an excise tax of 10 percent on the amount 
withdrawn, which is also subject to income tax.
    Once an individual reaches 70\1/2\ years of age, certain prescribed 
amounts, based on longevity tables, must be withdrawn from an IRA. 
Failure to withdraw the prescribed amount results in a stiff penalty of 
50 percent of the amount of the difference that should have been 
withdrawn, which is also subject to income tax. For example, assume a 
75 year old woman has $100,000 invested in an IRA, which is subject to 
a 5 percent withdrawal rate in 2002. To avoid a penalty, she is 
obligated to distribute $5,000 out of her account in 2002. However, 
assume she distributes only $3,000. She owes a penalty of $1,000, for 
example, 50 percent of $2,000. In 
addition, she is taxed on the full $5,000 of ordinary income.
    It is important to note that middle class retirees without the 
benefit of professional financial advice are far more likely to fall 
subject to these penalties. In 
addition, while it may not be politically correct to point this out, in 
many cases the surviving spouse of a traditional one-worker family may 
lack an established understanding of the family's finances, further 
increasing the risk of incurring penalties.
    As the previous example illustrates, it is important to understand 
that IRA holders are required to reduce the size of their accounts 
gradually, based on established longevity tables. IRA's can be 
understood to take the shape of a bell curve. In the early years, 
individuals may contribute to, but not withdraw from, a retirement 
account, resulting in a build-up of principal. Between the ages of 55 
and 70\1/2\, individuals may, but are not required to, withdraw savings 
as needed. After 70\1/2\, IRA's will eventually decline (though they 
may stand still during years where distribution rates may equal rates 
of return on investment).
Arguments
 $100,000 in retirement savings is simply insufficient to 
    support most retired individuals, especially given increased life 
    expectancy and skyrocketing medical costs.

    In some important respects, $100,000 is not worth $100,000 in the 
retirement context. That is, where that money serves as the major 
source of income other than Social Security, $100,000 may be barely 
sufficient to cover basic living expenses.
    For example, assume a 72 year old widow has $100,000 plus a $10,000 
annual Social Security pension on which to support herself. From the 
$100,000, assuming a 5 percent distribution rate (see discussion 
below), she will receive $5,000, which is taxable as ordinary income, 
along with the $10,000 in Social Security benefits, which may or may 
not be taxed depending on her circumstances. In other words, this widow 
has $15,000 annual income on which to support herself.
    Mindful of the fact that many parts of America have lower cost of 
living than Connecticut, I am nevertheless prepared to declare to this 
Subcommittee that this woman is unlikely to enjoy a lavish lifestyle, 
and in fact could not absorb predictable financial shocks that might 
include anything from a new roof to an uninsured medical procedure.
    This is a critical point, because many opponents of higher coverage 
limits often argue that anyone with $100,000 is well-off and can do 
without special favors. On the contrary, Mr. Chairman, Congress should 
ensure that those workers who save in a disciplined and responsible 
manner for their retirement have a secure investment option for an 
amount adequate to support themselves. It is fair, and frankly, it is 
good public policy.

 It is rational for certain retirees with savings in excess of 
    $100,000 to invest primarily or exclusively in insured deposits.

    Assuming an individual has over $100,000 in retirement savings 
invested through an IRA, the question becomes why would he or she 
choose to keep that money in a bank. During my career as a financial 
adviser, I have observed three principal factors at play for clients 
who choose to keep their money in a local insured depository: risk 
tolerance, need for predictability and local relationships.
Risk Tolerance
    When I advise clients on investment strategies, the most important 
piece of information I gather relates to that individual's risk 
tolerance, or willingness to put his or her savings at risk in exchange 
for a possible higher rate of return.
    Risk tolerance does not necessarily correlate to an individual's 
wealth cushion, nor to his or her future income needs. As a general 
matter, however, we expect risk tolerance to decline with age. In some 
sense, risk tolerance is a function of how much a person wants to 
increase his or her wealth, in addition to how much that person can 
``afford to lose.''
    For example, Charlie with $2 million may have a strong desire to 
increase that base to $10 million because of his lifestyle aspirations, 
and may be willing to risk losing some of his $2 million for the chance 
of a higher return. At the same time, Addie with $200 million may 
decide to pursue a no-risk investment strategy because she would have 
no use for more money, even though she could certainly afford to take a 
few high-risk bets without much risk to her future security. And Carol 
with $200,000 may be perfectly happy living on $12,000 a year, and be 
loath to risk that $200,000 for higher returns because she is content 
with the lifestyle her savings can afford. Bags of gold come in 
different sizes, and each individual decides what level of savings is 
enough for a comfortable retirement.
    I have found, however, that individuals with a smaller wealth 
cushion tend to have a lower risk tolerance with respect to a wealth 
accumulation that is just enough to meet their future needs with little 
room for loss. In most cases, a con-
servative investment strategy where there is sufficient, but not ample, 
savings is 
a wise course, as recent stock market volatility has indicated. In 
fact, the current 
environment underscores the importance of increasing deposit insurance 
coverage of retirement accounts, especially as the risk of bank 
failures increases with economic softening.
Predictability
    Individuals with a smaller wealth cushion may also prefer 
investments that have predictability with respect to providing a fixed 
income. While there are certainly secure investments, such as Treasury 
securities, that provide safety for the principal of the investment, 
these instruments are interest rate sensitive, and cannot be relied 
upon to provide a fixed monthly income. I advise clients who want or 
require predictability in their monthly income to invest in 
certificates of deposit, because these are the only investment that, 
assuming they are fully insured, can provide complete security of both 
the full principal, as well as a fixed-income stream.
Local Relationships
    Clients who express a desire to invest significant resources in an 
insured depository often, but not always, want to keep their money with 
people they know and trust. Especially in small towns, personal 
relationships develop between bankers and clients, and while this may 
seem anachronistic to urban dwellers, local relationships remain an 
important feature of the modern banking system.

 Many retirees who invest in insured deposits are ill-equipped 
    to cope with Federal distribution requirements that are made vastly 
    more complicated when accounts must be spread across institutions.

    Higher coverage levels for retirement accounts would significantly 
reduce the risk that a retiree with over $100,000 in insured deposits 
would become subject to the 50 percent penalty for underdistribution of 
IRA savings.
    Because distribution requirements are based on an individual's 
aggregate IRA savings, diversification of IRA money across several 
accounts increases the risk of under-distribution, especially as an 
individual grows older and perhaps loses some ability to manage complex 
financial situations. This risk is enhanced when an individual needs to 
spread money across several financial institutions, which is the 
practical effect of the current $100,000 limit.
    Because of ownership restrictions in the Internal Revenue Code, IRA 
holders 
typically need to spread accounts across different institutions to 
obtain coverage 
for more than $100,000. Unlike general accounts, IRA holders cannot 
benefit from 
higher coverage levels from multiple accounts at the same institution 
because of ownership restrictions.
    For example, whereas an individual with $200,000 in nonretirement 
funds could secure full insurance coverage in a single institution by 
opening two accounts in different legal capacities, the same owner of a 
$200,000 IRA could not do so. Rather, the money would need to be spread 
over two separate institutions to maintain coverage. This would also be 
the case for a widow or widower whose spouse maintained an IRA at the 
same institution as the surviving spouse. Once the 6 month grace period 
had passed, the surviving spouse would need to transfer the account to 
another institution or risk holding uninsured deposits.

 It is inappropriate to require retirees to choose between the 
    safety of their life savings and banking with someone they trust.

    For many retirees who prefer insured deposits out of loyalty to a 
particular institution, this solution is unsatisfactory, and they are 
forced to choose between maintaining insured deposits and banking with 
someone they trust. For other retirees who live in small towns, there 
may in fact be only one local bank, and we cannot assume that they have 
access to a car or to the Internet.
    And even when remote banking may be an option for rural Americans 
who live in a one-bank town, it is my strong sense that:

 On-line banking is unrealistic for Americans who are not 
    served by broadband 
    capacity;
 Many elderly Americans are not comfortable with electronic 
    commerce and are less likely to take advantage of remote banking 
    facilities even if they have access; and
 Elderly individuals with a strong personal connection to their 
    local bank are far more likely to risk uninsured deposits than to 
    trust an unfamiliar institution with their life savings.

    As a general matter, we in the financial planning community 
encourage inves-
tors to diversify their investments to reduce risk to their savings. 
However, in all 
candor, we do not necessarily encourage investors to diversify their 
sources of financial advice.
    But spreading insured deposits across several banks accomplishes no 
risk-spreading for the individual investor other than staying within 
the deposit insurance 
limits. In fact, diversification of assets across multiple institutions 
has serious 
drawbacks, not least of which is a confusing array of financial 
statements, which can lead to mistakes in planning, investing and tax 
reporting.
    From a systemic point of view, as Chairman Greenspan has noted 
wisely, the deposit insurance coverage limit is designed to accomplish 
exactly this objective of encouraging individuals to spread money 
across banks to reduce the Government's risk in any given institutional 
failure.
    In the retirement context, however, it is my strong belief that 
this is a bad tradeoff. The benefits from maintaining an inadequate 
level of insurance for retirement savings pale in comparison to the 
potential costs to retirees forced to maintain multiple accounts.
    For all these reasons, Mr. Chairman, I strongly urge Congress to 
increase coverage levels that have not been touched since 1978, and to 
take measures to ensure that these limits keep pace with the true costs 
of retirement.
    I thank you for this opportunity to present my views to the 
Subcommittee, and I welcome your questions.
                               ----------
           PREPARED STATEMENT OF AMERICA'S COMMUNITY BANKERS
                            November 1, 2001
    America's Community Bankers (ACB) \1\ is pleased to submit this 
statement on the need to increase Federal deposit insurance coverage 
for retirement accounts. ACB testified on the overall topic of deposit 
insurance reform on August 2, during which we presented the case for 
several urgently needed reforms and recommended a substantial increase 
in coverage for retirement savings. This statement focuses on 
retirement savings coverage.
---------------------------------------------------------------------------
    \1\ ACB represents the Nation's community banks of all charter 
types and sizes. ACB members pursue progressive, entrepreneurial, and 
service-oriented strategies in providing financial services to benefit 
their customers and communities.
---------------------------------------------------------------------------
    Last week, ACB's Chairman, David Bochnowski wrote in the American 
Banker that, ``In uncertain times, one certainty remains: Americans 
must still save for retirement.'' He went on to say:

          The irony is that some Government policies are sadly out of 
        touch with the realities of the market. When retirement savers 
        moved away from equities and toward bank accounts to protect 
        their financial assets, they discovered that deposit insurance 
        coverage for tax-deferred retirement savings had fallen behind 
        the times and behind inflation. It is past time for Congress to 
        correct the imbalance. (full text attached) \2\
---------------------------------------------------------------------------
    \2\ American Banker, October 26, 2001. David Bochnowski is also 
Chairman and Chief Executive Officer of Peoples Bank in Munster, 
Indiana.

    ACB is particularly pleased that FDIC Chairman Donald Powell 
strongly endorsed increased coverage for retirement accounts in his 
first statement on deposit insurance reform. On October 17 before the 
House Subcommittee on Financial Institutions and Consumer Credit, 
---------------------------------------------------------------------------
Chairman Powell made these comments:

          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 
        amount.
          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 U.S. Government to offer ample 
        protection to facilitate saving through vehicles that will 
        redeploy funds into the economy. In my view, we must do 
        whatever we can to provide for ongoing productive investment in 
        our economy and solid, sustainable growth. Higher deposit 
        insurance protection for long-term savings accounts could help.
          There is some precedent for providing such accounts with 
        special insurance treatment. In 1978, Congress raised coverage 
        for IRA's and Keogh's to $100,000, while leaving basic coverage 
        for other deposits at $40,000.
          The $220 billion of IRA and Keogh deposits currently at banks 
        and thrifts is not large compared to the volume of overall 
        deposits. Thus, if the coverage limit were raised for IRA and 
        Keogh deposits, the initial impact on the fund reserve ratio 
        would not be dramatic. The total volume of IRA's and Keogh's in 
        the economy, more than $2.5 trillion, is enormous, and 
        estimating the influx of retirement account deposits as a 
        result of higher-
        coverage is subject to some of the same uncertainties that 
        apply to deposits in general. The FDIC is prepared to 
        investigate the implications of higher coverage for these 
        accounts and provide this information to the Congress and the 
        public. We would also note that a phasing-in of higher coverage 
        limits for retirement account deposits could allow for some 
        measure of control over the impact on the fund reserve ratio. I 
        urge the Congress to give serious consideration to raising the 
        insurance limit on retirement accounts.

    ACB agrees with Chairman Powell that Congress should focus on 
increasing protection for retirement savings. This is needed to provide 
adequate coverage for the variety of tax-advantaged savings accounts 
that have grown substantially over the years, as well as prepare for 
any Social Security reform, including self-directed accounts should 
Congress adopt that concept.
    ACB agrees with Chairman Powell that retirement coverage should be 
increased to an amount substantially above the general coverage level. 
As he pointed out, this is not a new concept; in 1978 Congress provided 
for $100,000 coverage for retirement savings accounts, two and one-half 
times the then-current level for regular savings. Higher retirement 
account coverage would provide a stable funding source for community 
lending and is extremely important to retirees and those nearing 
retirement.
    Additional retirement account coverage would help implement an 
important national policy. Congress has just provided substantially 
enhanced tax incentives to encourage individuals to accumulate 
retirement savings. These individual savings are often replacing 
resources that employers previously provided through defined-benefit 
pension plans. This shift in retirement funding has increased the 
burden on individuals to manage their own assets. As individuals 
respond to tax incentives, their retirement assets often exceed by 
substantial amounts the current $100,000 coverage limit. Since planners 
generally recommend that individuals shift these 
savings into more secure and stable investments as they approach 
retirement, a substantial increase in deposit insurance coverage for 
retirement savings would be particularly helpful. These plans could be 
easily defined by requiring that they meet the standards of the 
Internal Revenue Code. The increased coverage would also be useful if 
Congress adopts some version of private accounts under the Social 
Security system.
    As long as the fund is above its statutory minimum of 1.25 percent 
of insured deposits, an increase in coverage for retirement savings 
should not require an ad-
ditional minimal premium. Chairman Powell noted that these accounts 
currently 
represent a comparatively modest amount as compared to total deposits. 
We agree with him that a phase in of the increase coverage might be 
appropriate, since there is a substantial amount of retirement money 
outside of the banking system. That would mitigate any adverse effect 
on the FDIC's reserve ratio.
    Notably, Chairman Powell did not recommend an increase in general 
coverage levels. Instead, he recommended that Congress provide for 
indexing coverage from the current $100,000 level. We agree with 
Chairman Powell that, ``Protecting such an important program from the 
effects of inflation strikes me as plain common sense.'' He went on to 
say that, ``The FDIC is not recommending that the safety net be 
increased. It is simply recommending that the safety net not be scaled 
back inadvertently because of inflation.'' Depository institutions and 
the economy have adjusted to the current level of coverage. Indexing 
would effectively maintain that level without the need for more 
Congressional action. Like the increase for retirement savings, 
indexing general coverage from today's levels should not lead to the 
imposition of premiums so long as the fund remains above the 1.25 
percent level.
Conclusion
    ACB appreciates this opportunity to present our views on proposals 
to increase deposit insurance coverage for retirement savings. This 
would be a welcome addition to a deposit insurance reform proposal that 
would merge the deposit insurance funds and give the FDIC the 
flexibility it needs to deal with the strains imposed by extraordinary 
growth in insured deposits at a few institutions. We look forward to 
working with the Congress on these important issues.


       RESPONSE TO A WRITTEN QUESTION OF SENATOR MILLER 
                    FROM L. WILLIAM SEIDMAN

Q.1. Mr. Seidman, yesterday in the hearing you said you agreed 
with raising the deposit insurance coverage level to $200,000 
and that doing so would cover retirement accounts. You also 
said that a study undertaken when you were Chairman of the FDIC 
showed the increased cost of covering $200,000 versus $100,000 
per account in a failure was minimal. So, you are willing to 
increase the moral hazard to the Government/taxpayer of 
covering $200,000 per account when an institution fails?
A.1. Yes, weighing the moral hazard risk against the benefits 
to the small community banks and its depositors, I believe the 
benefits outweigh the hazard.






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