[Congressional Record Volume 151, Number 165 (Monday, December 19, 2005)]
[Extensions of Remarks]
[Page E2624]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




        EXPLANATION OF THE DEPOSIT INSURANCE REFORM LEGISLATION

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                          HON. SPENCER BACHUS

                               of alabama

                    in the house of representatives

                       Sunday, December 18, 2005

  Mr. BACHUS. Mr. Speaker, today, we have a great opportunity to make 
significant improvements in our Federal Deposit Insurance system. Our 
position is strong, as both the insurance fund and the banking industry 
are extremely healthy, making this the ideal time to fine tune the 
system and establish a strong footing going forward.


          Basic principles of reform: Fairness and Flexibility

  The two fundamental driving principles of reform are to provide 
fairness to all insured depository institutions by assessing each based 
on risk, and to promote greater flexibility by allowing the FDIC to 
manage the fund differently based on existing economic conditions.
  The bill provides greater fairness to insured banks in many important 
ways. It authorizes the FDIC to revise its risk-based formula to 
reflect with greater accuracy the risk each institution poses to the 
insurance fund. In providing this authority, our Committee looked at 
examples provided by the FDIC to determine how the new system might 
work, including FDIC representations that show about 42 percent of all 
banks would likely remain in the lowest risk category. Because the very 
nature of bank loans involves risk, we expect the FDIC to form a 
reasonable system that encourages appropriate risk-taking, consistent 
with safe and sound banking, and with premiums at a level that protect 
the best run banks from being overcharged but don't inadvertently stop 
lending. In this bill, we make explicit that the size of the financial 
institution should not bar an institution from being in the lowest risk 
category. It is risk that matters, not size. We expect the FDIC to 
conduct assessments in such a timely manner that banks are able to plan 
for such an expense, thereby avoiding unexpected or untimely costs.
  Secondly, the bill recognizes that about 10 percent of institutions 
have never paid a premium to the FDIC to support its operations. This 
has put a burden on those institutions that fully capitalized the 
insurance funds in the mid-1990s. This legislation provides that those 
institutions that capitalized the fund with initial credits in 
proportion to each institution's financial contribution to FDIC. The 
credits are intended to offset premium assessments for many years to 
come, Those institutions that have not financially supported the FDIC 
would not have these credits and therefore must begin to pay premiums 
to the FDIC. Moreover, should the insurance fund grow to the upper 
regions of the normal operating range for the FDIC, banks would be 
entitled to a cash dividend in proportion to their historic financial 
contributions.
  In addition to promoting fairness, the bill provides the FDIC greater 
flexibility to manage the insurance fund. The current law constrains 
the FDIC from charging most banks when the reserve ratio remained above 
a certain level and forces the FDIC to charge high premiums (23 basis 
points) at times when it makes the least sense. Our bill corrects these 
problems by allowing the FDIC to manage the fund within a wide range, 
with the intention that assessments would remain reasonably constant 
and predictable.
  Importantly, this bill is not intended to raise more money than what 
the FDIC would have collected under the old law. Nor is this bill 
intended to encourage the FDIC to build the fund to the highest 
possible level. In fact, we know that each dollar sent to the FDIC 
means that there are fewer dollars that can support lending in our 
communities. As we considered this bill, we heard testimony that 
suggested that each dollar sent to Washington means that eight dollars 
of lending is lost. We cannot afford to restrict lending in our 
communities just to have more money added to the nearly $50 billion 
already in the insurance fund.
  To protect against the fund growing too quickly, the legislation 
provides an automatic braking system that would return as a dividend 50 
percent of any excess when the reserve ratio of the fund is above 1.35 
percent. It also caps the fund level, providing a 100 percent dividend 
when the reserve ratio exceeds the upper limit of the range at 1.50 
percent. This assures that money will remain in our communities. And 
while we provided the FDIC some authority to suspend the 50 percent 
dividend under extraordinary circumstances where it expects losses over 
a one-year timeframe to be significant, our expectation is that this 
authority will be used rarely and reviewed carefully each year when the 
new designated reserve ratio is set. This exception should be temporary 
and not a regular event, and the FDIC must communicate to Congress and 
the industry its justifications.
  The FDIC's development and implementation of a new risk-based 
assessment system should not negatively impact the cost of 
homeownership or community credit by charging higher premiums to 
prudently managed and sufficiently capitalized institutions simply 
because they fund mortgages and other types of lending through advances 
from Federal Home Loan Banks. The Gramm-Leach-Bliley Act took great 
care in trying to provide adequate funding resources for community 
financial institutions and insured housing lenders through expanding 
community institutions' access to Federal Home Loan Bank advances. The 
FDIC shall take into consideration the goals of the Gramm-Leach-Bliley 
Act with respect to Federal Home Loan Bank advances and the objectives 
of this Act when developing a risk-based premium system.


                        Designed for the Future

  Not only does the legislation provide fairness and flexibility, it 
also anticipates needed changes in the coverage levels over time. We 
know that inflation has cut in half the real value of the current 
insurance coverage since it was last changed in 1980. We also know 
that, as the baby boomers move into retirement, the current coverage 
level was inadequate to protect their life-long savings. Thus, this 
bill increased to $250,000 the insurance limit on retirement accounts.
  The House has repeatedly voted overwhelmingly in favor of legislation 
that would automatically index coverage levels based on inflation. The 
other body has only recently passed deposit insurance reform. The 
indexing language included in the Senate reconciliation bill required 
the FDIC to ``determine whether'' to increase coverage based on the 
amount of inflation increase plus a long list of factors. Our 
compromise language calls on the FDIC and NCUA to consider just three 
narrow factors. Those factors are: (1) the overall state of the Deposit 
Insurance Fund and economic conditions affecting insured depository 
institutions; (2) potential problems affecting insured depository 
institutions; and (3) whether the increase will cause the reserve ratio 
of the fund to fall below 1.15 percent of estimated insured deposits. 
If the FDIC and NCUA elect not to increase coverage, they must make 
their case based on these three narrow factors. The key language in the 
compromise is that the FDIC and NCUA, ``upon determining that an 
inflation adjustment is appropriate, shall jointly prescribe the amount 
by which'' coverage ``shall be increased by calculating'' the amount of 
inflation. This change in language, from ``determine whether'' to 
``shall jointly prescribe'' is a clear statement that Congress is 
establishing a presumption that the agencies will increase coverage if 
warranted by past inflation.


                           Stronger than Ever

  This legislation will make the insurance fund even stronger than it 
already is and, in combination with the extensive regulatory and 
supervisory authorities of the FDIC, ensures that the fund and the 
banking industry will remain strong for a very long time.

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