[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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                 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

                              ----------                              
                                                                   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



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