[Congressional Record Volume 146, Number 155 (Friday, December 15, 2000)]
[Senate]
[Pages S11897-S11898]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




             INCREASING THE FEDERAL DEPOSIT INSURANCE LEVEL

  Mr. JOHNSON. Mr. President, I rise today to briefly discuss S. 2589, 
the Meeting America's Investment Needs in Small Towns Act, or the MAIN 
Street Act as I call it. Not only is Main Street the acronym formed by 
this title, but it goes to the heart of why this legislation is 
necessary.
  As we move into the new economy, money is flowing from our small 
towns and communities to the larger financial markets. While each 
individual investment decision may make sense, the cumulative effect is 
a wealth drain from rural America. Money invested in Wall Street is not 
invested on Main Street. Wall Street wizards can work wonders with a 
portfolio, but they don't fund a new hardware store down the street. 
They don't go the extra mile to help a struggling farmer whose family 
they have served for years. And they don't sponsor the local softball 
team.
  By increasing the federally insured deposit level, we can help 
community banks and thrifts compete for scarce deposits. My legislation 
will account for the erosion to FDIC-insured levels from 1980. It will 
index these levels into the future, protecting against further 
erosions.
  Under current calculations, the immediate impact would be to almost 
double the insured funds, from $100,000 to approximately $197,000. The 
long range impact of this legislation would be to make locally based 
financial institutions more competitive for deposits, help stem the 
dwindling deposit base many areas face, and lead to new investments in 
our communities.
  Congress last addressed the issue of a deposit insurance increase in 
1980. At that time, we increased the insured level from $40,000 to 
$100,000. Congress has not adjusted that level since 1980. In real 
terms, inflation has eroded almost half of that protection.
  Every bank or thrift customer knows that the FDIC insures deposits up 
to $100,000. For many people, that notice symbolizes that the financial 
might of the United States government stands behind their banking 
institution. We learned the hard lessons of the 1930s, and created the 
FDIC to protect and strengthen our financial system.
  In rural communities across America, local banks serve as the hub of 
the town. Every business in town relies on the bank for funding. The 
banker knows the town, and the town knows the banker. In many ways, 
each knows it disappears without the other.
  Individuals in these towns like to know who is handling their money. 
They like the idea that their funds are secure in their home town. And, 
they like the fact that their money can be leveraged into other 
investments that will improve their communities. The more deposits a 
bank has, the more loans it can make. These loans are made locally, and 
serve as an investment in local communities.
  The MAIN Street Act will help preserve these small towns and 
communities. It will bring greater liquidity to community banks and 
promote growth and development. I look forward to working with the FDIC 
and other banking leaders as we seek to update our banking insurance 
protections to allow small banks to compete with other investment 
opportunities available. I ask unanimous consent to have printed in the 
Record an article by Bill Seidman which further outlines some of the 
issues surrounding federal deposit insurance.
  There being no objection, the article was ordered to be printed in 
the Record, as follows:

         $200,000 of FDIC Insurance? The Battle Has Just Begun

       The battle is on--in one corner there's the proverbial 
     David in the person of the FDIC Chairman Donna Tanoue, and in 
     the other corner, three giant Goliaths--Senate Banking 
     Committee Chairman Phil Gramm, Treasury Secretary Lawrence 
     Summers, and Federal Reserve Board Chairman Alan Greenspan
       Technically the conflict is over the FDIC's Deposit 
     Insurance Option Paper (published in August), which suggested 
     (some said foolishly) that deposit insurance coverage should 
     be increased from $100,000 to $200,000 per depositor. As the 
     paper pointed out, such an increase would compensate for the 
     last 20 years or so of inflation since the insurance level 
     was set at $100,000. The new ceiling might also help to meet 
     an increasingly difficult problem for community banks--
     obtaining sufficient deposits to meet growing loan demand. 
     Core deposits as a source of funding for community banks have 
     steadily declined and largely are being replaced by loans 
     from the Federal Home Loan Banking System.
       Once this idea was floated, Senator Gramm, and ever-pure 
     free marketer, reacted with a resounding ``No way--not on my 
     watch!'' At a recent Senate committee hearing (on an 
     unrelated subject) Gramm gained support for his position from 
     the secretary of the Treasury and the Fed chairman. Treasury 
     said it doesn't agree with the proposal because it increases 
     risk taking and possible government liability; Greenspan said 
     ``no'' because he feels it's a subsidy for the rich. (I guess 
     he's been in government so long that anyone who has over 
     $100,000 is really rich.)
       Do these opinions nix the possibility for a change in the 
     deposit insurance ceiling? I don't believe so. This is a 
     complex issue that will require congressional hearings and 
     much research, because it relates to ``too big to fail'' 
     policies and overall financial reform. Here are some of the 
     important points to be weighed in this debate.
       Increasing deposit insurance brings more financial risk to 
     government--Possible, but unlikely, since the bank insurance 
     fund has never cost the Treasury a penny (the thrift 
     insurance fund is the one that went broke. Even Chairman 
     Tanoue and Fed Governor Meyer have pointed out that the 
     greatest risk to the fund is likely to be the failure of a 
     large complex bank. Moreover, the risk is much greater to the 
     federal government when it supports a huge home loan bank 
     financing institution (another quasi-governmental agency such 
     as Fannie Mae or Freddie Mac)--where any trouble means big 
     trouble.
       It distorts the operations of the free market--This is also 
     referred to as creating a ``morale hazard,'' the idea being 
     that FDIC depositors won't have to worry about the condition 
     of the bank. Of course, the so-called free market is out of 
     kilter anyway, what with the Federal Reserve's discount 
     window and the Treasury's bailout of Mexico and half of Asia 
     through the IMF. In fact, the government seldom does anything 
     that doesn't impact the free market (think environmental 
     protection, antitrust, regulation of good drugs, bad drugs, 
     and so on). The issue of whether to increase the deposit 
     insurance ceiling has less to do with distortion of the free 
     market than it does with whether this particular action in 
     total is ``good for the country.'' (In the case of Mexico, 
     for instance, the free marketers decided that a U.S. bailout 
     of rich U.S. business leaders was good for the country and 
     the world; bingo, the funds were granted.)
       It's a subsidy for the rich--It's debatable whether FDIC 
     insurance is a subsidy at all. Most economists (though not 
     Greenspan) doubt that there is much of a subsidy because the 
     banks have paid for all of the insurance and the insurance 
     fund has covered any losses.
       Now that I've laid out the opposing views, here are several 
     good reasons for approving the FDIC deposit guarantee 
     increase:
       It will level the competitive playing field--Historically, 
     governments have protected all bank depositors when very 
     large banks are in trouble, thus providing an implicit 
     guarantee of unlimited insurance for those institutions 
     (e.g., Japan, Saudi, Korea, Thailand,

[[Page S11898]]

     and the U.S.). Therefore, at the very least, the increase to 
     $200,00 tends to give community banks a better chance to 
     maintain their deposit base against a too-big-to-fail 
     competitor.
       The increase will reduce the risk that smaller banks and 
     the communities they serve will stagnate due to the banks' 
     inability to obtain funding at a reasonable cost--It could 
     also reduce future FDIC insurance payments if these weak 
     banks fail in the next recession. (Incidentally, an FDIC 
     study shows that if the insurance level had been at $200,000 
     during the problems of the '80s and '90s, it would not have 
     materially increased FDIC insurance costs.)
       The increase will help to maintain a banking system that is 
     decentralized and diverse--This type of system helps the 
     economy, boosts productively, and promotes entrepreneurship--
     important factors in our present prosperity.
       It provides a savings incentive--As more baby boomers 
     retire with savings in excess of $100,000, the increased FDIC 
     insurance coverage will provide a convenient and conservative 
     savings option and will encourage savings, which all 
     economists agree would be good for the U.S. economy.
       You may have guessed by now that I'm rooting for the corner 
     with little David (Chairman Tanoue) in this important policy 
     showdown--and the battle is far from over. Why? I'll simply 
     use the litmus test that applies to all other proposed 
     reforms: It's good for the country.

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