[Congressional Record Volume 141, Number 65 (Friday, April 7, 1995)]
[House]
[Pages H4423-H4428]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


   CONGRESS MUST ACT NOW TO PRESERVE INTEGRITY OF DEPOSIT INSURANCE 
                                PROGRAM

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from New York [Mr. LaFalce] is recognized for 5 minutes.
  Mr. LaFALCE. Mr. Speaker, today I am introducing several bills 
designed to address the serious problems posed for the Savings 
Association Insurance Fund [SAIF] by the current obligations imposed on 
the thrift industry and the pending disparity between the premiums paid 
by BIF-insured and SAIF-insured institutions.
  Not too many weeks ago, many were denying that a problem even 
existed. The discussion has now proceeded past that stage, and I 
believe there is a substantial consensus the problem is real and should 
be addressed quickly--before it becomes a crisis.
  There are a multitude of competing interests involved in the 
resolution of this difficult problem. These bills need not, and are not 
intended to, satisfy anyone's or everyone's concerns, and the options I 
have incorporated are not exhaustive, nor are they mutually exclusive. 
But I believe they do set forth the major issues we must address, and 
provide mechanisms for doing so that are reasonably calculated to put 
this problem behind us. They are intended to move the dialog on this 
issue to the next stage.
  The regulators have now presented quite clearly the nature, extend, 
and urgency of the problem, and discussed a range of options available 
to the Congress in general terms. It is my hope that these bills will 
now move us to focus more concretely on the elements of any meaningful 
resolution, and allow us to begin to work with the administration, the 
regulators, and affected parties to identify the specifics of 
alternative solutions, assess and evaluate them, and then select a 
course of action.


                             i. the problem

  The art of governance is not addressing crises. It is anticipating 
them and developing public policy options that will preclude their 
occurrence. In this sense, the Congress now has a rare opportunity.
  Had we anticipated and addressed the problems posed by an 
undercapitalized thrift insurance fund in the mid-1980's, we would 
never have faced the thrift crisis of 1989. Despite warnings from 
myself and others, the Congress did not anticipate, and the result was 
an enormous burden placed on the American taxpayer in the FIRREA 
legislation.


                    a. difficulties confronting saif

  How, different but related problems confront us again. All of the 
relevant regulators, the Treasury Department, and the GAO--in a report 
commissioned by myself and Senator D'Amato--have officially alerted the 
Congress that we have serious problems which must be addressed in the 
near term. In summary, those problems are as follows:
  The SAIF insurance fund is seriously undercapitalized just at the 
point it will newly have to assume responsibility for thrift failures 
from the RTC effective July of this year; the mechanism by which thrift 
premiums are diverted to pay the interest on the FICO bonds, which were 
issued to pay for the thrift failures of the 1980's, is no longer 
viable. According to the FDIC, there is no question that there will 
eventually not be sufficient thrift premium income to service the FICO 
obligations. The only question is when that deficiency will occur; and, 
finally, within the next few months there will be a premium disparity 
between BIF-insured and SAIF-insured institutions of as much as 20 
basis points. Such a substantial differential could adversely affect 
the thrift industry in a number of ways, inhibiting its ability to 
raise capital; placing it as a serious competitive disadvantage; 
causing higher rates 
[[Page H4424]]  of thrift failures; and providing incentives for legal 
and regulatory maneuvering that will further reduce the moneys 
available to recapitalize the SAIF and service the FICO obligations.


                         b. finding a solution

  Some have voiced concerns that the regulators or the administration 
have not recommended a specific solution. I believe they have done as 
they should have done, at least thus far--alerted us to the problem, 
defined it fairly and clearly, and provided several alternative 
solutions which would address it, which discussing the policy 
advantages and disadvantages of each. None of the alternatives is 
clearly substantively correct, intuitively appealing, or politically 
easy. No regulatory or administration imprimatur will make them so.
  Others have suggested that the affected industries need to sit down 
at the table and arrive at an agreed-upon solution. I welcome the input 
of the affected thrift institutions, and I believe the industry has 
behaved responsibly in helping to bring the problem to our attention. I 
also believe the banking industry has both a policy and a political 
interest in helping to craft an intelligent and fair solution. But we 
cannot allow any industry's opinion to finally shape our views. Bank 
and thrift industry members have an obvious interest in minimizing 
their own losses. That is a legitimate interest on their part. But it 
is not our interest as policymakers.
  The choice between the various alternatives is a choice for the 
Congress to make. In making that choice, we must be concerned about 
questions of equity and ensure that we do not place an undue burden on 
members of either the thrift or banking industry, and certainly that we 
not place an inappropriate burden on the taxpayer. But I believe we 
must not take any reasonable option off the table at this point. Our 
primary goal must be to safeguard the depositor and preserve the 
integrity of the deposit insurance system.
  Both industries also have an interest in our doing that successfully. 
No one wins there is a crisis of confidence in the deposit insurance 
system. Any alternative that will maintain that confidence merits 
serious consideration.
  In preparing these bills, I have explored a multitude of options. I 
am open to suggestions of other options, but I see only three realistic 
sources which can provide the funds to solve these problems: The thrift 
industry; use of the resources already authorized and appropriated to 
the RTC to handle thrift failures; and some form of participation by 
BIF-insured institutions. I am willing to consider seriously any and 
all of these approaches, and combinations thereof, and welcome 
recommendations about how best to refine them. The best solution may 
well be that which combines some or all of these options. The best 
solution clearly will be one on which a majority of the House and the 
Senate can agree before June 30.
  There is, however, yet another option--lowering the standards which 
govern the reserves which must be held by the insurance funds to 
protect the depositor. That is an option I would hope we'd reject.
  Some of the options I put forward may be viewed as hitting the 
thrifts too hard. Others may be seen as placing unjustified burdens on 
the banking industry. Still others may be criticized for their reliance 
on excess RTC funds which have already been authorized and appropriated 
for what I believe are comparable purposes. Those criticisms are not my 
key concerns, although I will certainly take any legitimate criticism 
into account. But our primary goal must be to safeguard depositors and 
ensure the integrity of our deposit insurance system.
  Any solutions advanced, or any combinations thereof, will necessarily 
be subject to legitimate criticism and can easily be tossed aside as 
politically unfeasible. The challenge for the Congress is to avoid the 
easy path of nay-saying and risk avoidance, and work together to craft 
a reasonable solution.


                        c. timing of a response

  Because this issue will be politically difficult to address, it may 
prove virtually impossible to move independent legislation. Some have 
suggested attaching a solution to the pending financial services 
modernization bill or regulatory consolidation legislation. But I 
believe these bills will move too slowly for us to address the BIF-SAIF 
problem in a timely manner--that is, before June 30.
  I believe a more appropriate legislative vehicle would be the pending 
regulatory relief bill. Such relief, if properly crafted, is long 
overdue and the legislation can be expected to move quickly. I also 
believe the BIF-SAIF issue appropriately arises in this context. It is 
reasonable, as part of an effort to reduce regulatory and supervisory 
burdens, to also move to ensure that the deposit insurance program is 
stabilized and any risks to that system are removed.
  We must act quickly. As a policy matter, the problem is upon us. The 
FDIC has already issued draft regulations which will reduce bank 
premiums substantially, while leaving thrift premiums at current high 
levels. In doing so, the FDIC is meeting its statutory obligation. But 
the premium disparity will be in place in just a few months, and will 
exacerbate existing thrift industry problems. Politically, it is 
essential that we act before a change in the premium structure is put 
in place. Should Congress choose to require any financial participation 
by
 the banking industry, it would be much more difficult to impose new 
financial obligations than to make slight changes in the level of 
reduction of those existing obligations.

  Most importantly, on June 30 of this year, the SAIF will assume 
responsibility for thrift failures. According to the FDIC, it will do 
so in a seriously undercapitalized state. A serious economic downturn 
or the unanticipated failure of a large thrift could bankrupt the fund. 
We cannot afford to run that risk.
  As we move to devise a solution, we must have an eye to the longer 
term. Some have suggested that it is time to stop talking about banks 
and thrifts and start talking about moving toward one industry, one 
charter, and one regulator. That is an issue which merits serious 
deliberation, and issues like the bad debt reserve which could inhibit 
such movement from occurring naturally warrant examination.
  But if that is our ultimate goal--a question we have yet to decide--
we must have an intelligent approach to making the transition. It 
cannot be achieved by default, because public policy toward the thrift 
industry is so bankrupt that flight from the industry is the only 
sensible business solution. In the nearer term, we must make sure our 
policies do not inadvertently destroy an industry before we even have 
an opportunity to determine if and how we might wish to restructure it 
as part of a broader restructuring of our financial services system.
  If we are to legislate intelligently on a solution, we must have some 
perspective regarding how we got to where we are today and some 
criteria to govern our action going forward. In the balance of my 
statement, I will discuss the source of the problems we face, the 
criteria which should govern our search for a solution, and the major 
issues we must confront as we continue our deliberations.


                     ii. the source of the problem

                a. status of the deposit insurance funds

  In the late 1980's and early 1990's, the Banking Committee and the 
Congress focused considerable attention on enhancing regulatory 
oversight of the thrift and banking industries and stabilizing the 
condition of their insurance funds, through passage of FIRREA in 1989 
and FDICIA in 1991.


                     the bank insurance fund [bif]

  We have arguably been more successful in the context of the Bank 
Insurance Fund [BIF]. The FDIC reports that the BIF is in very good 
condition and its prospects are favorable. The BIF is expected to reach 
its designated reserve ratio, 1.25 percent of insured deposits--the 
amount reserved to handle anticipated losses and protect depositors--
within the next few months. Current law requires that the FDIC move to 
reduce bank premiums when that occurs, and the FDIC is proposing to 
lower premiums from the current level of about 24 basis points to 
approximately 4.5 basis points.


             the savings association insurance fund [saif]

  In contrast, the FDIC and the OTS report that, while the thrift 
industry itself is in very good condition, the Savings
 Association Insurance Fund [SAIF] is deeply troubled. On June 30 of 
this year, the SAIF must newly assume responsibility for thrift 
failures 
[[Page H4425]]  from the RTC, yet it is seriously underfunded. While 
the BIF is approaching its 1.25 reserve ratio, the SAIF has only $1.9 
billion, or 28 cents in reserves for every $100 in insured deposits. 
Faced with that situation, the FDIC is constrained to keep thrift 
premiums at current levels. The result will be a premium disparity in 
the neighborhood of 20 basis points.
  Such a disparity will place thrift institutions at a significant 
competitive disadvantage, inhibiting their ability to raise capital, 
encouraging them to look to other funding sources which will reduce the 
assessment base even further, and providing incentives to escape the 
industry, its charter and its problems. We have already seen Great 
Western and several other thrift institutions make initial moves to 
obtain new bank charters. Such efforts are legally permissible and 
market driven. But they will exacerbate the industry's problems.


           b. structural problems confronting thrift industry

  The premium disparity is in fact only an outward manifestation of 
more fundamental difficulties which become obvious when we examine why 
the SAIF is so underfunded. Certainly, it should be the industry's 
obligation to adequately capitalize its insurance fund, and 
capitalizing that fund should be our priority as policymakers. From 
1989 to 1994, SAIF assessment revenue amounted to $9.3 billion. If that 
revenue had been put solely toward recapitalizing the SAIF, the thrift 
insurance fund would have been fully capitalized long before now. 
However, $7 billion of that money--95 percent of SAIF assessments--were 
diverted from the SAIF to pay off obligations from thrift failures in 
the 1980s through either the Resolution Funding Corporation--REFCORP--
$1.1 billion; the Federal Savings and Loan Insurance Corporation 
Resolution Fund--FRF--$2 billion; or the Financing Corporation--FICO--
$3.9 billion to date. REFCORP and FRF no longer have claims on the 
SAIF, but the FICO claim will remain as an impediment to recapitalizing 
SAIF for 24 years.
  Establishing parity between the BIF and the SAIF today would require 
approximately $15.1 billion--$6.7 billion to move the SAIF to the $8.6 
billion which would constitute the amount necessary to achieve the 
designated reserve ratio, and $8.4 billion, which is the amount 
necessary at current interest rates to defease the FICO obligation. As 
OTS Director Jonathan Feichter points out, simple mathematics indicates 
that SAIF members will be unable to generate sufficient premium flows 
to both recapitalize the SAIF and service the FICO obligations. The 
SAIF assessment base is declining, and is likely to decline further, 
and that will worsen both problems.
  The situation is further aggravated by the fact that the premiums 
from the so-called Oakar and Sasser banks are considered unavailable 
for FICO purposes--making a large portion of the assessment base 
unavailable for that purpose. Yet making those funds available--if done 
alone--provides no real solution as it just depletes the funds 
available to capitalize the SAIF.
                                1. fico

  The FICO Program was flawed from its inception. I was one of the few 
Members of Congress to finally vote against the CEBA legislation 
incorporating this change in 1987. First of all, the level of funding 
provided--$10.8 billion--was totally insufficient to meet the need. 
Further, such stringent restrictions were imposed on the expenditure of 
the money as to render the funding almost useless. The legislation 
placed an annual $3.75 billion cap on the issuance of FICO bonds in 
response to industry pressure to minimize the industry's burden of 
servicing the bonds. In a letter to President Reagan urging him to veto 
the legislation, I urged that the amount provided was woefully 
inadequate and would require the Congress to revisit the issue. I noted 
at the time, ``a poorly funded plan is guaranteed to perpetuate the 
crisis atmosphere and could eventually result in a taxpayer bailout.''


                               2. firrea

  Unfortunately, we have revisited the issue--again and again and 
again--and the taxpayer bailout devised in the FIRREA legislation 
became a cornerstone of what proved to be only another partial 
solution. I opposed FIRREA as I had opposed the 1987 legislation for a 
number of reasons, but most basically because I not only believed it 
would not work, but I strongly believed it would make the situation 
far, far worse. I believed in 1987, and in 1989, and I believe today 
that a fully funded recapitalization scheme is the only way to restore 
public confidence in the thrift insurance fund and in the deposit
 insurance program more generally. Despite repeated efforts, we have 
still not achieved that goal.

  The FIRREA legislation had many laudable goals. Unfortunately it did 
not strike the proper balance in achieving them. It was no accident 
that under FIRREA the thrifts remained responsible for the FICO 
obligation. There was an intentional effort to place as much of the 
burden of paying for failed thrift institutions and recapitalizing the 
thrift insurance fund on the thrift industry as possible, so as to 
minimize the taxpayer contribution.
  In the abstract, these are laudable goals. But they are meaningless 
if the plan devised to achieve them does not work. The ability of the 
thrift industry to sustain these and other obligations placed on it was 
justified by FIRREA's proponents on the basis of economic and other 
assumptions that have proved grievously flawed. Most notably, in 1989 
the administration projected annual thrift deposit growth of 6 to 7 
percent a year. Since SAIF's inception, however, total SAIF deposits 
have declined an average of five percent annually.
  That should not have been surprising, and I questioned these 
assumptions and others at the time. The FIRREA legislation was 
otherwise so punitive to the industry that I believe it forced 
potentially viable thrifts into failure. The result was to leave fewer 
thrifts and a smaller assessment base to bear the brunt of the 
obligations imposed, and increase pressures on the declining number of 
healthy thrifts which remained.
  The previous administration and the Congress constructed a solution 
that has not worked. The obligations imposed on the
 thrift industry are not obligations it alone can sustain without once 
again posing a risk to the taxpayer. We have revisited this issue time 
and again. It appears we must now do so one more time. If we are to 
sustain confidence in the Government's ability to manage its deposit 
insurance system and meet its commitment to depositors, it is 
imperative that this time we construct a workable and permanent 
solution.


     III. Standards to be brought to bear in formulating solutions

  In attempting to do so, we should bring certain standards to bear on 
the solutions we examine. Most basically, any solution we devise should 
not rely on optimistic assumptions and projections about what will 
happen sometime in the future--whether about economic growth, thrift 
failures, thrift profits, deposit growth, et cetera--for its success. 
The solution should be workable and permanent.
  Beyond that basic point, I concur with the standards that the FDIC 
has suggested. First of all, any solution should reduce the premium 
disparity and eliminate to the extent possible the portion of SAIF 
premiums diverted to FICO assessments. Optimally, the SAIF institutions 
should and can capitalize their own insurance fund. However, they 
cannot do so if other obligations eat up a substantial portion of the 
premium flow. Second, any solution should result in SAIF being 
capitalized relatively quickly. Third, any solution should address the 
immediate problem presented by the fact that on June 30 of this year, 
the SAIF will take over from the RTC the responsibility of handling 
thrift failures in a seriously undercapitalized state.
  I have tried to be sensitive to all of these standards in crafting 
the various solutions I am putting forward. Not all of them meet all of 
these goals to the maximum degree I would hope. But I believe if we 
give serious attention to the specific problems and opportunities posed 
by various solutions, we can craft an ultimate solution which will.
  I am hopeful that the bills I have introduced will focus attention on 
the relative legitimacy and effectiveness of various specific 
alternatives. I would now like to discuss some of the major issues we 
must consider in making the necessary judgments.
                  [[Page H4426]] iv. the major issues

                   a. burdens on the thrift industry

                   1. utility of a special assessment

  There is much to comment some reliance on a reasonable one-time 
special assessment on the thrift industry, as part of a broader 
solution which otherwise addresses the current problems. Such an 
assessment could never be sufficient to solve the problems we confront, 
or even to fully capitalize the fund. Any onerous assessment would 
simply place the industry, and especially weaker institutions, in an 
even more difficult position than the one in which they now find 
themselves. But a reasonable assessment provides a real opportunity to 
frontload the capitalization of the SAIF and that is an important goal.
  Certain principles should govern any such assessment. It should be 
reasonable. It should be structured to be paid in installments so it is 
not necessarily an immediate hit on
 capital. Some flexibility should be granted to institutions in terms 
of the payment schedule. The FDIC should be given some discretionary 
authority to exempt, or reduce the assessment for, institutions which 
are troubled or would become troubled if the assessment were imposed.

  Any special assessment should be structured so as to capture current 
members of the SAIF. Otherwise, the potential for such an assessment 
will simply provide yet another incentive for thrifts to move out of 
the system.


                  2. Capitalization of the Thrift Fund

  There are various approaches to sharing the two primary obligations 
which arise--capitalizing the SAIF and servicing the FICO obligations. 
However, from my point of view it is more intuitively appealing and has 
more substantive merit to have the thrifts focus their primary effort 
on recapitalizing their insurance fund. Premiums are intended for 
insurance fund purposes and ideally we should minimize diversion of 
those monies, in either fund, for other purposes. We may not be able to 
totally honor that standard and solve the problem, but we should try, 
and in the future we should avoid diverting insurance fund premiums to 
multiple uses.
  It is also true that the FICO bond servicing imposes the more onerous 
obligation, not so much in overall amount--although the amount needed 
to defease the bonds is somewhat greater than the amount needed to 
recapitalize the fund--but because it creates the prospect of a long-
term and substantial premium disparity if the thrifts alone must 
service the bonds.
 These bonds are 30-year bonds and non-callable. They will not be paid 
off until 2019. Such a long-term disparity is fundamentally 
debilitating for the thrift industry and will simply create greater 
incentives for legal and regulatory maneuvering.


                        3. premium differential

  Any solution should attempt to minimize the premium differential 
between BIF and SAIF institutions. A differential of the size currently 
pending places thrifts at a serious competitive disadvantage, will 
reduce thrift ability to raise capital, and could induce additional 
failures, creating further problems for the industry and its fund.
  I believe the ability of the thrifts to sustain the adverse impact of 
such a differential depends on its size and longevity: a modest 
disparity--nothing as large as the pending disparity--might be 
manageable for three or four years, if the certainty of parity were to 
follow. But a long-term disparity of any consequence--for example, 
double digits--is fundamentally debilitating and only provides 
incentives for thrifts to reduce their assessment base, change their 
charter, or otherwise remove themselves from the line of fire.
  I have tried to generally construct options that would keep any 
disparity at no more than a 9-basis-point level. Even that may be too 
high. Moreover, I am disposed toward those options which minimize not 
only the size but the term of the differential.
                 b. appropriate use of excess rtc funds

  Some argue that it is politically impossible for the Congress to make 
any use of the taxpayer money represented by the estimated $10 to $14 
billion in excess RTC funds that have been authorized and appropriated, 
but not expended, on thrift losses. If there is conceptual 
justification for utilizing those resources--and I believe there is--we 
should not be too timid to even discuss it. I am unwilling to take any 
option completely off the table without some reasonable substantive 
discussion. Some or all of these moneys could, in theory, be made 
available to help capitalize the SAIF or help service the FICO 
obligations, or at least to provide a backstop against thrift losses 
while the SAIF fully recapitalizes.
  I have always tried to minimize the adverse impact of the SAIF 
recapitalization effort on taxpayers. In fact, I voted against FIRREA 
because I believed that, in two important respects, it did not minimize 
the taxpayer burden.
  First of all, I believed that borrowing to pay for the legislation 
unnecessarily increased the costs to the taxpayer and passed those 
costs on to future generation. I believed that borrowing was both 
fiscally and morally irresponsible, and I offered an amendment on the 
House floor which would have required that we pay for what we were 
doing. Unfortunately that amendment failed, the final legislation 
required that the Government once again borrow, and the cost to the 
taxpayer--and burden on future generations--has been greater as a 
result.
  My opposition to FIRREA was also based on the fact that I believed 
that the rapid imposition of much stricter standards on thrifts 
precipitated the failure of otherwise viable institutions, increasing 
the cost of thrift failures and the burden on the taxpayer. Had more 
thrifts survived, the then optimistic projections about deposit growth 
and the size of the assessment base might have proved more accurate and 
we might not be confronting the problems we face today.
  While I believe we must try to minimize the burden on the taxpayer, 
that does not mean we should not consider using moneys already 
authorized and appropriated for the purposes it was intended to be 
used. It is clear from the legislative history that Congress fully 
realized that its assumptions in FIRREA might prove overly optimistic, 
and that additional Treasury funds would be required to fully 
capitalize the SAIF. The legislation did in fact provide for that 
contingency.
  FIRREA authorized the appropriation of funds to the SAIF in an 
aggregate amount of up to $32 billion to supplement assessment revenue 
by ensuring an income stream of $2 billion each year through 1999 and 
to maintain a statutory minimum net worth through 1999. Subsequent 
legislation extended the date for receipt of Treasury payments to 2000. 
Despite repeated requests by the FDIC, however, appropriations for 
these purposes were never requested and SAIF never received any of 
these intended funds. Had they been received, the SAIF would have been 
capitalized by now.
  The FDIC again raised the looming problems in the thrift industry at 
the time Congress considered the RTC Completion Act. As the FDIC noted 
at that time, the legislation left ``unresolved issues regarding the 
viability and the future of the thrift industry and the SAIF.'' The 
failure to address the issue then has only postponed the inevitable.
  The fundamental tension on this issue is reflected in existing 
legislative provisions intended to deal with the possibility that 
additional Treasury moneys might be necessary, although these 
provisions limit their use to covering losses. The excess RTC money is 
technically available to pay for losses until 1998. In fact, two other 
funding sources are in theory available to pay for losses: First, an 
authorization for payments from the U.S. Treasury of up to $8 billion 
for losses incurred by the SAIF in fiscal years 1994 through 1998; and 
second, unspent RTC money during the 2 years following the RTC's 
termination on December 31, 1995.
  However, to obtain these funds, the FDIC must certify to Congress 
that an increase in SAIF premiums would reasonably be expected to 
result in greater losses to the Government, and that SAIF members are 
unable to pay assessments to cover losses without adversely affecting 
their ability to raise and maintain capital or maintain the assessment 
base. The certification requirement was made onerous to make taxpayer 
money the last resort. In theory, that is appropriate. But I believe 
that the standard was made so high that certification is virtually 
impossible.
  [[Page H4427]] There is ample evidence that Congress anticipated the 
need for, and attempted in various ways to provide for, greater use of 
taxpayer dollars to capitalize the SAIF or cover losses. Moneys to help 
capitalize the SAIF were, however, never requested of the
 Congress or made available by it, and FDIC access to additional 
resources even for purposes of covering losses has been unduly 
restricted. Using excess RTC moneys to service FICO obligations, help 
capitalize the SAIF, or serve as a backstop against losses while the 
fund recapitalizes are conceptually consistent with that original 
congressional intent and merit consideration.

  It was also anticipated in FIRREA that the bulk of thrift failures 
would have been resolved by the time the SAIF assumed responsibility 
from the RTC. However, repeated delays in providing adequate funds to 
the RTC delayed the resolution process. As a result, the burden and 
risk the SAIF will be assuming this summer is greater than it might 
have been. At the very least, we should therefore consider using excess 
RTC funds as a backstop for the SAIF to cover additional losses until 
the SAIF is better capitalized.
  There may indeed be some intractable Budget Act or pay-go problems 
associated with using the excess RTC funds, although the problems may 
be more readily addressed if the funds are somehow used as a backstop. 
Whether, and to what extent, these problems exist, and how they might 
be resolved, merit exploration before the option is dismissed. If the 
administration and the Congress believed use of these funds in any of 
these fashions were appropriate, and were committed to such an option, 
I would imagine a solution to these problems might be found.


         c. possible use of funds from bif-insured institutions

  Some have suggested that BIF-insured institutions participate 
financially in the solution, either through participation in the FICO 
obligation, a fund merger, or both. I appreciate their reluctance to be 
called upon to do so. They argue it is not their industry and not their 
problem, and that they have committed substantial resources to putting 
their own insurance fund on a sound footing. These arguments have 
substantial merit. But they are not the whole story.
  First of all, I believe both the banking and thrift industries have a 
common interest in the integrity of the deposit insurance program. No 
constituent of mine has ever spoken of the confidence generated in his 
financial institution by the soundness of the BIF or the SAIF. In most 
cases, consumers have little idea which fund insures their deposits. 
What they have confidence in is the fact that their deposits are FDIC 
insured. A breach of that confidence adversely affects both thrifts and 
banks.
  Moreover, we have only to look at the degree to which the FIRREA 
legislation and associated taxpayer costs have poisoned the well as we 
have considered legislation on financial modernization and safety and 
soundness issues affecting our banks to know that a problem in one 
industry is a problem for both. We have yet to pass modernization 
legislation. We may yet be unable to do so, because of concerns about 
safety and soundness and putting taxpayer dollars at risk. While FDICIA 
incorporated some real accomplishments, it was also in many ways an 
extreme
 regulatory overreaction to the thrift crisis that we are still trying 
to ameliorate. The relationships drawn in the public's mind between 
these issues demonstrates that neither industry can afford to be 
indifferent to the concerns of the other.

  On a more practical level, the relationships between the industries, 
and the desire for fuller relationships, are real. Banks hold at least 
one-third of SAIF deposits. They use the Federal Home Loan Bank advance 
window. They have purchased thrifts--often less expensively than might 
otherwise been possible because onerous burdens placed on the industry 
put many thrifts on the auction block at the same time--to enhance 
their branching network or make use of the benefits of a broader thrift 
charter. Banks can and do become Federal savings banks which, while 
BIF-insured, constitute a variant of the thrift charter. Bank holding 
companies have thrift subsidiaries. It seems then unreasonable to 
suggest that thrift holding companies cannot form comparable 
relationships with banks.
  Many banks support modernization legislation that would remove 
arbitrary barriers between types of financial institutions--yet they 
seem to want to maintain some arbitrary barriers in this instance. 
These industries are not two completely segregated subgroups that have 
nothing to do with each other. Clear relationships exist. It is 
somewhat disingenuous to suggest that those relationships should only 
exist when they are of benefit to the banking industry.
  I do have great sympathy for the desire of the banking industry to 
see bank premiums reduced substantially later this year. I believe such 
a reduction is rightfully expected and warranted, given the provisions 
of current law. It has also been earned by the substantial 
contributions the banks have made to their fund in recent years. Many 
banks have already incorporated such anticipated changes into their 
business plans, as they might reasonably do. Once the fund is 
appropriately recapitalized, moneys which have been put into premiums 
can usefully be made available to provide loans to bank customers.
  In my view, any solution involving the banks should not delay a 
reduction, or substantially intrude upon the level of such a reduction. 
I do believe, however, a reasonable argument can be made that it might 
be prudent not to take the premiums below 6 basis points this year 
until a solution to the broader problems the FDIC has identified in the 
thrift component of the deposit insurance program is found.
  I also believe that the idea of merging the funds merits serious 
discussion. Even if this is not effected in the near term, I believe an 
eventual move to one fund, one charter, and one Federal regulator is 
something we should seriously consider. Were we to consider such an 
option in the short term, however, it would need to be done with great 
care. In order for bank premiums to come down substantially this year, 
as the industry has a right to expect, additional time might be 
required to allow the combined fund to meet its designated reserve 
ratio, and a special assessment on the thrifts might reasonably be 
considered in order to provide coverage for any new risks they bring to 
the combined fund.
  I understand and appreciate the banking industry's argument that it 
did not solve the thrift industry problems of the 1980's and should not 
be responsible for solving them. But the healthy thrifts which remain 
did not create those problems either. Moreover, a focus on placing 
blame makes no meaningful contribution to the debate. Banking industry 
funds may or may not need to be part of any solution to pending thrift 
industry problems, but in either case I believe the quality of the 
solution will be enhanced by their participation in the discussion.


                           d. fdic authority

                            1. reserve ratio

  In recent testimony before the Banking Committee, one of the 
witnesses, Professor Kenneth Thomas of Wharton, argued that the 1.25 
reserve ratio was an inadequate safeguard and should be increased to 
1.5. I have not proposed that such a change be made, and the bills I am 
introducing do not include a proposal that the reserve ratio be 
increased. Nor should any proposal I am including delay a premium 
reduction once the BIF reaches the 1.25 reserve ratio. I do believe, 
however, that the proper level of that ratio is a serious issue which 
merits examination.
  Some have characterized such a suggestion as outrageous. I believe it 
is only responsible and prudent. It is critical that the insurance 
funds maintain sufficient reserves to protect depositors and taxpayers. 
To the best of my knowledge, there has been no meaningful analytical 
work demonstrating clearly that 1.25 is the appropriate ratio. 
Certainly, no fund could realistically be sufficient to address the 
kinds of structural problems both the banking and thrift industries 
have faced in the past decade, and that should not be our goal. We 
should also try to avoid excessive fund build-up. Once the fund is 
adequately protected, resources are better used for lending and 
community investment than to an unnecessary piling up of reserves. 
Nevertheless, we should be prudent. I will be looking to 
[[Page H4428]]  the FDIC and the GAO for more substantial analysis of 
this important issue.
  I do believe, however, that it is important to clarify that the 1.25 
ratio is not an absolute and precise target. It should be viewed as a 
floor, with some limited discretion available to the FDIC to maintain a 
cushion above that level without permitting an excessive build-up. I 
believe it is excessive to require that the FDIC establish significant 
risk of substantial future losses to the fund for the year before being 
permitted to increase the reserve even very modestly above that level.
  Chairman Helfer has made a convincing argument that the FDIC should 
refocus its mission, seeing its role less as resolving failed 
institutions and more as anticipating future problems. I believe there 
is overwhelming merit in that argument. Economic conditions change, as 
do the risks posed by bank portfolios. If the FDIC is to effectively 
play that new role, it must have some flexibility. There have in fact 
been recent indications that bank investment strategies have changed, 
some of the sources fueling bank incomes will not continue to be 
available over the long-term and some banks might be at risk in an 
economic downturn. We cannot ignore the lessons of the past.
  We must however balance concerns about protecting depositors with the 
need to increase credit availability. Money going into an insurance 
fund is not going to consumers. I believe the FDIC should proceed to 
reduce bank premiums substantially, as planned, once the BIF reaches 
the 1.25 ratio set under current law. If a further cushion is deemed 
prudent, it can be built up gradually without impeding the near-term 
reduction.


                           2. fdic discretion

  I also believe it is time to examine the issue of FDIC discretion 
more broadly. As Chairman Helfer has emphasized, the FDIC is precluded 
by a variety of statutory provisions from addressing the problems it 
has identified on its own authority. I would not casually give 
congressional authority over to a regulatory agency. However, I believe 
that some of the strictures under which the FDIC is currently operating 
are excessive and unnecessary. One of the legislative options I suggest 
would clarify or expand the FDIC's regulatory authority in a number of 
regards: provide it with greater authority to administer the FICO bond 
obligation; modify the certification requirements; provide 
discretionary authority to impose a modest special assessment on thrift 
institutions to frontload the capitalization of the fund; provide 
greater discretion to maintain a small cushion beyond the target 
reserve ratio in each fund; and provide limited authority to transfer 
resources between funds.
  The last item may be particularly controversial. But that does not 
mean we should not examine it. In general, I concur that the premium 
levels for each fund should be set independently. However, the job of 
the FDIC is not to manage two funds. It is to manage a deposit 
insurance program and protect depositors of both banks and thrifts. It 
cannot do so effectively if its hands are tied so that it is forced to 
explicitly ignore the impact that the status of one fund has on the 
members of the other. The FDIC should have some flexibility to address 
that problem.


              e. possible problems posed by goodwill cases

  Some of the bills I have introduced address the issue of creating a 
reserve to have available should adverse judgments against the 
Government be made in the pending goodwill cases. These cases point out 
yet again that the consequences of FIRREA are with us still.
  In the 1980's, some healthy thrift institutions entered into 
contracts with the Government under which they purchased failed or 
failing thrift institutions the then thrift insurance fund--FSLIC--did 
not have the funds to resolve. Since the Government could not make 
depositors whole by covering the loss, the acquiring institutions were 
instead permitted to count as tangible capital for a limited period of 
time an intangible asset called ``supervisory goodwill'' which they 
were to work off their books over time, thus absorbing those losses 
slowly.
  In FIRREA, supervisory goodwill was no longer permitted to count as 
tangible capital and institutions holding this asset were required to 
remove it from their books precipitously. I never questioned that the 
Government could break these contracts. But I consistently argued that 
it could not do so without being subject to damages. Recent court cases 
indicate the courts have considerable sympathy for my argument. The 
FDIC has already paid out claims on two such cases; many others are 
pending. Rulings adverse to the Government could cost the taxpayer 
additional billions.
  Again, this is a problem we should have anticipated. I argued that an 
undue emphasis on being tough on the thrift industry in FIRREA would 
result in yet greater cost to the taxpayer in the long-term, and argued 
against the rapid imposition of the new standards, unfortunately to no 
avail. The possibility I foresaw may unfortunately now become a 
reality.
  It is sometimes cost effective to be temperate, and I hope the 
lessons of the past will help encourage some temperance as we deal with 
current problems.


                             v. conclusion

  The problems are real, and I believe we have an obligation to address 
them now. It is my hope that placing some more specific options on the 
table will generate useful information, reactions, discussion, debate, 
and then, resolution.


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