[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
H.R. 1185--THE FINANCIAL DEPOSIT
INSURANCE REFORM ACT OF 2005
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
MARCH 17, 2005
__________
Printed for the use of the Committee on Financial Services
Serial No. 109-10
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24-397 WASHINGTON : 2005
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North HAROLD E. FORD, Jr., Tennessee
Carolina RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut WM. LACY CLAY, Missouri
VITO FOSSELLA, New York STEVE ISRAEL, New York
GARY G. MILLER, California CAROLYN McCARTHY, New York
PATRICK J. TIBERI, Ohio JOE BACA, California
MARK R. KENNEDY, Minnesota JIM MATHESON, Utah
TOM FEENEY, Florida STEPHEN F. LYNCH, Massachusetts
JEB HENSARLING, Texas BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina AL GREEN, Texas
KATHERINE HARRIS, Florida EMANUEL CLEAVER, Missouri
RICK RENZI, Arizona MELISSA L. BEAN, Illinois
JIM GERLACH, Pennsylvania DEBBIE WASSERMAN SCHULTZ, Florida
STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin,
RANDY NEUGEBAUER, Texas
TOM PRICE, Georgia BERNARD SANDERS, Vermont
MICHAEL G. FITZPATRICK,
Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
Robert U. Foster, III, Staff Director
Subcommittee on Financial Institutions and Consumer Credit
SPENCER BACHUS, Alabama, Chairman
WALTER B. JONES, Jr., North BERNARD SANDERS, Vermont
Carolina, Vice Chairman CAROLYN B. MALONEY, New York
RICHARD H. BAKER, Louisiana MELVIN L. WATT, North Carolina
MICHAEL N. CASTLE, Delaware GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
SUE W. KELLY, New York LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas DENNIS MOORE, Kansas
PAUL E. GILLMOR, Ohio PAUL E. KANJORSKI, Pennsylvania
JIM RYUN, Kansas MAXINE WATERS, California
STEVEN C. LaTOURETTE, Ohio DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois JULIA CARSON, Indiana
VITO FOSSELLA, New York HAROLD E. FORD, Jr., Tennessee
GARY G. MILLER, California RUBEN HINOJOSA, Texas
PATRICK J. TIBERI, Ohio JOSEPH CROWLEY, New York
TOM FEENEY, Florida STEVE ISRAEL, New York
JEB HENSARLING, Texas CAROLYN McCARTHY, New York
SCOTT GARRETT, New Jersey JOE BACA, California
GINNY BROWN-WAITE, Florida AL GREEN, Texas
J. GRESHAM BARRETT, South Carolina GWEN MOORE, Wisconsin
RICK RENZI, Arizona WM. LACY CLAY, Missouri
STEVAN PEARCE, New Mexico JIM MATHESON, Utah
RANDY NEUGEBAUER, Texas BARNEY FRANK, Massachusetts
TOM PRICE, Georgia
PATRICK T. McHENRY, North Carolina
MICHAEL G. OXLEY, Ohio
C O N T E N T S
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Page
Hearing held on:
March 17, 2005............................................... 1
Appendix:
March 17, 2005............................................... 25
WITNESS
Thursday, March 17, 2005
Powell, Hon. Donald E., Chairman, Federal Deposit Insurance
Corporation.................................................... 6
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 26
Bachus, Hon. Spencer......................................... 28
Gillmor, Hon. Paul E......................................... 32
Hinojosa, Hon. Ruben......................................... 34
Royce, Hon. Edward R......................................... 36
Powell, Hon. Donald E........................................ 38
Additional Material Submitted for the Record
Powell, Hon. Donald E.:
Written response to questions from Hon. Gregory W. Meeks..... 48
H.R. 1185--THE FINANCIAL DEPOSIT
INSURANCE REFORM ACT OF 2005
----------
Thursday, March 17, 2005
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 9:34 a.m., in
Room 2128, Rayburn House Office Building, Hon. Spencer Bachus
[chairman of the subcommittee] presiding.
Present: Representatives Bachus, Royce, Lucas, Kelly,
Tiberi, Hensarling, Pearce, Neugebauer, Price, McHenry,
Sanders, Meeks, Gutierrez, Moore of Kansas, Hooley, Hinojosa,
Baca, Green, Moore of Wisconsin, and Clay.
Mr. Bachus. [Presiding.] Good morning. The subcommittee
will come to order.
Today's hearing is on H.R. 1185, the Federal Deposit
Insurance Reform Act of 2005. I want to first welcome FDIC
Chairman Don Powell and express my appreciation for all the
hard work that you have done on this issue and for your
leadership at the FDIC.
You have done an incredibly superb job there. You are a
credit to the administration and just one more example of the
good people that George W. Bush, our President, has placed in
the administration. I always enjoy listening to your testimony
and look forward to it today.
I normally do not have a long opening statement, but since
there are so few of us, I am going to put some things in the
record. Deposit insurance reform has been thoroughly discussed
and debated over several years.
During both the 107th Congress and the 108th Congress, we
have introduced comprehensive deposit insurance reform
legislation. The legislation was a byproduct of recommendations
made by the FDIC in early 2001, a series of hearings held in
the subcommittee on proposed reform to the Federal deposit
insurance system, and broad-based bipartisan cooperation.
H.R. 3717 passed the House in the 107th Congress by a vote
of 408 to 18. H.R. 522 passed the House in the 108th Congress
by a vote of 411 to 11. Congresswoman Hooley and I introduced
this same legislation last week with Chairman Oxley and Ranking
Member Frank. There are currently 32 sponsors. I look forward
to working on this legislation in the same cooperative vein as
last year with Ranking Member Sanders and Mr. Frank.
Federal deposit insurance has been a hallmark of our
nation's banking system for 70 years. The reforms made by this
legislation will ensure that the system that has served
American savers and depositors so well will continue to do so
for future generations.
What does the legislation do?
First, it merges the separate insurance funds that
currently apply to deposits held by banks on the one hand and
savings associations on the other, creating a stronger and more
stable fund that will benefit banks and thrifts alike.
Second, the bill makes a number of changes designed to
address the pro-cyclical bias of the current system, which
results in sharply higher premiums being assessed at down-
points in the business cycle when banks can least afford to pay
them and when funds are most needed for lending to spur
economic growth. By giving the FDIC greater discretion to
manage the insurance funds, based on industry conditions and
economic trends, the legislation will ease volatility in the
banking system and facilitate recovery from economic downturns.
Third, the legislation includes modest increases in the
amount of coverage available to depositors. Like other
government programs that form part of the economic safety net
for American families, deposit insurance should be periodically
adjusted for inflation to ensure that its value does not erode
over time. The system has gone 25 years without any such
adjustment, the longest period in its history. The modest
increases that are provided in our bill are critical if deposit
insurance is to remain relevant. The alternative is to simply
let deposit insurance wither on the vine, which is an
unacceptable outcome for millions of Americans who depend upon
it to protect their savings.
Much has been made of the fact that the Treasury Department
and Federal Reserve oppose increasing deposit insurance
coverage levels. What gets lost in the single-minded focus on
coverage, however, is that the Treasury, the Fed and every
other Federal banking agency broadly support all of the other
key components of the reform package, including merging the
funds, eliminating the current system's bias, and addressing
the so-called ``free rider'' problem by requiring that large
brokerage firms that sweep customer funds from uninsured
accounts into insured deposits will have to start paying their
fair share of premiums.
I remain hopeful that we can work with the Senate and the
administration to resolve the coverage issue and get deposit
insurance reform passed this year. All of us have heard from
community bankers in our districts about the challenges they
face daily in competing for deposits with large money-center
banks that are perceived by the market rightly or wrongly as
being too big to fail.
By strengthening the deposit insurance system, H.R. 1185
will help small neighborhood-based financial institutions
across the country, and particularly in rural America, continue
to play an important role in financial economic development.
The deposits that community banks are able to attract
through the Federal deposit insurance guarantee are cycled back
into those local communities in the form of consumer and small
business loans, community development projects and home
mortgages. If this source of funds dries up, it would have
devastating effects for the economic vitality of our smaller
cities and towns.
Put simply, H.R. 1185 will promote the stability and
soundness of the banking system. Moreover, it will provide
assurance to working families, retirees and others who place
their hard-earned savings in U.S. banks, thrifts and credit
unions, that their FDIC-insured deposits are safe and secure. A
pledge long made should not be reduced by inflation.
In closing, I want to thank Chairman Oxley, Mr. Sanders and
Mr. Frank for working with me to develop this legislation, and
thank all 32 cosponsors for making deposit insurance reform one
of the committee's top legislative priorities this year.
I look forward to working with Chairman Oxley, with
Congresswoman Hooley, Ranking Members Frank and Sanders and
other members of the committee on this important issue.
The Chair now recognizes the Ranking Member of the
subcommittee, Mr. Sanders, for his opening statement.
Mr. Sanders. Thank you very much, Mr. Chairman.
Mr. Powell, thank you very much for being with us today. I
am going to have to apologize early. I have not figured out how
to be at two hearings at the same time, so I am going to have
to leave earlier than I would have wanted.
Mr. Chairman, since this is the first hearing in our
subcommittee during the 109th Congress, let me begin by
expressing the hope that we can work together in a nonpartisan
way to address some of the important issues that fall within
our subcommittee's jurisdiction.
For example, I am proud to be an original cosponsor of your
legislation to protect credit unions. That is an important
issue. America's credit unions are one of the most vital, one
of the most democratic institutions in America, and it is
important that we do everything that we can to protect them.
Mr. Chairman, I also look forward to working with you to
provide financial incentives to expand employee ownership
throughout the country. I hope Mr. Powell takes some note of
that as well.
I thought, in fact, that one of the more interesting
hearings that we held last year dealt with the possibility of
expanding employee ownership in this country. I look forward to
working with you on the issue.
The fact is, there are already in Vermont and around this
country many small-and medium-size businesses that are owned by
the workers themselves, and those companies are not about to
move to China or to Mexico. They are going to stay in their
communities and do their best to provide good-paying jobs to
the people in those communities. I hope that we can provide
financial incentives to those ESOP efforts that are under way.
In addition, Mr. Chairman, I was pleased that we could work
together in the last Congress to end what the banks refer to as
``universal default'' or what I refer to as the credit card
bait-and-switch issue. I do not know how much familiarity Mr.
Powell has with that issue, but it is to my mind a growing
problem where.
And I am sure you have, Mr. Powell, received offers from
credit card companies guaranteeing you zero interest, but if
you read the fine print you find out that you could end up
paying 28 percent or 30 percent interest. This is an alarming
problem that is impacting millions of Americans.
I hope, Mr. Chairman, that in a nonpartisan way that we can
move forward together. I do not think you want to see the
American people ripped off, and you know that people are paying
the amount of their loan over many times just in outrageously
high interest rates. I hope that we could work together on
that.
So there are a lot of important issues facing us, and I
think the American people are looking forward to this committee
standing up for consumers. It is no great secret that large
banks and credit card companies exert an enormous amount of
influence over this Congress. I hope that this committee will
be representing consumers.
I thank you very much, Mr. Chairman.
Mr. Bachus. I thank the Ranking Member. As you know, you
and I worked as partners together to try to end the more
egregious practice of bait and switch. I think it is something
that unites Republicans and Democrats, poor, middle-class and
affluent citizens. It is something that enrages us all and is,
I believe, something that is a practice that is due more
regulation. Thank you.
Are there other members?
I would like to recognize Ms. Hooley as the sponsor of the
bill.
Ms. Hooley. Thank you, Mr. Chair, for calling this hearing
today. I am happy to be working with you, Chairman Oxley and
Ranking Member Frank in introducing the Federal Deposit
Insurance Reform Act of 2005.
This is an effort that I truly believe continues the
notable bipartisan working style of this committee and has
allowed the attraction of a broad array of cosponsors. The
legislation will give Americans an even more stable and secure
insurance system for deposits in their banks, thrifts and
credit unions.
These needed reforms will bring the deposit insurance
system into the 21st century by enhancing the value of our
insured deposits, improving retirement security for all
Americans, and ensuring that the value, cost and benefit of
deposit insurance is shared equally.
I look forward to hearing the views that the panel before
us has on this legislation. I also look forward to hearing your
views on other pressing issues facing our financial
institutions.
I thank the panel for being here, and I look forward to
your testimony.
Thank you.
Mr. Bachus. Thank you.
And now I go to another cosponsor of the bill, Mr. Lucas,
for any comments you have.
Mr. Lucas. I have no statement.
Mr. Bachus. Okay, if not, Mr. Hinojosa? I appreciate your
participation.
Mr. Hinojosa. Chairman Bachus and Ranking Member Sanders, I
want to express my sincere appreciation to both of you for
holding this very important hearing today.
I especially want to thank you, Chairman Bachus, for
introducing H.R. 1185, the ``Deposit Insurance Reform Act of
2005'' that we are considering here today. I look forward to
cosponsoring this legislation every Congress, but I hope that
the winds are with us this time and the bill will finally
become law this year.
As most of us here are aware, the full faith and credit of
the United States stands behind trillions of insured deposits
at banks and savings associations. This insurance guards
depositers' accounts up to $100,000, providing stability to
banks and to the economy since its inception in the 1930s.
From the time I was appointed to this prestigious
committee, we have been examining many proposals for changes to
the Federal deposit insurance system for banks and savings
associations and the share insurance program for credit unions.
Under your guidance, Chairman Bachus, we have considered
legislation with provisions to balance the financial condition
of insured institutions to ensure the financial strength of the
insurance funds, and provide competitive equality among
participating institutions, including Federally insured credit
unions.
In the 108th Congress, this subcommittee reexamined all
these issues. H.R. 522, the Federal Deposit Insurance Reform
Act of 2003, sought to restructure the Federal Deposit
Insurance Corporation, change the FDIC's pricing of insurance,
and increase basic per-account coverage up to $130,000, indexed
to inflation.
It also provided increased insurance coverage of municipal
deposits. H.R. 522 passed this committee with the Oxley-Frank
manager's amendment and passed the House on April 2, 2003, but
the Senate failed to act on that bill, and it died in the 108th
Congress. I was proud to have been a cosponsor of H.R. 522.
While I am pleased to learn that the current Administration
continues to support deposit insurance reform similar to that
proposed in earlier Congresses, I am disheartened by its
continued opposition to raising coverage of accounts to
$130,000. Possibly Mr. Powell can shed light on all this. Our
financial institutions need this increase in coverage,
especially our community banks.
During one of the many hearings on deposit insurance reform
over the years, Chairman Alan Greenspan of the Federal Reserve
contended that there will always be a niche for community
banks, thus negating the need for increased deposit insurance
coverage. I believe that he is mistaken and that our community
banks are currently at a competitive disadvantage.
Consequently, I believe that H.R. 1185 will help create
parity across the financial institutions landscape, and as
stated earlier, hope that this bill will finally become law
this year.
Having said that, Mr. Chairman, I yield back the remainder
of my time.
Mr. Bachus. Thank you.
I have been told that no members of the majority wish to
speak. Is that correct? Is there anyone else that wishes to
make an opening statement, Mr. Clay or Ms. Moore? No, okay.
At this time, if there are no further opening statements,
we will recognize Chairman Powell for his statement.
STATEMENT OF HON. DONALD E. POWELL, CHAIRMAN, FEDERAL DEPOSIT
INSURANCE CORPORATION
Mr. Powell. Thank you, Chairman Bachus, Representative
Sanders and members of the subcommittee. It is a pleasure to
appear before you this morning to discuss deposit insurance
reform.
Deposit insurance reform is the top priority of the FDIC
this year. We appreciate the committee making it an early
priority as well. I would particularly like to thank Chairman
Bachus and the other sponsors of H.R. 1185 for providing
leadership on this issue and introducing deposit insurance
reform legislation early in the 109th Congress.
An effective deposit insurance system contributes to
America's economic and financial stability by protecting
depositors. For more than three generations, our deposit
insurance system has played a key role in maintaining public
confidence and provided a safe place for savings and retirement
funds.
While the current system is not in need of radical
overhaul, flaws in the system could actually prolong an
economic downturn, rather than promote the conditions necessary
for recovery. These flaws can be corrected only by legislation
and the need for that legislation increases with each passing
year.
Ensuring that Americans are able to save for retirement,
education or medical care has always been important. It is
crucial that people continue to feel secure in placing their
savings in accounts at insured depository institutions.
A strong deposit insurance system is crucial to maintaining
the safety of these accounts and deposit insurance reform
legislation as set forth in H.R. 1185 would enable the FDIC to
keep the system strong and viable for generations to come.
Deposit insurance reform is not about increasing assessment
revenue from the industry or relieving the industry of its
obligation to fund the deposit insurance system. Rather, the
goal of reform is to distribute the assessment burden more
evenly over time and more fairly across insured institutions.
This is good for depositors, good for the industry and good for
the overall economy.
Today, I want to emphasize three critical elements of
deposit insurance reform: one, merging the Bank Insurance Fund
and Savings Association Insurance Fund; two, improving the
FDIC's ability to manage the merged fund; and three,
effectively pricing premiums to reflect risk.
First, merging the funds. As most of you know, the banking
and thrift crisis of the last decade left the FDIC
administering two deposit insurance funds, one for bank
deposits and one for thrift deposits. But now 10 years later,
industry trends have left no meaningful distinction between the
two. We should merge the funds into a single deposit insurance
fund that would be stronger and will treat all deposits the
same.
Second, improving the FDIC's ability to manage the merged
fund. The FDIC is prohibited from charging any premiums to most
banks in good economic times. That means that during difficult
economic times, the FDIC is forced by law to levy steep
premiums on the industry. Doing so would further stress our
country's financial institutions at the very time that, as a
matter of economic necessity, we would be asking banks to
strengthen their balance sheets and extend credit.
Third, effectively pricing premiums to reflect risk. Under
current law, safer banks are forced to subsidize riskier banks.
This is unfair. Just as unfair is the fact that new deposits
are able to enter the system in good times without paying for
deposit insurance. Almost 1,100 banks have entered the system
since 1996 without paying any premiums for Federal deposit
insurance.
We have an opportunity, and in my view a responsibility, to
the American people to remedy these problems. The FDIC
recommends the following: eliminating the hard targets and
triggers in the current law; allowing the FDIC to manage the
size of the insurance fund within a range; permitting the FDIC
to charge steady risk-based premiums to allow the insurance
fund to build up in good times and to be drawn down during bad
times; permitting the FDIC to charge all insured institutions
appropriately for risk at all times so that safer banks do not
necessarily subsidize riskier banks.
These methods for pricing and managing financial risk are
best practices in the private sector and we would like to
manage our system much the same way.
Please note that an inability to implement such fundamental
insurance principles is not merely a theoretical problem. The
Pension Benefit Guaranty Corporation, for example, is unable to
properly price its premiums for risk and this inability has
contributed to its current deficit of over $23 billion.
With some flexibility in fund management, we can alleviate
potential problems, while strengthening our ability to deal
with any future crisis.
However, we are not asking for absolute discretion. We
recognize the need for accountability and will work with you to
ensure a system that provides it. The reforms I have just
described are critical to improving the deposit insurance
system.
Another issue that has been the subject of much discussion
is deposit insurance coverage. Some have said that coverage
should be higher, some lower. Our position is simply to
maintain its value through indexing.
Again, we appreciate the committee's leadership on deposit
insurance reform and look forward to working with you to get
this job done this year. I believe that H.R. 1185 is consistent
with the spirit of the FDIC's recommendations. Without a doubt,
it would create a system that is significantly better than the
existing system.
I look forward to your comments and questions.
Thank you.
[The prepared statement of Hon. Donald E. Powell can be
found on page 38 in the appendix.]
Mr. Bachus. Thank you, Chairman.
I first want to say I am pleased to hear you reaffirm in
your testimony the FDIC's support for a provision in this
legislation that provides for indexing coverage levels for
inflation as a way of preserving the value of the coverage for
depositors.
When people argue against indexing, aren't they really
arguing for the elimination over time of deposit insurance,
since over time inflation will completely erode the value of
the coverage?
Mr. Powell. Yes, to some extent I think they are, Chairman
Bachus. As you know, with inflation, the $100,000 has eroded
over the past 25 years.
So our position at the FDIC is simply to address that issue
with indexing. That way, we can put that issue to the side and
the coverage can keep up with inflation.
Mr. Bachus. I appreciate that.
I will not ask you to comment on this, but I have found in
talking to different bankers and members of the public that
sometimes the larger banks, there is a perception that they are
too big to fail and the government will step in and save them,
but some of your community banks and smaller banks I think are
disadvantaged, particularly by not raising coverage. But I am
not going to ask you to jump into that fray.
I will ask you to address something that Mr. Feeney and I
and several other members of the majority, we wrote you, as you
know, supporting the idea of including in any Social Security
reform proposal a so-called ``community bank option,'' where
workers can put a portion of their Social Security monies into
a CD-type product at community banks in addition to stock or
bond index funds.
The community bank option becomes more important as workers
approach or reach retirement age because it protects them
against the effects of a significant market downturn.
This community bank option is very low-risk, FDIC-insured,
and protects the worker's principal.
Is this a concept that you could support?
Mr. Powell. I think obviously most Americans want a choice
in how to invest their retirement funds. That is the reason
that a great majority of Americans put their money in savings
accounts and certificates of deposit in insured institutions,
because they want the diversity that that offers. It is safe,
as you indicated. It is insured by the full faith and credit of
the United States.
Plus in many economic cycles, the interest rate is not bad.
So you have a fixed-income option through the offering of
certificates of deposit.
Mr. Bachus. I, for one, have supported the President's call
for personal retirement accounts because the rate of return of
Social Security has been less than the inflation rate, where if
we gave Americans the option we give federal employees to
invest in the thrift savings account, the worst we would have
done with federal employees would have been 4.8 percent, which
would have been a rate of return of three times what Social
Security had. And the best we would have done is 11 percent.
So all of us are somewhere between 4.8 percent and 11
percent, all federal employees. I just wish that my mother's
Social Security investment had had that rate of return.
As the President said, Social Security is a key component
of our retirement security system and something that he wants
to preserve and make better. I believe that this community bank
option, as well as something like all federal employees have.
In your home state of Texas, many counties have turned to
this system and none of them have failed. They have all yielded
a lot of return. We do not hear any of the horror stories that
are really associated with people misunderstanding the
President's proposal.
We go in order that the members appeared. Ms. Hooley is
next.
Actually, Ms. Moore, you will be after Ms. Hooley on the
Republican side, then Mr. Clay, Mr. Moore and Mr. Meeks and Mr.
Gutierrez.
On our side, Mr. Lucas is no longer here. It will be Mr.
Pearce, Mr. Hinojosa, Mr. Neugebauer, Mr. McHenry and Mr.
Royce.
So at this time, I will recognize Ms. Hooley.
Ms. Hooley. Thank you, Mr. Chair.
Mr. Powell, thank you very much.
I was meeting with some of the community bankers in my
state in Oregon, and asked them what is it that you would like
to see changed if you had the ability to do that.
One of the more prevalent sentiments I heard, there seems
to be an overabundance of regulators, agencies, rules, and red
tape requirements for community banks, both at a State level
and a Federal level. We know some of those regulations are
important so that you have a system that works and people have
confidence in that system.
But they said, would you go back and explore ideas for
simplifying the financial regulatory system. I think the
Federal Deposit Insurance Reform Act takes a small step in
doing that by merging the insurance funds.
I was wondering, do you have any other suggestions for this
committee about what we could do? Are there some things out
there that make sense and still deal with the safety and
soundness and making sure that people have confidence in a
system that works?
Mr. Powell. There is an ongoing effort led by Vice Chairman
John Reich of the FDIC, together with all of the other banking
regulators, to address this specific issue that you just
mentioned, reg relief, burden relief. It is a constant cry from
the industry that the burdens which they are under in order to
conduct their business is in fact perhaps is number one or
number two on their agenda.
That effort has been going on for about 6 months, where
there has been lots of energy and lots of experience directed
toward that effort. Vice Chairman Reich has reached out to all
constituents, to the industry, to consumer groups and to
Members of Congress. He is in the final stages of preparing a
recommendation to Congress as it relates to specific regulatory
relief.
Without getting into any of those issues, I can assure you
that the recommendations will be given to this committee and to
a committee in the Senate shortly, and ask that Congress act
upon those recommendations.
Ms. Hooley. Thank you very much. I appreciate that you are
doing that.
Again, we all know there has to be a certain amount of
regulation or we do not have a system that works. And yet, what
are those things that sort of go over the edge that are not
critical to having that confidence in safety and soundness in
the system.
Mr. Powell. I appreciate that. That is the reason his
outreach has been to all Americans.
Ms. Hooley. All the regulators.
Mr. Powell. It has been to consumer groups. It has been to
individuals and to the banking industry.
Ms. Hooley. I will look forward to seeing that report and
having it come before our committee.
Thank you.
Mr. Bachus. Thank you.
Mr. Pearce?
Mr. Pearce. Thank you, Mr. Chairman.
I really appreciate your testimony. I appreciate what you
are trying to do. It makes pretty good common sense.
As I take a look at your testimony on page four, you make
the comment that in 93 percent of the institutions that are
about equal in their capitalization that there are identifiable
differences in the risk.
Can you kind of go through some of those things that would
give us numerically an equivalency, but would create
significant differences in risk?
Mr. Powell. Ninety-three percent of the institutions in
America today do not pay any premiums.
As with any insurance company, as we all know, risk is not
all the same. An institution that may be rated a two or a one,
they pose different types of risk. Maybe their concentration
issue might be different. Their asset structure might be
different. Their liability structure might be different. Their
growth rate might be different. Management might be different.
Capital might be different.
There are lots of areas that we would look at when
determining what the premiums should be. There would be some
subjective, obviously, and there will be objective data in
there, but we are committed to three areas.
We are committed to making sure that it is fair,
transparent, and we are committed also to making sure that the
industry has the necessary feedback when we will be determining
what the risks should be and how we would approach that risk as
it relates to the premiums that they would pay. We would act
not unlike an insurance company.
Mr. Pearce. Again, I am just not so familiar with the exact
structure, but what opportunities do banks have if we give you
this latitude? And it looks to me like we should. But what
responses can banks make if your actions do not seem so
transparent or if they do not seem so fair?
Because I think you and your constituents right now in the
department would do well, but it is the next group I am worried
about.
Mr. Powell. I think, first of all, they need to be engaged
in this process from the very beginning. We seek and covet
their input.
Second, if for some reason we are irresponsible in the way
we assess these premiums, I think they can do two or three
things. First of all, they can contact the FDIC, obviously, and
we are going to listen. The folks at the FDIC will listen to
that through their trade associations, through their elected
officials.
I would expect them to contact members of this committee
and members of their local congressional district, trade
associations. If we are doing that, I think there would be an
outcry.
Mr. Pearce. I appreciate that.
You recommend later in your presentation that a broader
base-point range would be desirable for you to have a little
more flexibility. What range are you suggesting?
Mr. Powell. My preference would be 1 to 1.5, with again
some accountability, some reporting requirements back to
whomever we should be reporting to.
The more flexibility we can have in managing that fund, I
think we can better serve the industry during downtimes as well
as good times.
Mr. Pearce. The scoring of the entire proposal is somewhat
different this time that it was last time. I was not around for
that one, but do you have an opinion on the scoring of this
bill? They have attached quite a cost to it.
Mr. Powell. Our objective is for it to be revenue-neutral.
I think that scoring obviously has some assumptions based upon
some future predictability, but our desire is that it be
revenue-neutral.
Mr. Pearce. On the pricing differential for large banks,
again I do not know exactly where in here, but you make a
comment that we cannot necessarily just price on size alone,
but you argue in your presentation that we do need to consider
that.
Tell me a little bit more about that particular aspect.
Mr. Powell. The most important thing is, as I mentioned
earlier, we want it to be fair with no discrimination against
large institutions or small institutions.
Having said that, the complexity of a large institution,
depending upon what that institution may or may not be doing,
poses certain risk. We would assess that risk based upon what
we would find in their balance sheet, income statement,
management and things of that nature.
Mr. Pearce. Thank you, Mr. Powell.
Thank you, Mr. Chairman.
Mr. Bachus. Thank you.
Ms. Moore?
Ms. Moore of Wisconsin. Thank you, Mr. Chairman.
I am a brand new member of Congress and a brand new member
of this committee. So I guess just by way of education for me,
I would like some clarification about your belief that we need
to do this merger in order to, I guess I am looking on page
three, that it would eliminate the premium disparity between
the BIF and the SAIF.
I am remembering from ancient history the collapse of the
savings and loan industry. I am wondering right now if there
are premium disparities between those folks who have not paid
any premiums; between the thrift institutions and the banks.
In other words, is this merger going to cause one industry
to subsidize another?
Mr. Powell. No, ma'am.
Ms. Moore of Wisconsin. And that is because?
Mr. Powell. That is because they would be treated equally.
I think the testimony says the ``possibility'' of premium
disparity. I do not think if the funds in fact are merged, that
there will be any disparity between thrifts and the banks.
Ms. Moore of Wisconsin. Okay. What is the reserve ratio
now, going into this merger?
Mr. Powell. It is about 1.34.
Ms. Moore of Wisconsin. So it is above par for what you
expect?
Mr. Powell. Yes, ma'am.
Ms. Moore of Wisconsin. Can you just explain to me, it sort
of follows the question that members on the other side asked
about the numbers of institutions. You talked about the
institutions that do not participate at all. Would they become
a part of this new system?
Could you just explain to me how their premiums are going
to be priced in a way that is equitable and they are insured,
but that it will not cause the other institutions to subsidize?
I just do not understand that. If you could just roll me
through it.
Mr. Powell. Because of the current law, we do not assess
premiums to most institutions, only those institutions that are
undercapitalized and management is not up to par. It is very
few institutions. Ninety-three percent of insured institutions
in America do not pay any premium.
I was part of a bank that was chartered about 4 years ago,
5 years ago. We got into the system. We were insured and we did
not pay any premium. I do not know of an insurance product that
is free. These institutions are all insured and they are not
paying any premiums.
Now, if they were here today, they would say, well, we have
been paying premiums for a long time when we funded the program
many years ago. However, there are a lot of institutions that
have been organized after 1996 and they have not paid any
premiums at all. So we are attempting to address that.
All institutions will pay based upon their risk profile.
Everybody will pay.
Ms. Moore of Wisconsin. So that would be going forward, so
those folks who have paid the premium will not have any sort of
a refund or credit?
Mr. Powell. Yes. The proposal as the bill was passed and
introduced last year, is that there would be some credit
assessments based upon what they had paid into it as of
December 31, 1996.
So if you are an institution and you have been paying the
premiums, and I am an institution and have not been paying the
premiums, I am going to write the check and you are going to
get a credit.
Ms. Moore of Wisconsin. Got you. That is what I needed to
know. Thank you so much.
Thank you, Mr. Chairman.
Mr. Bachus. Thank you. Let me commend you for your
questioning. You certainly did not question like a new member.
You did very well. Thank you.
Mr. Hensarling?
Mr. Hensarling. Thank you, Mr. Chairman.
First thing, with all of the television cameras in the
hallway, I am tempted to ask the Chairman about possible
steroid abuse at the FDIC.
[Laughter.]
I will refrain from that.
Mr. Bachus. Are you on steroids?
[Laughter.]
Mr. Hensarling. Although not a major league ballplayer, I
know that our Chairman is a major league financial player and
his leadership and his stewardship of the FDIC have been
excellent, and I certainly commend him for that.
Chairman Powell, this is very old ground that has been
tilled by this committee on a couple of occasions, so I do not
care to keep you long.
I guess a question I had in the 108th Congress I would like
to ask again, that is really to understand the implications for
the American taxpayer of this proposal.
Particularly as I understand it, the flexibility that the
FDIC seeks on the risk-based premium, that it is not your
purpose to increase assessment revenue, merely to redistribute
it.
If you do not increase the assessment, yet your deposit
coverage limit goes up, aren't you inherently taking on more
risk? If you have the same revenue, how can the taxpayer not be
exposed to more risk?
Could you help me sleep a little better at night and
illuminate this issue for me please?
Mr. Powell. As you know, the ultimate backstop is the good
faith and credit of the United States of America. Having said
that, the current law, that duty of paying the premiums and
funding any balance of the fund, if the fund gets down to zero,
all banks must pay until the fund is adequate.
So we would have to go through a lot of capital, a lot of
capital in the banking industry now in excess of $1 trillion.
They, in my view, could pay the necessary premiums without
going to the taxpayer to supplement the fund if in fact it went
down because of some crisis.
So again, the backstop is the taxpayer, but it first has to
go through all of the insured institutions.
Mr. Hensarling. Thank you very much.
Mr. Chairman, I yield back the balance of my time.
Mr. Bachus. Thank you.
Mr. Meeks?
Mr. Meeks. Mr. Chairman, I will be brief.
Let me just ask real quick, in regards to municipal
deposits, does the FDIC have any safety concerns about whether
or not funds which are deposited into commercial banks as
opposed to savings banks or credit unions, do you see any risk,
any concerns?
Mr. Powell. No, sir. Most of those funds, the municipal
deposits in insured institutions, most states require that
there be United States government obligations placed against
those funds. We do not have any undue concern about that.
Mr. Meeks. Has their been an analysis done to your
knowledge as to what the DRR would rise to if the individuals
who are not paying, the freeloaders were actually paying?
Mr. Powell. I am sure we have done an analysis and I would
be happy to get back to you on that and give you a copy of that
analysis. You are saying those, the free riders, if in fact
they were paying, where would the fund be?
Mr. Meeks. That is correct.
Mr. Powell. Yes. It would be better, but I do not know how
much better, but I would be happy to get that back to you.
[The following information can be found on page 48 in the
appendix.]
Mr. Meeks. Okay. Do you think that credits would kick in?
Could it be that good, so much that there would be credits that
would immediately kick in?
Mr. Powell. I doubt that. I doubt that. Depending on what
benchmark, would it be 1.5 or 1.3 or 1-whatever that benchmark
might be. Most of these that have come on-stream are the
smaller institutions, however nobody has paid since 1996,
large, small, in between.
Mr. Meeks. In regards to management of banks, now that the
cost of insurance has increased from $40,000 to $100,000, have
you seen any detriment or any substantial findings, or anything
with regard to management of banks because of the increase?
Mr. Powell. No, sir.
Mr. Meeks. None at all?
Mr. Powell. I think what you were referring to is because
the coverage was raised, has that caused management to take
additional risk or abnormal risk?
Mr. Meeks. Absolutely.
Mr. Powell. No.
Mr. Meeks. Great.
Last question, then. In regards to changing the DRR from
the hard 1.25 to a floating 1.15 or to 1.40, what circumstances
would have to happen for you to change it or to move it from
one direction to the other?
Mr. Powell. With flexibility in there, and obviously if it
started on the downward trend, it would be because of some
failures to the system and charges to that particular fund, and
that would be during down economic times.
Obviously, if in fact we start increasing the premiums
because of that, that would cause some funds that would be
normally going to credit and help the economy, it would be
paying premiums to the FDIC.
So we would attempt to manage that process. The same thing
would be true if the fund was rising, that during good times it
may be necessary that we would rebate in the form of credits or
in the form of cash rebates.
That would all have to be assessed depending on a global
review of the industry and what affect we thought the current
economic times and future economic times may cause on the fund.
Mr. Meeks. Thank you.
I yield back.
And I would love to see that analysis.
Mr. Powell. Thank you.
Mr. Bachus. Thank you.
Mr. Neugebauer? I note that you are a cosponsor of the
legislation.
Mr. Neugebauer. Yes. Thank you, Mr. Chairman.
Thank you, Chairman Powell, for being here today. I just
want to comment and talk about a little, kind of a couple of
different issues.
When you say 93 percent of the banks are not paying into
the system today, and yet we know if you had an event like we
had in Texas in the 1980s, you would have to go to an
assessment situation if your reserve dropped below the
statutory level. Would that mean that only 7 percent of the
banks then would be paying into that? How would be the
mechanics of that?
Mr. Powell. We would start assessing premiums from all
banks. In fact, the premiums can go as high as 23 percent to
the fund if it's about the necessary benchmark. So all would
pay.
Mr. Neugebauer. And then when I think about the 1980s and
then I think about today.
Mr. Powell. I would not like to go back there.
Mr. Neugebauer. I know. I don't either. Thank goodness we
survived that.
I think the question that I have is in the marketplace
today, Wall Street has devised all of these vehicles where
people are putting in and they are saying they are insured
accounts, and because there is not a crisis today, is there
demand in the marketplace for people coming into financial
institutions, is there a worry that, you know, are my funds
insured?
Because I know some of my friends, I am kind of paranoid
about that because I was in an area where that, but they do not
give any thought to whether their funds are insured. What is
your perception of the demand in the marketplace for higher
insurance levels?
Mr. Powell. That is a tough issue. I talk to a lot of
bankers at large institutions, small institutions, metropolitan
institutions, country banks and so forth.
I think it depends upon your market. It depends upon your
market. Some folks believe that they would receive more
deposits if in fact the coverage was raised. Others do not
believe it is important because of the current economic times
we are in, that their customer base is not concerned about
increasing the coverage. They believe that $100,000 is
adequate.
We at the FDIC have tried to listen to all of those
parties. We do know that it has not been changed in the last
25-plus years, and that it has deteriorated over time.
Attempting to put that question behind us, that is the reason
our recommendation is that it be indexed.
Mr. Neugebauer. The third question I have, you mentioned
the pension fund. It is in deficit. Do you think the current
reserve level is based on the risk to FDIC at this particular
point in time? Or are we at adequate levels? Or should we think
about increasing that?
Mr. Powell. Congressman, I think we are at adequate levels,
based upon current economic data and the current condition of
the industry. I think we are at a good level.
I do not know what tomorrow is going to bring, and that is
the reason we are asking for more flexibility to manage that
fund during good times and during bad times.
Mr. Neugebauer. Mr. Chairman, I yield back the balance of
my time.
Mr. Bachus. Thank you, Mr. Neugebauer.
Mr. Moore?
Mr. Moore of Kansas. Thank you, Mr. Chairman.
Mr. Chairman, I want to thank you for being here today and
for your testimony and for your good work in this area. I am a
cosponsor of H.R. 1185 and I appreciate your work there, and I
certainly appreciate Chairman Bachus's work as well.
I have no further questions, but thank you, sir.
Mr. Powell. Thank you.
Mr. Bachus. Thank you, Mr. Moore.
Mr. McHenry?
Mr. McHenry. Low man on the totem pole. I always get
forgotten.
Mr. Bachus. You are an important new member of this
committee. With a name like Patrick McHenry, I mean, how could
you be anything but a patriot?
[Laughter.]
Mr. McHenry. Thank you, Mr. Chairman.
Unfortunately, the gentleman from Texas, Mr. Hensarling,
took my joke. That is a mistake a freshman would make is
telling a more senior member the good line he was going to use,
and then he uses it about 20 minutes before he can.
But thank you for being here today. I certainly applaud the
Chairman for taking on this task.
I am a new member of the committee. I am also a member of
the Budget Committee. As such, I thought I would ask in terms
of the budget impact. Certainly, I know the history here. In
the past, it was scored as a net savings to the budget, and now
it seems it is being scored as an additional cost to the
American people.
I would hope that you could address that.
Mr. Powell. Yes. We have reviewed that.
First of all, our intent is that it be revenue-neutral. I
think it is revenue-neutral. Their analysis is based on some
assumptions and some projections of the future that none of us
have control over. Again, our hope is and our desire is and our
intent is that it be revenue-neutral.
Mr. McHenry. Excellent.
In terms of how this will impact the average American, if
you could speak in those terms. How will it affect the average
American who goes to their community bank and makes their
deposit? How is that going to affect the average community bank
and how is that going to affect some of your average working
men and women?
Mr. Powell. I think the average customer of the ``average''
bank in America will not see any effect other than from the
savings side. They are conscious of making sure that their
funds are safe and secure in an insured institution. They
understand what the FDIC is and what that means to financial
stability, not only of their institution, but the financial
stability of the banking system in America. So I think there is
a keen awareness of that.
On the other side, I think what it really speaks to is that
most Americans when we have an economic downturn, credit is
restricted. You cannot borrow money in bad times. You can
always borrow money in good times, so credit is restricted. And
that is the time that really we need banks extending credit.
With the current system, banks will be paying premiums, or
they may be paying premiums, more premiums for their FDIC
insurance than under this proposal. So that is the reason we
have asked for flexibility as it relates to assessment to
institutions to make sure that this pro-cyclical event does not
occur again.
Mr. McHenry. Certainly. I certainly appreciate your
testimony and answering the questions today. I certainly have a
number of other questions for you, but not pertaining
specifically to deposit insurance reform. I hope that we can
discuss those at some point.
Mr. Powell. I would be happy to come see you.
Mr. McHenry. Thanks so much.
Thank you, Mr. Chairman. I yield back my time.
Mr. Bachus. Mr. Royce?
Mr. Royce. Thank you, Mr. Chairman.
I welcome you, Chairman Powell. I want to indicate I am a
strong supporter and advocate of merging the BIF and the SAIF.
I am very much in favor of the flexible DRR provision that is
in this bill. But what gives me pause is the increase in the
deposit insurance limit. I cannot support the bill with that in
it. I have heard Chairman Greenspan lay out an argument, a case
that I would just like to repeat briefly here.
He says that extending the liability of the fund beyond the
$100,000 limit would do the following. I would like to get your
thoughts on that. He says it would increase the government
subsidy to depository institutions. It would expand moral
hazard and it would reduce the incentive for market discipline
without providing any clear public benefit. I thought I would
ask you for your response to Chairman Greenspan.
Mr. Powell. I agree with his first point.
On number two, I would have a different view. I understand
his view on number two and number three, moral hazard. I was in
the banking business almost 40 years and was in Texas during
the worst downturn we have ever had in the banking business. I
can assure you, Congressman, that deposit insurance coverage
did not dictate my management style or my management decisions.
I do not think it dictated any banker in Texas.
What that really implies is that because of the subsidy, I
am going to take additional risk. When I take additional risk,
I may lose my job. I may lose my investment in the bank and the
bank may fail. So that has to be measured depending upon lots
of things in the marketplace. It is a factor. It is a factor
and I do not deny that at all. But I do not think it is an
overwhelming factor. Obviously, if we did not have deposit
insurance, I would not have the funding to make loans and any
loan poses some risk.
The third one is, I can again understand that view. It
really relates to the second one.
Mr. Royce. Yes. I understand you.
Mr. Powell. I think deposit insurance clearly provides
stability in the marketplace. We do not have runs on it, and I
think the FDIC still stands for the symbol of confidence. That
is powerful. That is powerful in the economic free markets that
we have in America. I think we are the envy of the world, and
for lots of reasons. I think deposit insurance contributes to
that stability and that confidence that Americans have when
they deposit their money in a bank.
Mr. Royce. I understand that argument. The moral hazard
argument, though, is one that has been persuasive not just with
the Federal Reserve that is opposed, but also the Office of
Thrift Supervision and with the Office of the Comptroller of
the Currency, and also with the Treasury Department. All of
these agencies oppose increasing the deposit coverage limits
because of their concerns about safety and soundness.
The second question, or last question, I wanted to ask you
is this. I think an argument has been made that as the
insurance limit increases, individual depositors are less
likely to become another check out there on the bank's
management. In other words, a bank will not have to be as well
managed during troubling times to attract more deposits because
the money is guaranteed by the FDIC. Chairman Greenspan calls
this phenomenon reputation risk. He says under this kind of
scenario, there is no reputation risk. As members of this
committee, shouldn't we be concerned about this argument?
Mr. Powell. Let me go back to your first question, because
I want to respond to that.
Mr. Royce. Sure, absolutely.
Mr. Powell. We at the FDIC are not recommending increasing
coverage. I want to be sure you understand. We are recommending
that coverage not be diluted in any way. The $100,000 we
believe has served America okay. We just want it to keep its
value so therefore we are indexing. So we are not recommending
coverage.
Your second question, again, it is a fair view. There is a
balance there. I do not think the average American depositor
could understand the condition of a bank anyway. I do not think
they could read a financial statement, a balance sheet and an
income statement and come away with making some judgment of
whether they should put their money in that institution.
I think Congress made that decision many years ago when
they established the FDIC, that it was in the best interest of
America that we provide some stability, the taxpayers provide
some stability of where I could put my money in and not be
sophisticated and know that it is safe.
Whether it should be $100,000, that is a debate for another
issue, but clearly deposit insurance was a policy issue that
the American people I think wanted because of them being not
sufficient to determine in fact if that is a safe investment.
That is the reason we have other choices. That is the
reason a consumer can put it in a non-insured institution. That
is the reason they can put it in the stock market. That is the
reason they can put it in some other thing, but in an insured
institution, it provides safety that one can have.
I think obviously because of that subsidy, banks are
regulated. Banks have to do certain things that others do not,
that is not there. I think also banks have provided a
tremendous economic engine. I am not sure they could have done
that without ``the subsidy'' and the regulation because of that
subsidy, the regulation that that imposes upon them and puts
discipline into the system that perhaps you would not have.
Because of that economic engine, I think we are all better
off in America from an economic standpoint.
Mr. Royce. Thank you, Chairman Powell.
Thank you, Chairman Bachus.
Mr. Bachus. Thank you, Mr. Royce.
I will recognize Mr. Baca, and then I would like to ask
another follow-up question to Mr. Royce, and might actually
yield to him when I do that.
Mr. Baca?
Mr. Baca. Thank you very much, Mr. Chairman.
Mr. Powell, as you know, H.R. 1185 increased the amount of
coverage for retirement accounts to $260,000 and requires the
retirement coverage level to be indexed every 5 years in order
to protect the value of the safety net.
Given the sensitivity of the retirement savings issue after
the Enron and WorldCom downfalls, do you think the increased
coverage level for retirement accounts and municipal deposits
is sufficient? And if so, why?
Mr. Powell. I think it is sufficient, but I am not sure I
can tell you why. That number just doubles the $130,000, and
that number could have been $200,000. There have been a lot of
studies. I think there is $225 billion in the banking industry
in the form of retirement funds, but that is not very much
compared to the global retirement deposits in all types of
institutions.
As Americans become older and savings are increasingly
important to all of us, that could be revisited from time to
time. But I think where it is today, we at the FDIC have been
neutral on that particular dollar amount.
Mr. Baca. Because apparently there seems to be a lack of
trust by the American people, especially with what happened
with Enron and WorldCom recently. So it appears that we really
have to go back and revisit this because people are very much
concerned with their future in terms of what happens.
Even right now with Social Security, when you look at the
year 2042, when we are really going to have a crisis. We do not
have a crisis right now, but could have a crisis if we do not
begin to move in the right direction.
Mr. Powell. I agree.
Mr. Baca. Okay.
Thank you very much, Mr. Chairman. No further questions. I
yield back the balance of my time.
Mr. Bachus. Thank you, Chairman Powell.
Mr. Royce had to leave for another hearing, but I was kind
of curious to see if you had any thoughts on, he mentioned
Chairman Greenspan and the Treasury Department under Secretary
Rubin.
They took a position against insuring Americans who
deposited their money for over $100,000 in American
institutions. They said it created a moral hazard and that the
government should not be in the job of insuring deposits. In
fact, Chairman Greenspan has said he would just as soon let it
wither on the vine. He does not think the government ought to
be guaranteeing things.
My question for Mr. Royce, I guess, and for you is, why has
the Federal Reserve and the Treasury bailed out some 77
different institutions, including Mexico, for several billion
dollars, and Long Term Capital Management which did not pay a
dime into any insurance fund?
It just mystifies me how Chairman Greenspan would say that
the American people who invest $120,000 in a savings account,
why we should let them lose their money, but we ought to bail
out Long Term Capital Management, a massive hedge fund, which
only had multimillionaire investors, that we ought to bail that
out?
Because when these institutions go belly up, then it
affects the whole economy.
I would think that when a little bank in Texas or a little
bank in Georgia or a little bank in California goes under, that
the Federal Government, that the people who paid into the
insurance fund and who are willing to pay for more coverage,
that they are entitled, basically, to be covered, as opposed to
Long Term Capital Management, with several billion dollars in
1998, the same folks that you are now quoting rushed to their
defense. They had not paid a dime into the government or to the
taxpayers, and the taxpayers picked up billions of dollars.
Mexico, several other large institutions, and they stepped in
and insured it to the limit.
Mr. Royce. If the gentleman would yield just for a minute.
Just for the record, Mr. Chairman, I wanted to make it
clear that I argued at the time and voted against the bailout
for Mexico and other bailouts as well.
So for me, the moral hazard argument is a philosophical
argument. When I hear others put that argument forward, and I
am mindful of past experience with moral hazard, that is why I
brought it up today with Chairman Powell.
Mr. Bachus. I guess I am just asking you and Chairman
Powell, don't you agree that it is more egregious? I do not
think it is egregious if people want to pay into insurance
$120,000. But you know that is a question of policy. I am just
saying that you quoted Chairman Greenspan, and the Treasury
Department, Bob Rubin, they bailed out Mexico. What was the
reason for that?
Mr. Royce. I debated that argument. I talked to Secretary
Rubin at the time about that and raised my concerns that the
bailout of Mexico, the moral hazard there, might lead to other
risky behavior. I feel that subsequently it led to a little
more risk taken in the markets in Asia.
Mr. Bachus. I agree.
Mr. Royce. As a consequence of the moral hazard of bailing
out Mexico, we set up the institutions in the United States and
our investors to over-invest in a hot market in Asia, and as a
consequence of that mal-investment, we then went through a
second phase. And so, as a matter of fact I had breakfast with
Chairman Greenspan at the time in order to lay out that
argument about the bailout in Mexico. So I just for the record
wanted to clarify.
Mr. Bachus. I did not know if he at the time gave you some
explanation, at the same time he was saying to my constituents
back in Greenville, Alabama, or a little town that wanted
$120,000 worth of coverage for their retirement income, why he
did not want to cover that, but he was willing to go to Mexico
or bail out a bunch of millionaire hedge fund owners that had
not paid a dime into any fund. I just did not know what the
explanation was, if he offered you an explanation for why they
were for that. Was it just the Washington view?
Mr. Royce. I think that the views expressed by all of the
agencies that we have discussed I would hope indicate that they
have learned something from the bailout of Mexico. My real hope
would be that the more we move toward free market solutions and
the more we move away from subsidies, the less likely we will
be to see something like the Asian meltdown or the situation in
Mexico in the future.
I think the answer to this is to get back to market-based
economic principles and to move away from implied subsidies and
moral hazard.
Mr. Bachus. You would actually be for abolishing the
guarantee altogether?
Mr. Royce. Well, I was not aware that I was going to be a
witness here today.
[Laughter.]
But let me make this point, if I could, Mr. Chairman.
I am for not compounding a problem that I have witnessed in
the past with regard to what happened in the S&L industry, with
regard to what happened in the bailout of Mexico.
I mean, as I look at this economic conundrum that results
whenever we create an incentive for money to move where there
is an implied government guarantee of a bailout, I think we
inevitably run into some moral risk questions and problems.
That is why I raised it today. I did raise it because many
of the regulatory institutions that have oversight have raised
that argument, but they are not witnesses here today. They have
not been invited here today.
I just thought that at this hearing with Chairman Powell,
at least the economic arguments should be put forward. That is
why I raised it.
Mr. Bachus. I do not think there is an implied guarantee. I
think people pay into the insurance fund and it is a guarantee.
I do not think there is anything implied about the guarantee to
depositors.
Mr. Royce. No, in this case it is a direct guarantee.
Mr. Bachus. I think Mexico is a good example.
Mr. Royce. In many other cases, we are advancing implied
guarantees, and that is also a concern to me and that is why I
raised that issue as well.
Mr. Bachus. I just think it is healthy, and I think that it
is consistent with wanting to raise coverage to keep up with
inflation, to do what Chairman Greenspan, to say that he does
not believe in deposit insurance. He would just as soon it
wither on the vine.
I just think it is more important that we guarantee
deposits in our institutions. I think the savings and loan
crisis would have been lots worse if there had been no
guarantee. Boy, I cannot imagine what the recovery would have
been like.
Mr. Royce. Arguably, if the gentleman would yield, I think
the argument can be made that without the types of guarantees
and encouragement that existed there, and without Congress
expanding and increasing that guarantee, which this institution
did.
It took the amount, it doubled the amount at one point, and
then it allowed all types of additional investment, and as a
consequence of that it created an environment where at least
economists believe it incentivized this risk-taking, and as a
consequence of that we had the comeuppance of the failures----
Mr. Bachus. The other thing is, and even Chairman Greenspan
has said part of the savings and loan problem was the problem
that Congress came with new legislation and authorized the
savings and loans to do a lot of things they had not been
doing, and it was that that caused the system to fail, not the
deposit insurance guarantee which had existed since the
Depression.
So it was not deposit insurance that caused the system to
fail. If it had been that, it would have failed before, and the
banks did not fail. That had to be something to do with the
savings and loans. The banks did not fail.
Mr. Royce. The Chairman of this committee at the time, and
this certainly predates our election to the Congress, but the
Chairman of the Banking Committee at the time, as memory
serves, sponsored a bill to double the deposit insurance in
that industry, for the S&L industry.
Anyway, I just wanted to raise these economic points, and I
appreciate your forbearance in allowing me to do so.
Thank you, Mr. Chairman.
Mr. Bachus. I appreciate that, Mr. Royce, because I think
when we have these discussions--did you have any comments you
wish to make?
Mr. Powell. No, sir.
[Laughter.]
Mr. Bachus. I was pretty sure of that.
I just hope that the money that is paid into FDIC will be
used to insure deposits and not be used to, that or the Federal
Reserve or any other government money will be used to bail out
hedge funds or Mexico or other countries, which has been the
case in 77 different instances.
If there are no other questions. Oh, Mr. Price?
Mr. Price. I just enjoyed the colloquy.
[Laughter.]
Mr. Bachus. You can see that we are working toward a
bipartisan solution to this problem.
I will say this, one thing you said this morning is
increasing the range. I will tell you that my thought on this
was that we ought to at least bring it down to 1 or 1.1. I do
not know why 1.5, if anything, if it is going to go from 1.25,
it ought to go in the same direction, the same distance.
I will say that I believe anything above 1.4 could create a
drain and could make banks noncompetitive, and that is the last
thing we want to do. If I had my druthers, I would say 1 to
1.35. I do think that moving it down, that there would probably
be very little resistance from this committee if someone
offered an amendment to that effect.
I thank you for your attendance.
Mr. Powell. Thank you, sir.
Mr. Bachus. I have always admired your leadership, and I
feel like you have brought is you have brought representation
from mainstream America and from financial institutions, and
from constituents outside the beltway. I think that is very
refreshing.
Mr. Powell. Thank you.
[Whereupon, at 10:50 a.m., the subcommittee was adjourned.]
A P P E N D I X
March 17, 2005
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