[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
H.R. 522--FEDERAL DEPOSIT
INSURANCE REFORM ACT OF 2003
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
MARCH 4, 2003
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-6
86-853 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana 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 JULIA CARSON, Indiana
Chairman BRAD SHERMAN, California
RON PAUL, Texas GREGORY W. MEEKS, New York
PAUL E. GILLMOR, Ohio BARBARA LEE, California
JIM RYUN, Kansas JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois CHARLES A. GONZALEZ, Texas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
MARK GREEN, Wisconsin JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona MIKE ROSS, Arkansas
VITO FOSELLA, New York CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MELISSA A. HART, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
TOM FEENEY, Florida DAVID SCOTT, Georgia
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey
TIM MURPHY, Pennsylvania BERNARD SANDERS, Vermont
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
March 4, 2003................................................ 1
Appendix:
March 4, 2003................................................ 29
WITNESS
Tuesday, March 4, 2003
Powell, Hon. Donald E., Chairman, Federal Deposit Insurance
Corporation.................................................... 6
APPENDIX
Prepared statements:
Clay, Hon. Wm. Lacy.......................................... 30
Emanuel, Hon. Rahm........................................... 31
Gillmor, Hon. Paul E......................................... 32
Hinojosa, Hon. Ruben......................................... 34
Israel, Hon. Steve........................................... 35
Royce, Hon. Edward R......................................... 36
Powell, Hon. Donald E........................................ 37
H.R. 522--FEDERAL DEPOSIT
INSURANCE REFORM ACT OF 2003
----------
Tuesday, March 4, 2003
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to call, at 2:10 p.m., in Room
2128, Rayburn House Office Building, Hon. Michael Oxley
[chairman of the committee] presiding.
Present: Representatives Oxley, Leach, Bereuter, Baker,
Bachus, Royce, Kelly, Ryun, Manzullo, Biggert, Shays, Tiberi,
Kennedy, Hensarling, Garrett, Brown-Waite, Barrett, Harris,
Renzi, Maloney, Meeks, Inslee, Hinojosa, Lucas, McCarthy, Baca,
Matheson, Miller, Emanuel, Scott and Davis.
The Chairman. [Presiding.] If the committee would please
come to order.
Today, we are meeting to discuss legislation sponsored by
my colleague and Financial Institutions Subcommittee Chairman
Spencer Bachus, the Federal Deposit Insurance Reform Act of
2003. Chairman Bachus' legislation is the result of a thought-
out, deliberative process laying the groundwork for reform of
the nation's deposit insurance system. Last year, we had a
great deal of success with the exact piece of legislation that
we will be discussing today, the greatest success being the
more than 400 votes the bill received on the House floor last
year.
Today's hearing will focus on the views of FDIC Chairman
Don Powell. Chairman Powell was instrumental last year in
developing and passing comprehensive deposit insurance reform
legislation out of the House. This year, with Chairman Powell's
help, I am confident we can get that bill signed into law.
Today's hearing could not have occurred at a more
appropriate time in the financial and economic cycle. While the
deposit insurance system is the strongest it has ever been, it
may be tested as the nation is confronted with an uncertain
economic climate. Even so, I say with confidence that both the
industry and the deposit insurance system are sound and the
economic recovery, when it occurs, will be in large part
determined by the ability of the financial services sector to
remain vibrant and strong. A sound and responsive deposit
insurance system is at the core of such vibrancy and strength.
The FDIC faces critical challenges, chief of which is the
need to reform deposit insurance in a way that ensures that the
system is equipped to respond to new and emerging risks. The
FDIC must continue to adapt to address the challenges and risks
posed by the post-Gramm-Leach-Bliley environment, the
integration of global financial service markets, and the
interconnectedness of these events with our communities.
This is a tall order that will require the help of the
Congress to provide the necessary legislative tools and the
agency to make the necessary structural and program changes.
This hearing will explore these issues and any insights that
Chairman Powell may share for seeing to it that the system
remains worthy of the public's confidence and appropriately and
fairly treats all stakeholders and beneficiaries with respect
to deposit insurance coverage and premium assets.
I look forward to hearing Chairman Powell's views today. I
say with much conviction that the committee continues to have
faith in our financial services industry and in the ability of
the FDIC to implement comprehensive, meaningful and equitable
reform.
Chairman Powell, thank you for your commitment to public
service and to the FDIC at this most challenging of times. The
committee will pursue any changes to the deposit insurance
scheme with deliberation, thoughtfulness and a complete
understanding of the attendant implications and benefits. The
changes we are considering will affect the savings and
investment decisions of millions of individuals and companies.
The committee will not undertake this responsibility lightly.
Again Mr. Chairman, welcome, and we are glad to have you with
us.
The chair now recognizes the gentlelady from New York, Ms.
Maloney, for an opening statement.
Mrs. Maloney of New York. Thank you, Mr. Chairman, and good
afternoon Chairman Powell, and thank you very much for joining
the committee. We look forward to your testimony.
For 70 years, our constituents have depended on the deposit
insurance system to protect their savings and maintain the
safety and soundness of the banking system. As I joined this
committee at the close of the S&L crisis, I have since been
committed to safety and soundness legislation and oversight of
the banking system that builds on all we have learned since
that disaster. We have to remember that standing behind the
system is the full faith and credit of the United States and
our constituent taxpayers.
I am pleased that we are conducting this hearing in an
environment of bipartisan cooperation, and basically general
consensus among the financial service regulators. As an
original cosponsor of H.R. 522, the Federal Deposit Insurance
Reform Act of 2003, I am supportive of the overwhelming
majority of the provisions of the bill. It is long past time to
merge the insurance funds. Additionally, eliminating the 23
basis point cliff and providing a new premium system that takes
into account the past contributions of institutions are major
steps forward.
The mechanism for determining credit for past contributions
is based on an amendment I cosponsored with Congressman
Bereuter last session. This provision is critically important
as premiums banks pay to the FDIC limit their ability to make
loans in the communities they serve. I thank Chairman Bachus
for including this balanced amendment in the legislation, and I
must add, for working so hard to build a consensus. When you
had your first hearing I thought we would never have a
consensus. But by the end of the session, he had built a strong
bipartisan piece of legislation.
While there is much to praise in the bill, I continue to be
concerned about the increase in maximum account coverage from
$100,000 to $130,000. As Federal Reserve Chairman Alan
Greenspan's written testimony from last week stated, and I
quote, our most recent surveys of consumer finances suggests
that most depositors have balances well below the current
insurance limit of $100,000, and those that do have larger
balances have apparently been adept at achieving the level of
deposit insurance coverage they desire by opening multiple
insured accounts. The Fed, Treasury, OCC and OTS all oppose
raising coverage. Only Chairman Powell supported tying coverage
to inflation from its current $100,000 level. My position is
that the overall improvements to the deposit insurance system
in the legislation outweigh the challenges I have with this
coverage increase, but I continue to hope this section can be
modified in some way.
I thank the chairman and ranking member for their work on
this legislation, and I yield back the balance of my time. I
thank the chairman for this oversight hearing.
The Chairman. I thank the gentlelady.
The chair is now pleased to recognize the author of this
important legislation, the gentleman from Alabama, Mr. Bachus.
Mr. Bachus. Thank you, Mr. Chairman.
First of all, I want to commend you for your commitment to
deposit insurance reform. You have made this legislation one of
the top priorities of the committee. You did that last year,
and I appreciate that.
I also want to say, Ms. Maloney, that this legislation did
in fact result from a bipartisan coming together of almost
every member of the House of Representatives. In fact, the
legislation that I have introduced this year is the same
legislation that passed 408-18 last year. You cannot get much
more of a consensus on a major piece of legislation than that.
This year, it has been reintroduced with 35 cosponsors from
both sides of the aisle. Ranking Member Frank is one of the
sponsors of the legislation.
Let me say this, deposit insurance reform has been the
hallmark of our nation's banking system for almost 70 years.
The reforms made by this legislation will ensure that the
system that has served American savers and depositors so well
for so long will continue to do so for future generations.
There has been a lot of discussion of what this legislation
does. In that regard, let me stress this. There has been a lot
of debate about coverage and what the level of coverage ought
to be. The reason that there has been so much focus on coverage
is the fact that all the other provisions of this legislation,
there is complete consensus for the need for everything else--
merging the insurance funds, complete agreement by Federal
Reserve, Treasury, FDIC, all the regulators, the industry, no
debate on that; eliminating the current system's pro-cyclical
bias, complete agreement; addressing the so-called free-rider
problem by requiring that large brokerage firms that sweep
customer accounts for uninsured accounts into insured deposits
will have to start paying their fair share, agreement on that.
The only disagreement is on coverage. Let me submit simply
one statement on that fact and I will conclude my testimony,
because I know Chairman Powell has a plane to catch at 4
o'clock, and I want the committee to have an opportunity to
address him. Members should understand that if deposit
insurance coverage had simply kept pace with inflation since
1980 when levels were last adjusted, it would now be more than
$200,000. Even if one accepts the argument that an increase in
1980 from $40,000 to $100,000 was ill-advised, it is still the
case that indexing from the $40,000 level in effect in 1974
would bring coverage today to $140,000. So the notion that
raising coverage to $130,000 represents some kind of
irresponsible expansion of the deposit insurance system is
simply unfounded. In fact, using inflation-adjusted dollars,
the protection that we are offering American depositors today
is less historically than it has been in over 60 years.
With that, Mr. Chairman, I conclude my remarks. Mr. Powell,
I appreciate your testimony. I do believe that to promote a
stable and a sound banking system, that deposit insurance
reform and deposit insurance coverage is a hallmark of that
system. If we are to preserve that level of protection at
historic levels, we will have to raise coverage. I say index it
so we will not have to keep revisiting this every few years.
Thank you, Mr. Chairman.
The Chairman. I thank the gentleman.
Are there further opening statements?
Mr. Royce. Yes, Mr. Chairman.
The Chairman. Who seeks recognition? The gentleman from
California, Mr. Royce.
Mr. Royce. Yes, not to belabor the point, but I would like
to thank you again, Mr. Chairman, for reintroducing this bill,
and certainly thank Subcommittee Chairman Bachus for
reintroducing this legislation.
As he has articulated, this bill makes a number of much-
needed statutory changes to the current deposit insurance fund.
These changes are generally supported by banking regulators,
but again there is one change which is not. I do want to go on
record and say that I am reticent to give this bill my
unqualified support as it contains two provisions that I find
particularly troubling. One is an excessive increase in deposit
insurance coverage limits, and a provision that levies
additional assessments on banks to fund the so-called lifeline
deposit accounts.
Extending the liability of the fund beyond its current
$100,000 limit, again in the words of Federal Reserve Chairman
Alan Greenspan, would increase the government subsidy to
depository institutions, would expand moral hazard, and would
reduce the incentive for market discipline without providing
any clear public benefit. In addition to this opposition from
the Federal Reserve, the Office of Thrift Supervision, the
Office of the Comptroller of the Currency, and the U.S.
Department of the Treasury all oppose increasing deposit
coverage limits in the interest of safety and soundness.
Additionally, giving the FDIC the authority to levy fees
from private institutions for purposes other than managing the
safety of the fund, such as for federally subsidized checking
accounts, is in my view ill-conceived and sets a bad precedent
which may encourage future politically motivated encroachments
upon the integrity of the fund. So it is my hope that as we
fashion this bill, we can bring it back to the $100,000 limit
and address these issues. The other provisions, as I have
mentioned before, are very needed and I commend the authors.
Thank you.
[The prepared statement of Hon. Edward R. Royce can be
found on page 36 in the appendix.]
The Chairman. The gentleman yields back. Are there further
opening statements? The gentlelady from New York?
Mrs. Kelly. Thank you, Mr. Chairman.
It is well known that the FDIC has long played a critical
role as a provider of confidence and stability in the financial
system, and many members of this panel would agree that reforms
to modernize our federal deposit system are long overdue. While
I have a couple of reservations about the current bill, the
fact that we are having this hearing so early in the session I
think is a good indicator of this committee's strong commitment
to enacting needed reforms in this Congress. I want to thank
the chairman for making this a priority and for the work he has
done on H.R. 522. The bill includes changes that ought to help
us create a more efficient, equitable and flexible system that
reflects our needs.
So I thank you, Chairman Powell, for being here today. I
look forward to your testimony.
I yield back.
The Chairman. The gentlelady yields back. Yes, the
gentleman?
Mr. Scott. I am Mr. Scott from Georgia.
Mr. Chairman, I understand that, as was stated before, that
both you and Ranking Member Frank have both signed on as
cosponsors of H.R. 522, and certainly given the support in the
past and a large bipartisan vote that the House gave a similar
measure last year, I have little doubt that H.R. 522 will
certainly receive a solid vote from this committee. I certainly
want to also thank Chairman Powell for appearing before the
committee today.
From what I understand, H.R. 522 will allow for greater
insurance coverage for retirement accounts, which benefits
seniors, and raises the coverage for municipalities, which
benefits community growth. Certainly given these challenges
with the current economy, I certainly look forward to learning
more about these benefits at today's hearing.
There is one somewhat troubling aspect that I would hope
that your testimony might cover today. My understanding is that
H.R. 522 would increase insurance coverage limits for in-state
municipal deposits to the lesser of $2 million or the sum of
$130,000, and 80 percent of the amount of the municipal deposit
in excess of $130,000. I would like to get some indication of
how you believe that this increase would promote community
development in those areas where growth has historically been
stagnant, particularly in some of the areas in the rural areas
or some of the lesser-developed areas in areas of my state, for
example, of Georgia.
I yield the balance of my time.
The Chairman. The gentleman from Georgia yields back. The
chair apologizes. I am still trying to learn the new members'
states.
Are there other opening statements? Noting none, we now
turn to our good friend, the Chairman of the Federal Deposit
Insurance Corporation, the Honorable Donald Powell.
STATEMENT OF HON. DONALD E. POWELL, CHAIRMAN, FEDERAL DEPOSIT
INSURANCE CORPORATION
Mr. Powell. Thank you.
Chairman Oxley and members of the Committee, it is a
pleasure to appear before you today to discuss deposit
insurance reform. Deposit insurance reform is a top priority of
the FDIC this year, and we appreciate the Committee's
continuing interest in pursuing reform. The fact that this
Committee was able to write legislation last year that
attracted more than 400 votes in the House of Representatives
was an extraordinary accomplishment.
I especially want to thank Chairman Oxley, Representative
Frank, Representative Bachus and Representative Waters for
introducing H.R. 522, and to thank their colleagues who are
supporting the legislation. H.R. 522 is a reflection of the
time and hard work the Committee has spent on these issues over
the last year.
When the FDIC has raised issues, the Committee has been
more than willing to listen to our concerns and to work with
us. That continues to this day on both sides of the aisle, and
we look forward to continuing working with you to get the best
possible legislation for everyone concerned.
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. While the current system has been effective to
date, we are committed to working with you and the financial
services sector to improve it. H.R. 522 incorporates all of the
major reform recommendations put forward by the FDIC, and we
appreciate the Committee's recognition of these important
issues.
Today, I want to emphasize three elements of deposit
insurance reform that would do just that: one, merging the Bank
Insurance Fund and the 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 to guarantee
bank deposits and the other to guarantee thrift deposits. 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 will 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 when, as a
matter of economic necessity, we would be asking banks to
strengthen their balance sheets and to extend credit. Today, we
announced that the reserve ratio of the BIF increased from 1.25
to 1.27 over the last quarter, and the SAIF reserve ratio
decreased from 1.39 to 1.37. Now is the perfect time to address
deposit insurance reforms. The industry is strong and so are
the insurance funds.
Third, effectively pricing premiums to reflect risk. Under
the 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 1,000 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 unnecessarily 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 in much the same way. With some flexibility
in the fund management, we can alleviate the problems with the
current system, while strengthening our ability to deal with
any future crisis. We are not asking for absolute discretion.
We recognize the need for accountability and will work with you
to ensure that the system provides it.
The reforms I 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 coverage should be higher. Some have said coverage
should be lower. Our position is simply to maintain its value
through indexing.
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. I want to
repeat that. Deposit insurance reform is not about increasing
assessment revenue from the industry, nor is it about 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.
Again, we appreciate the committee's leadership on the
deposit insurance reform, and look forward to working with you
to get the job done this year.
Thank you, Mr. Chairman.
[The prepared statement of Hon. Donald E. Powell can be
found on page 37 in the appendix.]
The Chairman. Thank you, Chairman Powell.
Let me begin. I notice that in your prepared testimony that
you do not mention increased coverage limits for retirement
accounts like 401(k)s and IRAs. Was that just an omission? Do
you continue to still support that provision of last year's
legislation?
Mr. Powell. It was an omission. We do continue to support
that.
The Chairman. Thank you.
As you know, we were following closely the hearing in the
Senate last week. It certainly appeared from all the press
accounts that there was a strong consensus among the regulators
who testified, with the obvious exception of the amount of
coverage. Is that correct?
Mr. Powell. Yes, sir. I think there is consensus on 90
percent of the bill.
The Chairman. Let me ask you this, what about the issue of
retirement accounts and municipal deposits? Is that split off
from the $130,000 for individuals, or does the opposition go to
the retirement accounts and the municipal accounts as well?
Mr. Powell. I think the opposition goes to the retirement
accounts and the municipals as well--with those who would
oppose increasing coverage.
The Chairman. So you were outnumbered on that?
Mr. Powell. Yes, outnumbered on that.
The Chairman. But you held your own.
Mr. Powell. Well, I am not sure about that.
The Chairman. Yes, you did.
[LAUGHTER]
Let me ask you, in your testimony you point to several
provisions that the FDIC supports and that are contained in
H.R. 522 addressing the so-called ``free rider'' issue. These
include removing statutory limitations on the FDIC's ability to
charge premiums to all depository institutions and tying
transitional assessment credits to past contributions to the
funds. As you know, some have proposed giving the FDIC the
authority to levy special premium assessments on rapid growth
accounts that dilute the insurance funds as an additional way
of addressing the free rider issue. What is your position on
that particular issue?
Mr. Powell. I think, first of all, the ``free rider'' is an
issue, and I think deposit insurance reform does in fact speak
to that. We believe that all institutions should pay. As I
mentioned in my testimony, 1,000 institutions have entered the
system since 1996, none of which have paid. I chartered an
institution in Texas about four years ago. It was an FDIC-
insured institution. We did not pay any premiums. That is
wrong, that is unfair. It is not right. As for institutions
that grow at a rapid pace, I am not sure that growth by its
very nature should be penalized or should be assessed
additional premiums. It is a factor. From a safety and
soundness standpoint, there are other issues besides growth. I
would not support a special assessment to those institutions
that are growing at a more rapid pace perhaps, unless in fact,
it is a safety and soundness issue. We would charge in the
risk-based premium for that particular cause.
The Chairman. So you would not seek a special legislative--
Mr. Powell. No, sir.
The Chairman. Okay. Very good.
As you know, Chairman Powell, a private company recently
unveiled a product designed to allow small and mid-size banks
to offer deposit insurance coverage well in excess of the
current $100,000 limit by participating in a network of
institutions that would share insured deposits. Some have
suggested the availability of this product somehow undermines
the case for high coverage levels. One could also argue the
product reflects a demand in the marketplace for exactly the
kinds of higher coverage levels that H.R. 522 would provide.
What is your view on those apparently competing ideas?
Mr. Powell. Mr. Chairman, I do not think it is necessarily
proper for me to comment on the private sector. Innovation
occurs each and every day. We have not discussed that
particular proposal in depth at the FDIC. My sense is that it
will not in any way hurt deposit insurance reform. I think that
is the private sector at work. Whether it is successful, I do
not know, but it is not anything that we have any concern
about.
The Chairman. Thank you.
The Chair's time has expired. The gentlelady from New York,
Ms. Maloney?
Mrs. Maloney of New York. Thank you, Mr. Chairman.
I would like to follow up on Mr. Oxley's question on fast
growth institutions. My understanding is that these new
deposits are not the major reason for the reduction in the
reserve ratio, but rather only responsible for roughly one-
fourth of the 16 basis point drop in the ratio. Is that your
understanding?
Mr. Powell. I am not sure of the math. I think it is
something like $80 billion of increase in deposits. I am not
sure on the math.
Mrs. Maloney of New York. I have read that in several
papers, that it was roughly one-fourth of the 16 basis point
drop.
Mr. Powell. I think that is correct.
Mrs. Maloney of New York. Okay. Additionally, I understand
it is your position that fees for growth could make entry into
the banking system more difficult for new institutions. Is
that--?
Mr. Powell. It is not anything that we would support.
Mrs. Maloney of New York. Okay. And do you think these fees
go against the theme of expanding competition, which was the
reason for Gramm-Leach-Bliley?
Mr. Powell. Yes, ma'am, that would be part of the factor.
Mrs. Maloney of New York. Okay. I just wanted to further
ask you, Chairman Powell, about the coverage question. The
regulators uniformly do not want to raise coverage beyond
$100,000. You agree, but would index it to inflation. That is
my understanding. In your testimony, you call coverage limits,
quote, ``the most controversial, but least critical of the
FDIC's recommendations.'' Do you think this is the least
critical area because as a former banker you do not believe
raising coverage will attract many additional deposits? Or as a
regulator, are you concerned about increasing the liability to
the government?
Mr. Powell. Coverage is an issue that I have struggled
with. I struggled with it when I was in the private sector, and
I have struggled with it as a regulator. I have talked to
bankers who believe that the coverage should be $200,000. I
visit them at their institution, and come away understanding
the rationale behind that. I was in the Midwest recently
visiting an institution in excess of $40 billion. The CEO
brought up the issue of coverage, and he said, ``I am opposed
to increasing coverage.'' I said that I recognized that, and
that does not surprise me. He said, ``Listen to me. I was
opposed to it until I went downstairs and visited with new
accounts folks and customer relations people at our
institution, and they tell me it makes a difference to the
customers.'' I thought that was very interesting. Then I
visited with bankers that have indicated to me they think the
coverage is about right. In fact, some would say that it should
be lower.
I do not know where the coverage should be. I just know
that Congress established it in 1980 at $100,000, and it has
served the American people and the industry very well during
some good times and some bad times. I do know that most of the
time we react in a crisis and fortunately we are not in a
crisis today. It is my conclusion that the $100,000 level as
established, in fact, has eroded in time down to about $47,000
today. But to take the issue away from the debate we should
index it at the $100,000 level in order that it will not erode.
I favor, very frankly, the House bill that simply says if
indexing is not working, I think the bill says six months prior
to the announcement of any increase, that Congress can say
``stop.'' So it seems to me the House bill offers the checks
and balances against any unwarranted increase that would not
serve the industry or the American people.
Mrs. Maloney of New York. Again, following up on Chairman
Oxley's questioning, now that you are able to open multiple
insured accounts, and this is taking place in the private
sector, in your opinion does that really moot this question
about raising the limit--if you can quickly put it into
multiple accounts?
Mr. Powell. No, ma'am. I do not think so, because that has
been available in the marketplace for many years. I think the
average depositor, while he or she may be aware that they can
in fact go into multiple accounts, it is not as simple as it
may sound, because if the husband and wife are limited to what
they can put into these accounts, in the retirement accounts,
and while $100,000 is a lot of money to me, as time evolves
some folks in fact reach that $100,000 in a relatively short
period of time. Some bankers in smaller communities where there
are one or two banks have also indicated to me that there are
not many choices in these communities, and some of their
customers are reaching retirement age. Some would have
$300,000, $400,000, $500,000 in retirement accounts.
Mrs. Maloney of New York. With regard to these retirement
accounts and municipal deposits, the bill really reflects a
compromise. At one point, it was $5 million; now it is $2
million. Do you believe that raising the coverage on them has
more legitimacy than on standard accounts?
Mr. Powell. I think the Congress and the American people
put a value on retirement accounts, and there are other
incentives that would encourage people to place money in
retirement accounts. So we support increasing retirement
accounts. We do not support the increase in the municipal
deposits.
Mrs. Maloney of New York. My time has expired. Thank you
very much.
Mrs. Kelly. Thank you. Mr. Bachus?
Mr. Bachus. Thank you.
Mr. Chairman, I think the one thing this hearing has pretty
much reiterated is that the debate seems to be on coverage. I
think there is a consensus on everything else, so I am going to
focus on really where the debate is.
Some have suggested--there have really been two arguments
thrown out for not increasing coverage. One argument is, it is
unnecessary; another argument is it puts the financial
institution or the system in moral hazard, puts our financial
system at risk. So let me focus first of all on the
unnecessary. In fact, looking over in the Senate, I actually
heard testimony which I did not hear challenged that only the
very wealthy have an occasion to have over $100,000 in a bank
account. You are a Texas banker. What is your real-life
experience? Do people other than the very wealthy have over
$100,000 in a banking account? Is there an occasion where they
would legitimately have more than that amount?
Mr. Powell. I am not sure that you and I would have the
same definition of wealthy.
Mr. Bachus. I am just going from what the statement in the
Senate was, ``only the very wealthy'' have over $100,000.
Mr. Powell. Everybody is wealthy compared to me. Anyway, as
I indicated, I struggle with this issue. As a banker in the
late 1980s and early 1990s, I will tell you the issue of moral
hazard is one that I have learned more about since coming to
Washington. Being a banker in Texas during the late 1980s and
early 1990s, deposit insurance, in my view, did in fact
contribute to the crisis, but it was not the only factor. High
interest rates, oil prices and poor judgment also contributed.
I have made the comment publicly that I believe we in
Texas, had the coverage limit been $25,000, $40,000, would have
found ways to get the money into those institutions. What is
important from a supervisory standpoint is what you do with
that money, which takes the debate off the coverage issue. It
is a safety and soundness issue, and really a supervision issue
and a regulatory issue. We were making bad decisions with the
money, and also we were making poor decisions on what interest
rate we were paying for those deposits.
So there were a lot of issues as it relates to this issue
of moral hazard. As I indicated earlier, I am not sure where
that coverage should be. I just know that FDIC insurance during
those times in my life, the late 1980s and early 1990s, was a
symbol of confidence. From a liquidity standpoint, it was
extremely important that we had the seal of the FDIC on our
door just to remain open.
Mr. Bachus. Thank you.
One thing I would just maybe suggest to you, and I am going
to go on to the moral hazard argument, but that people today
sell their house and when they sell it they deposit the
proceeds into their bank account. Sometimes a husband or a wife
dies, and there is insurance proceeds, often it is more than
$100,000. Sometimes it is $500,000, but they deposit that
normally into one bank account. That seems to be the
experience. So there are times, I think, when other than the
very wealthy have over $100,000 in their bank account.
The second thing is, and I will call Congressman Royce and
Chairman Greenspan and Chairman Shelby over in the Senate, I
will call them the big three. The big three have argued that
there is a moral hazard; that if we increase it, we increase
risky behavior, and therefore we should not create moral
hazard. Interestingly enough, the FDIC looked at this issue in
a study in 2001. I want to point that out to you. This was
prepared for the FDIC by two respected economists, including
Federal Reserve Governor Alan Blinder. The point was made that
if the FDIC is given the authority to charge risk-based
premiums as H.R. 522, this legislation, does, quote, most
objections based on moral hazard should evaporate. That is a
quote from that report.
Professor Blinder goes on to state about coverage, quote,
``in a world of properly priced deposit insurance, it seems
more appropriate to ask the opposite question. Why have any
coverage limits at all?'' So at least on one report for the
FDIC by these two eminent individuals, they addressed that.
Recognizing that no one here is arguing for unlimited deposit
insurance coverage, isn't Professor Blinder's underlying point
a valid one, that if the FDIC has the ability to penalize banks
for engaging in risky behavior through the assessment of risk-
based premiums, the moral hazard concerns of those who oppose
coverage increases seems unfounded?
Mr. Powell. It is a factor. It is a factor, Congressman, as
well as Congress establishing some other tools that regulators
can use that would in fact limit moral hazard, such as prompt
corrective action.
Mr. Bachus. Thank you.
Mr. Powell. Let me speak to your ``wealthy'' issue.
Something just crossed my mind. I think there were 11
institutions that failed last year. Between 1992 and mid-2002
there were 9,600 accounts that were uninsured, representing
about $245 million. Obviously, to those people it was very
important.
Mr. Bachus. Thank you.
I appreciate also your endorsement of Professor Blinder's
remarks. Thank you.
Mrs. Kelly. [presiding] Thank you.
Ms. McCarthy?
Mrs. McCarthy of New York. Thank you, Madam Chairman, and
thank you, Mr. Powell.
I just want to go off on a different track. You are
recommending that we bring together, and you have mentioned
many times about the reasoning on why we should bring the bank
insurance fund and the savings associate insurance fund, and
why they should merge. I am just curious how long that would
take, and what would the cost savings be, if there are cost
savings, and would it become more efficient?
Mr. Powell. How long would it take?
Mrs. McCarthy of New York. Yes.
Mr. Powell. I am not sure I can answer that. Staff probably
could answer that. I would say in a reasonable period. It is an
accounting issue. I would think it would be a matter of days.
Mrs. McCarthy of New York. So it is just a matter of
really--
Mr. Powell. Yes, it is just a matter of bookkeeping entries
that would go in. I think merging the funds would be much more
efficient. I think it would be efficient for us at the FDIC,
and more important I think it would be more efficient for the
industry, because a lot of the banks have acquired S&Ls, S&Ls
have acquired banks, and there is some confusion about keeping
separate books to make sure what is in which fund. So I think
it is a win-win for everybody. There is almost unanimous
support for that provision of the bill. I really have not heard
very much opposition to it.
Mrs. McCarthy of New York. I just want to make one comment,
too. Fortunately when my husband died, and I did get an
insurance check, not much, but it was over $125,000, and I am
not wealthy. So I happen to agree with you. Thank you.
I yield back my time.
Mrs. Kelly. Thank you, Ms. McCarthy.
Mr. Baker?
Mr. Baker. Thank you, Madam Chair.
I appreciate your appearance here today, Mr. Powell, and I
have a really pretty simple question. To construct a risk-based
premium system, one must have certain elements that you are
going to put into the pot, which I understand are not yet fully
determined. That presumes that you have the ability to see the
data that is relevant to the concerns in some timely manner. I
have had, and continue to have concerns about the 90-day-old
retrospective reporting quality of call reports. Particularly
if we are now going to move to a risk-based system to start
assessing premiums, it would seem to me that real time,
transparent disclosures and methodologies would be of real
value to you.
I am going to get to the point of what I believe to be a
pilot program that either has been initiated or soon to be
initiated relative to extensible business reporting language,
the acronym XBRL. I find it very interesting and of
extraordinary value for a number of particular reasons. Is that
methodology something that possibly, pursuant to this pilot
program--I am not exactly sure what the goal of it is--but
after your analysis, is that something that could be reviewed
as a potential way for us to get a better and clearer
understanding of the true risks within a financial institution?
Mr. Powell. Absolutely. I share your concern. As a banker,
it always caused me pause or discouragement frankly with the
slowness and timing of information that we received from the
FDIC. Most institutions know what their balance sheet and their
income statement is at the close of business each day.
Accordingly, the FDIC, with other Federal financial
institutions exam council members, are currently planning a new
call report system that would include the use of XBRL.
We are at the very beginning of that. We have developed
some specs for vendors to submit for proposals to the FFIEC,
all with the thought of being more timely, more accurate, and
having more consistency in reporting. Real-time data is
something that we have a goal at the FDIC to accomplish. I
think we are going to get there. It will be slower than what I
would like, but also as you mentioned, it will assist us in
risk-based premiums.
Mr. Baker. Good. I think it has an application even beyond
financial institutions. I like the idea of extending this to
publicly traded corporations, but I want to make sure that
someone of the stature of the FDIC has thoroughly examined it
and whenever it is appropriate, whatever observations or
recommendations can be publicly made, I would certainly like to
know them.
Mr. Powell. We will keep you informed.
Mr. Baker. Thank you very much.
Mrs. Kelly. Mr. Miller?
Mr. Miller. Thank you, Mr. Powell.
The Office of the Comptroller of the Currency and the
Office of Thrift Supervision have ordered federally chartered
banks and thrifts to end their affiliation with pay-day
lenders, based at least in part on safety and soundness
considerations, although pay-day lenders receive astronomical
interest rates. The average annual interest rate on a 12-day
loan in my state of North Carolina is 547 percent. They are
also very risky loans. They tend to be made obviously with very
little or any underwriting. There is no security for the loans.
They are obviously made to people who are very poor, which is
why they are in the market for a substandard loan in the first
place.
I know the FDIC has now issued an advisory for public
comment on those affiliations. Do you see between FDIC-
supervised thrifts and petty lenders, do you see that
affiliation affecting the safety and soundness of banks under
your supervisions? If so, what kinds of regulations are you
considering?
Mr. Powell. I do see it as a safety and soundness issue.
Part of our guidelines speak to that one issue, safety and
soundness. Accordingly, our guidelines also tell those
institutions that we will be requiring capital equal to the
outstanding indebtedness. We may also have other supervisory
requirements for those institutions that participate in those
loans. It is a safety and soundness issue.
My thinking, as a former banker, some of the requirements
that we at the FDIC may impose upon those institutions may not
make it economically viable to participate in the business. But
if an institution so chooses, we will act accordingly from the
safety and soundness standpoint.
I also think, Congressman, it is important that in this
whole notion of pay-day lending, we think a little bit about
literacy--economic literacy. We at the FDIC are committed to
that. We have a program that we refer to as ``Money Smart,''
and we would be happy to send you information about that. But
education is part of the whole notion of resolving some of
those practices that go on.
Mr. Miller. Mr. Powell, the reason, of course, that there
is that affiliation in the first place is simply that pay-day
lenders can avoid state regulation by claiming a preemption of
federal law. Obviously, North Carolina does not allow 547
percent interest rates under our usury laws. Have you
contemplated simply a prohibition, the way the OCC and the OTS
have--follow their lead?
Mr. Powell. We have contemplated it. I think the best thing
for us to do is wait until we have comments back from our
proposal, and we would be happy to share those comments with
you and share our conclusion after receiving those comments.
But I think we need to make sure that we vet it in the
marketplace to be sure that we are not missing anything.
Mr. Miller. Thank you, Madam Chair.
Mrs. Kelly. Chairman Powell, I am interested in the
financial literacy that you just spoke of. Can you tell me the
name of that again?
Mr. Powell. Money Smart.
Mrs. Kelly. Money Smart?
Mr. Powell. Yes, ma'am.
Mrs. Kelly. It might not be a bad idea if the whole
committee had a copy of that. Would you be willing to send us a
copy?
Mr. Powell. Absolutely. We are very proud of that. In fact,
we are introducing it in Chinese--we have it obviously in
English and Spanish and a Chinese version is going to be ready
for the marketplace I think within 30 days.
Mrs. Kelly. Would you be willing to send us a Hispanic copy
as well, please?
Mr. Powell. Absolutely.
Mrs. Kelly. Thank you very much.
Mr. Royce?
Mr. Royce. Thank you, Madam Chairman.
I would like to ask Chairman Powell, as you may be aware,
tomorrow this committee will be holding a hearing on the
proposed interest on business checking legislation, proposed by
Mr. Toomey and Ms. Kelly, which I support. However, the
legislation as introduced would discriminate against industrial
loan companies in my state--businesses that make a valuable
contribution to keeping the financial services marketplace
dynamic and keeping it competitive. Even though the FDIC
regulates these companies and the NOW accounts they offer, they
are not included in this legislation. I would like to know,
would the FDIC be supportive of efforts to allow financial
institutions to pay interest on NOW accounts held by
businesses? I would just ask, in your view, is there any safety
and soundness issues here?
Mr. Powell. The FDIC would not object to paying interest by
these financial institutions on NOW accounts held by
businesses. We do not really perceive those any different from
any other business accounts, and we do not see it as a safety
and soundness issue.
Mr. Royce. I appreciate that very much, your answer on that
score.
Also, returning to the question of the $100,000 coverage,
you had indicated earlier that during the S&L crisis in the
1980s when we had the issue of whether moral hazard was a part
of creating that climate, you said the higher deposit insurance
did contribute to the crisis. In your view, there were other
factors, but it was a contributor. We have the argument put
forward in the Senate the other day, the thesis of why have any
coverage at all. If you have coverage limits removed, but at
the same time if you have a perfect construction of a risk-
based premium model put in place, in theory you would not have
moral hazard as a consequence.
I think the answer that Hawke, or certainly Alan Greenspan,
because he has said it as well, would put forward--they would
say, because ultimately the incentive for market discipline is
preferable to attempts of government regulatory agencies to try
to approximate the discipline of markets. They would say, to
construct a risk-based premium system perfectly and do it by
government oversight is inherently risky, especially when you
start talking about the thesis of removing it altogether, the
limit.
It is not only the moral hazard argument that has been put
forward here, it is also the increase in government subsidy,
which is an issue. It is reducing the incentive for market
discipline. At the end of the day, you have the four regulatory
agencies on the other side of you arguing, do not do this; do
not move forward with increasing the coverage. That is rather
formidable opposition. I was going to ask you, how do you
answer the opposition of every other financial institution
regulator, who although they all agree that the rest of this
legislation--this bill is badly needed. Everything else in this
bill is a step in the right direction. They feel that this
element is not. I wanted to get your response once more for the
record.
Mr. Powell. Thank you. Let me speak to the subsidy issue.
It is a subsidy, but as a former banker, I used to say we pay
for that subsidy. It is a franchise. We have a charter. We have
a choice. It is a subsidy.
The second issue, market discipline. I am a free market
guy. I struggle with the free market's instability. My
experience says that in the free market when an institution is
in trouble, the sophisticated depositor flees and the
unsophisticated depositor stays. It is a matter of education.
The other agencies--I appreciate and understand their views. I
do believe that Comptroller Hawke at the Senate hearing said
that he did not have any objection to indexing.
Mr. Royce. Thank you, Chairman. I appreciate it.
Mrs. Kelly. Thank you.
Mr. Scott?
Mr. Scott. Thank you, Madam Chairman.
I would like to go back to the point I mentioned in my
opening remarks, if you could address it. We have a lot of
communities that are stagnant in their growth. How will the
increase in insurance coverage limits for in-state municipal
deposits promote community development in those areas? I have a
second part to that I will follow up on.
Mr. Powell. Congressman, I think at the institution where I
used to be CEO, we would bid on municipal deposits if we
thought there was an economically viable way we could make a
buck. There were days that we would bid on them, and days we
did not because of competition. Had we been able to be the
successful bidder on those deposits, we of course would loan
money based on them, but that is very, very competitive in the
marketplace. Most states have a central depository where they
accept municipal deposits and they pay, very frankly, a rate
that most bankers do not want to pay. It is a higher rate.
Thus, that money goes to the central location, which takes the
money out of the local marketplace. So, it is a matter of
economics with lots of institutions. They want the money, but
they want the money at their price. As you know, most states
also require that those deposits be fully collateralized with
treasuries or comparable-type securities.
I have not found that it causes any bankers any concern
that municipal deposits are not insured. I have heard from
members of Congress and I have heard from some bankers in Ohio
where there was recently an institution that failed, and there
were some losses of municipal deposits. To my knowledge,
however, there has not ever been a municipal depositor who has
lost any money in an insured institution that has failed,
saving with the exception of one that occurred last year, and
that was a result of fraud.
Mr. Scott. The other part of my question is that Chairman
Greenspan made a statement in his testimony before the Banking
Committee that by raising these coverages to $100,000 or above
would encourage banks to engage in risky behavior. Do you agree
with that? And also, are there some incentives in here that
would prevent banks from doing what Greenspan fears they would
do?
Mr. Powell. The best incentive is keeping their job. I
appreciate and understand, and as I have mentioned before, I
understand and recognize the principle of moral hazard. I do.
But also recognize that most bankers want to operate an
institution that serves the community, that is committed to the
community, that returns a reasonable return, a good return to
the shareholders. If they are making decisions that would cause
that institution to be overly supervised by the regulators, or
that depositors or customers would leave that institution
because of poor decisions, the first person that is going to be
replaced is management. Most of the time, management has
ownership in the institution. Not only are they going to be
replaced, but they are going to lose their investment.
Having said that, clearly there are temptations. It
occurred in Texas in the late 1980s and early 1990s, to make
poor decisions. As I have indicated, I respect and understand
that deposit insurance was a factor, but in my opinion, it was
not the main one.
Mr. Scott. Thank you. I yield back.
Mrs. Kelly. Thank you very much. It is now time for me to
ask my questions, Chairman Powell.
We have been hearing from a lot of the banks and from a
number of the people here on the committee that there are
people who want higher coverage levels, and other people want a
level to stay where it is. I wonder if the FDIC has studied the
concept of giving the financial institutions the option to
purchase additional municipal deposit coverage. That might give
them flexibility that I was talking about earlier in my opening
statement. I am wondering if you have ever studied it, and what
your findings might have been.
Mr. Powell. We have had some preliminary studies on that. I
will confess to you I am not sure what the conclusions were. I
will tell you that we would be more than happy to study that
and come back to you and the other members of the committee and
members of Congress with our conclusions.
Mrs. Kelly. Thank you. I think that would be interesting,
if the banks could get extra coverage from the FDIC. It seems
to make sense, and I would really appreciate your doing a
study.
I would also like to get your thoughts on the
appropriateness of programs to lower the premiums or the
credits to the financial services that offer services to
certain communities. As you may know, Congresswoman Waters had
an amendment that would provide for a 50 percent discount in
the assessment rate for deposits attributable to lifeline
deposits and so forth. I would like to get your feelings on
that.
Mr. Powell. I support the initiative for all institutions
to reach out to the un-banked in their community. It is very
important that we make sure that all members of our community
are part of the economic wealth of America.
Mrs. Kelly. Do you support the 50 percent discount?
Mr. Powell. I do not support the 50 percent discount
because I do not perceive it as a safety and soundness issue.
Premiums, in my view, should be based on the safety and
soundness of the institution, and I would not support the
lifeline provision. Again, I want to emphasize that we should
find other ways, other incentives, in my view, to encourage
financial institutions to reach out to the un-banked. Clearly,
I support that.
Mrs. Kelly. Since I have a little bit more time, I would
like to know what constants do you have currently in charging
risk-based premiums, as authored by FDIC?. What information are
you using in setting the risk-based premiums?
Mr. Powell. I may need some help from the staff, but
basically as you know, many--91 percent or 92 percent of the
institutions now do not pay, and part of the law that we
operate under is that well-managed and well-capitalized
institutions should not pay. It has specific definitions--it is
capital and supervisory rating, and that is it--the amount of
the capital and our supervisory rating, the CAMELS ratios.
Risk-based premiums under the proposed legislation would expand
that, in my view, in a much more--not unlike the private
sector. It would look at internal and external issues. As you
know, we are attempting to make sure that the risk-based
premiums are transparent; that they are fair; and that they
have more objectivity than subjectivity in the cost.
Mrs. Kelly. Is there someone behind you who might talk to
us a little bit about what exactly, besides fairness,
transparency, and the cost--is there anything else that they
would like to add, since you said that--
Mr. Powell. I can add some things to be specific--balance
sheet, growth, management, earnings, capital, liquidity, rating
agencies. You might even look at stock price, secured
liabilities, funding, growth.
Mrs. Kelly. It sounds like that pretty much covers it.
Okay, great. Thank you.
I wanted to ask you about a bill that has been reintroduced
in the House that has a flexible range that goes down to 1.15
percent. A Senate bill was introduced that allows the level to
go down to 1 percent. Does the administration think that either
of these floors for the fund is too low?
Mr. Powell. Does the administration?
Mrs. Kelly. Yes.
Mr. Powell. I have had some conversation with the folks at
Treasury, and part of that conversation was they believe that
the Senate bill in fact is too wide of a range. We at the FDIC
obviously want a wider range. We think the 1 percent and
perhaps the 1.15 percent in the House bill, to the 1.4 percent
to the 1.5 percent--the larger the range, we believe the better
that we will not have unintended consequences from the pro-
cyclical issue.
Mrs. Kelly. Thank you very much. My time is up.
We go to Mr. Emanuel.
Mr. Emanuel. Thank you.
Mr. Chairman, you have actually directed an answer to a few
of the questions. This goes in the league of a softball. Take a
breather. Relax here on this one.
Mr. Powell. Thank you.
Mr. Emanuel. Chairman Powell, at last week's Basel Accord
hearing, we heard concerns about how Basel II could potentially
create competitive inequalities among different classes of
financial institutions. We had a discussion and back and forth
some questions. Just your comments on how you see H.R. 522 in
that same vein--whether you think it will create some of the
inequalities that we asked about on Basel II--just from your
perspective of how this bill would do.
Mr. Powell. As it relates to large institutions and smaller
institutions? We at the FDIC, treat them all the same.
Hopefully, no one would interpret deposit insurance, or risk-
based premiums or any other issue as being a favor to smaller
institutions or larger institutions. They are all the same.
Mr. Emanuel. Thank you very much.
Mr. Bachus. [presiding] The gentleman from Texas, Mr.
Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman.
First, Chairman Powell, as a fellow Texan I want you to
know I sleep better at night knowing that you are running this
shop. I also want to congratulate you for your compelling and
reasoned testimony. I read with great interest today that
apparently, for the first time in our nation's history, FDIC-
insured institutions topped $100 billion in earnings. So you
and your people must be doing something right. I salute you for
your stewardship.
I have a couple of questions. One, I wanted to follow up on
Ms. Kelly's line of questioning. Obviously, as most of the
members of this committee, I agree that we need to move to a
risk-based premium system. In your testimony, you talk about
eliminating the existing inflexible statutory requirements, and
adding discretion and flexibility for the FDIC board of
directors. Although I have never been a banker, I have been a
businessman. When I had the misfortune of dealing with
regulators, I always wanted there to be a tangible standard or
metric that I knew that I could shoot for, and I was always
concerned about any arbitrary application on the part of the
regulator.
So I wish you could give us any further details about the
current status of thought within the FDIC, about how we impose
accountability and safeguards on this new system of discretion
and flexibility.
Mr. Powell. Thank you.
I am in a fiduciary role. I take accountability and
responsibility very seriously. We would be happy to work with
Congress and we would be happy to work with industry to make
sure that we are in fact accountable. We would be happy to
listen to any suggestions, any recommendations that would in
fact hold us more accountable as it relates to this deposit
insurance program.
But however, saying that, the hard targets, I do not think,
have served us in the past, and we would again ask the Congress
not to put in hard targets, especially as it relates to
managing the funds; but we want to be accountable.
Mr. Hensarling. Second question, moving to the issue of
indexing the deposit insurance for inflation that you are
advocating, I am new to this particular argument, and I have
heard within this committee inquiries that give me some insight
into the rationale. You mentioned in answering one of the
questions, kind of some anecdotal evidence, speaking to some, I
believe, new account officers at a bank. But I am curious, do
you have any comprehensive studies or evidence to what extent
the impetus is really consumer-driven here?
Mr. Powell. I do not think there is any empirical data,
Congressman. I do not think we have any empirical evidence that
it should be at $90,000, $150,000. We have some surveys that we
have participated in over the last four or five years, before
my time, asking folks what they believe the coverage should be.
It goes all over the board. So there is no empirical evidence
that it should be at a certain level.
As I said earlier, repeating myself, I am not sure where it
should be. I just know that it has served the American people
and industry for the last 23 years, and most of the time we
react to a crisis. That is what happened the last time it was
raised from $40,000 to $100,000. I would hope that we will
remove it from the crisis arena, put that issue to bed, and
just index it. That is the reason I said I liked the provision
within the House bill that says if in fact it gets away,
Congress can say stop.
Mr. Hensarling. I believe I understand the costs associated
with the proposal, and that is increased exposure for the
American taxpayer. I understand the scenario of the one-time
insurance proceeds that may exceed $100,000. In trying to
understand the benefits of the proposal, I am curious about
other rationales or other benefits that you see associated with
it.
Mr. Powell. There is no question that the FDIC leverages
the United States Treasury balance sheet. However, as you know,
premiums are paid by the industry. Before we go to the United
States Treasury, we would tap the industry. There is something
like $750 billion of book value in the industry today. So we
would have to expose $750 billion and then approach the United
States Treasury balance sheet. Obviously, we leverage the
United States Treasury balance sheet--we acknowledge that.
But with true risk-based premiums, it should move more in
the direction of the private sector, where there are penalties
for institutions that are not conducting themselves in a
businesslike way, in a way that produces sound and effective
policies. And it would reward those institutions that in fact
do conduct their business using sound and safe policies. So
there will be winners and there will be losers and hopefully
these premiums will be an incentive to those who are doing some
things that they should not be doing, so they would not have to
pay the premium. That would be a management decision.
Management may choose to say, you know, I do not care, I will
pay the premiums, I am going to continue down the road in the
business practices and the business model that I want to go to.
Mr. Bachus. Thank you, Mr. Hensarling.
Mr. Davis?
Mr. Davis. Thank you, Mr. Chairman.
Mr. Powell, I have been felled with a bout of laryngitis
the last few days, so I apologize for sounding like Don
Corleone in advance.
Let me pull out a couple of things. I am a cosponsor of
this legislation. One of the reasons is because I suspect that
it would provide something of a competitive advantage or
something of a competitive tool for small banks. I represent a
district that contains a large contingent of rural areas, and
as you know, it is a very difficult challenge to sometimes get
banks to locate in those areas. The only ones who are willing
to do it are often your small banks, your community banks. I
see this perhaps in answer to one of Mr. Hensarling's
questions, I see this as an additional incentive or additional
advantage of this legislation.
Having said that, let me ask you this set of questions. In
response to Representative Kelly's questions about the criteria
that would be used for setting premiums, the risk-oriented
criteria that would be used for setting premiums, the majority
of those criteria seem to me that they would favor larger, more
established, better capitalized banks. So therefore, some of
the advantage that could be gained by small banks could be lost
as we moved to the other part of the process.
So address that concern for me, if you would--talk to me
about what the FDIC can do to avoid putting the disadvantage
back on small banks when the risk factors are calculated.
Mr. Powell. I appreciate your concern, Congressman, and
have had some bankers indicate the same concern to me. I have
found that smaller institutions, the management of smaller
institutions in the communities that you have described, are
pretty solid. They are bright. They are very competitive. I do
not think it is a disadvantage. I do not think our risk-based
premiums will cause any disadvantage to small institutions, nor
do I think it will cause disadvantage to large institutions. I
think it will be very uniform across the small and across the
large institutions.
Again, we are going to be very transparent in this. Every
institution will have an opportunity to comment on the risk-
based premium profile. It is not in any way the intent to favor
one size of institution over another size.
Mr. Davis. Let me ask you one other question, Mr. Chairman.
Given the fact that the weightiest argument of the opponents
seems to be that raising the premiums, or rather raising the
deposit insurance, will somehow provide an incentive for risky
behavior on the part of banks. Are you amenable to some kind of
a compromise in which the increase happens only for very low-
risk banks instead of happening across the board?
Mr. Powell. I think that is what a risk-based premium does.
I think the coverage issue is a different issue. I think the
coverage issue is one issue, but risk-based premiums will be
based upon how a bank, in fact, performs.
Mr. Davis. Right. I understand that. I guess what I am
asking is, is it possible that we could have some kind of a
formula in which we calculate the degree to which certain banks
fell in a high risk or low risk category, and then we only
increased the insurance for banks that were not low-risk?
Mr. Powell. I think it would be very confusing for the
marketplace. I think there would be more disruption in the
marketplace than benefits. It may be that considering--someone
asked a moment ago how one might get additional coverage--the
study we talked about paying additional premiums for that. But
I think having one institution having coverage at one level and
another institution having coverage at another, I think would
disrupt the marketplace.
Mr. Davis. Would you be open to any scenario in which if a
bank saw its rating fall, for example, from one risk category
to another, that it would lose the level of insurance, or
something that would at least provide incentives towards sound
conduct on the part of the bank?
Mr. Powell. Hopefully, we can do that through charging them
more for the product.
Mr. Davis. Okay. I will yield back the balance of my time,
Mr. Chairman.
Mr. Bachus. Thank you, Mr. Davis.
Mr. Davis is from Alabama, and he yielded back some of his
time. He was very prompt--also a Harvard graduate. He knows how
valuable time is.
The gentlelady from Florida?
Ms. Brown-Waite. Thank you very much, Mr. Chairman.
Chairman Powell, the administration and the Federal Reserve
have expressed opposition to the portion of the bill that
increases the coverage limits. Can you explain what the primary
concerns are, because I have not received the details of it.
You may have gone over this previously. I came in a little late
to the meeting. If you have, I apologize. If you have not, I
would appreciate hearing your interpretation of their
opposition.
Mr. Powell. Thank you. Here is my interpretation of their
view. I think the moral hazard issue is an issue that was
raised by the Federal Reserve and Treasury. I think also they
believe there is opportunity in the marketplace to distribute
one's money among insured institutions and insured accounts.
The system is working the way it is okay. These are probably
some of their views--I am not doing them very good service, but
primarily the moral hazard issue, and there is no compelling
reason to increase coverage by consumers.
Ms. Brown-Waite. My second question relates to the
arbitrariness of going to $130,000. I think you may have
addressed that, but if there were a formula that you had that
brought us to the $130,000, other than it appears to be
arbitrary, because if you look at the inflation factor, it does
not match up with inflation. Is $130,000 what you think is the
path of least resistance?
Mr. Powell. I am not sure that, again I repeat myself to
some extent, where that number should be. I just believe that
the House bill does not cause any concern for us at the FDIC
from a safety and soundness issue. And the cost to the
industry, if we in fact merge the funds, I do not think would
be a burden.
Ms. Brown-Waite. Thank you. I yield the rest of my time.
Mr. Bachus. I thank the gentlelady.
Mr. Meeks?
Mr. Meeks. Thank you, Mr. Chairman.
Chairman Powell, let's say this is an ideal world, and just
as you want it--you know, deposit insurance reform is enacted
just as you want it. What would the FDIC do if an institution
then shifted a very large amount of previously uninsured funds
into an insured bank, causing the fund to drop below the lowest
allowable reserve ratio?
Mr. Powell. Under deposit insurance reform, that
institution would immediately start paying premiums on these
funds to the FDIC. We would also base our premiums upon the
risk profile of that institution. If, in fact, the institution
was doing some things--growing too fast, undercapitalized, poor
management, business plan in a fog--they would be paying
additional premiums.
Mr. Meeks. So let me just make sure, so you are saying all
FDIC-insured banks would pay these additional?
Mr. Powell. Yes, sir--all pay.
Mr. Meeks. Let me ask another question. I believe you
testified to this. I was not here, but I know there has been
some concern about the fact that newcomers since 1997 have not
paid into the deposit insurance system. If we made premium
requirements more flexible, how would you propose to charge
such newcomers when the DRR is above the ratio target?
Mr. Powell. Under deposit insurance reform in the House
proposal, the DRR would be a flexible number determined by the
FDIC, with accountability. Remember, all institutions would pay
immediately--everybody will pay, again based upon the risk
profile.
Mr. Meeks. Okay. One other question. If you have the
flexibility to move the DRR within a range, what are some of
the factors that would cause you to move the DRR up and down
within that range?
Mr. Powell. That is a good question. I think there would be
several factors. I think the condition of the industry would be
the primary factor. We would act just like a life insurance
company, just like any other insurance company would act
depending upon what we believe the risk is to the insurance
company--condition of the industry; where the deposit fund
balance was; history; and obviously some economic data. Through
our supervision and cooperation with other agencies and their
input, we could come, I believe, to an appropriate decision.
Mr. Meeks. Thank you. I yield back.
Mr. Bachus. Thank you.
The former Chairman of the full committee, Mr. Leach?
Mr. Leach. Thank you, Mr. Chairman.
I would like to talk a little bit about history from two
perspectives, if I could, Mr. Chairman. This concept of why the
S&Ls got in trouble, and whether there was a tie to deposit
insurance is a judgmental concern. First, let me describe very
precisely the difficulty when the S&Ls came in, how it tied to
deposit insurance, and why it may not be as directly relevant
to this debate as has been placed on the table.
The S&Ls got in trouble in the first instance because they
were an industry that lent long and borrowed short. When
interest rates rose, this caused serious difficulty. They got
in trouble in the second instance when--and here there is a tie
to deposit insurance--the regulators did not have the backbone
to recapitalize when their capital base eroded, often to the
point of less than zero.
Then they got in trouble in the third instance when public
officials, often at the state level, with some support from a
national regulator, decided to give them powers that had never
been given to a particular industry. This elongated the losses.
The tie to deposit insurance is that an institution can
operate effectively in an unregulated environment--that is, it
can have less than zero capital--and can attract deposits
because you have deposit insurance, there is an incentive to
attract more money at higher interest rates, to pay yourself
more if you run the institution, and to dividend yourself more
if you own the institution. So there was a cascading
phenomenon.
The reason I emphasize this is, deposit insurance is not in
and of itself a problem, except when it is tied to failure of
regulators to be firm and thoughtful. The real fault is
regulation that was infirm and unthoughtful. Deposit insurance
was a footnote, although a very important footnote. But if one
assumes proper regulation, increasing deposit insurance is no
particular problem. That is the point of view that I think
should be on the table today.
Now, if one assumes that bank regulators are asleep at the
switch--that means the FDIC, the OCC, the Fed and all the State
regulators--then the case for increasing deposit insurance is
non-existent. If one assumes that they are pretty credible, the
case can be rather powerful. I am of the view the regulators
today are pretty credible and that they learned a lot from
previous experiences. Therefore, the case for increasing
deposit insurance to me is persuasive.
Then you have the question of how much coverage should be
increased. There is pretty good consensus from yourself, from
others, that COLA adjustments are pretty reasonable. I think
so, too. Then the barometer becomes at what point do you tag
them? Do you tag them starting immediately? Do you tag them
starting with the last increase? I am on the generous side of
that issue, but there might be some room for compromise.
I think the discussions that revolve around deposit
insurance causing the S&L crisis must be measured against the
totality of the circumstance and not simply catergorized as a
cause because the cause was only tied to imprudent regulation.
There is one other footnote to all of this. The first
cause, which relates to the issue of an industry borrowing long
and lending short, the positive aspects of that industry,
whether done by a bank or an S&L today, is the new techniques
of laying off risk in ways that did not really exist, at least
as a general practice, in the mid-to late-1970s, when the
escalating inflation problem developed. But that particular
industry, which is housing, is one of the steadiest and one of
the best risk layer-offers, without the use of sophisticated
derivatives, although at the Fannie and Freddie level there is
some use of derivatives, but that is a separate sort of
circumstance. It does not relate directly to a financial
institution that has deposit insurance.
So my own personal view is that the administration should
not be so reluctant and the use of the phrases S&L problem and
deposit insurance may be hiding other competitive judgments
that should not really be part of the equation. I think this is
a small institution issue principally, although not
exclusively, and that small institutions are right.
But anyway, that is a judgment circumstance, and I would
appreciate your comment.
Mr. Powell. Well said, Congressman, well said. I agree with
you 100 percent.
Mr. Leach. Thank you. I yield back the balance of my time.
Mr. Bachus. I would like to also associate with the remarks
of the former Chairman, Mr. Leach.
At this time, I would like to recognize one of your fellow
Texans, Mr. Hinojosa.
Mr. Hinojosa. Thank you, Chairman Bachus.
Before I make a statement, I wish to request that my entire
written statement, which I was going to present earlier, but I
was in another committee meeting, be included in the record.
Mr. Bachus. Without objection.
[The prepared statement of Hon. Ruben Hinojosa can be found
on page 34 in the appendix.]
Mr. Hinojosa. Thank you.
I am very pleased that my colleagues before me have asked
so many questions and given clarification to your position on
H.R. 522. I saw where in last week's Senate Banking hearing you
indicated your support for indexing individual deposit
insurance coverage to inflation. Some of us have a strong
feeling for seeing it being increased to the $130,000 from the
current $100,000 level, but I certainly respect your reasons
for how you feel.
Having answered so many of the questions that were on my
mind as to how you felt and why, I simply want to use this time
to commend you, Chairman Powell--you and the FDIC--for your
money smart financial literacy program for adults. Both the
English and the Spanish versions are being disseminated in my
congressional district, and hopefully will help educate my
constituents on checking, savings, credit and other types of
financial products necessary to improving one's economic
situation in life.
I have a large percentage that do not use banks and do not
have banking accounts. So this type of financial literacy will
be very helpful. I just want to go on record that I personally
thanked you, and that I am pleased that you came to speak to us
this afternoon.
Mr. Powell. Thank you. I will pass your comments on to the
staff that worked on Money Smart.
Mr. Hinojosa. I yield back the balance of my time, Mr.
Chairman.
Mr. Bachus. Chairman Powell, we have one more questioner.
The gentleman from Connecticut?
Mr. Shays. I thank the gentleman. Thank you, Mr. Chairman,
and Chairman Powell.
I have come late, but I have had a chance to read your
statement. I just want to get into one area that deals with the
deposit insurance. I am very concerned, as you point out in
your statement, that you could have a thousand new charter
institutions with more than approximately $880 billion in
insured deposits that have never paid premiums for the deposit
insurance they receive. That just seems to me to be kind of
crazy.
So I like the idea that we would require everyone to pay. I
also recognize that there is a point at which you do not want
to build up the fund to absurdity, obviously, and take out
money that could be used to help build a community. So I like
the idea of requiring all to deposit and then to provide a
rebate, in essence, when the fund gets up to a certain point.
The area of my question is, though, who should decide what
goes back to the banks? While I could draw comfort in the fact
that you could decide, and you would be reasonable, should not
the Congress set some parameters in deciding how large that
fund should be and make sure that we are not taking too much
out? In spite of my budget instincts, I have always wanted to
have a lot of protection.
Mr. Powell. Yes, Congressman. I think Congress should, and
I think the ranges in the House bill, I would hope they might
be expanded, and I think would in fact call for certain things,
if in fact the fund grows beyond the 1.4. We at the FDIC
recognize and understand, and it is not our intent to increase
premiums or to assess the industry unnecessarily. So we would
be obviously happy to work with Congress about any assessment
credits or rebates back to the industry when it reaches a
certain level.
Mr. Shays. And just so I am clear on one part here, and I
tend to reveal my ignorance by my questions, but I learn. As we
increase the deposit insurance, we would then clearly be
requiring more to be placed in the fund. Correct?
Mr. Powell. I am sorry?
Mr. Shays. As we allow for protection of from $100,000 to
$130,000, we would want more money set aside?
Mr. Powell. There would be more exposure. Yes, there would
be more exposure. Fortunately, the fund now, if we in fact
combine the two funds, it would not be material from a safety
and soundness issue.
Mr. Shays. And one last question, where is the greatest
resistance to combining the two funds? I mean, this has been an
issue that we have debated.
Mr. Powell. Combining the funds--I have not heard anyone
opposing merging the funds.
Mr. Shays. So why--I mean, years ago we talked about this.
Mr. Powell. I--
Mr. Shays. Okay. Let's get it done.
Mr. Bachus. Thank you. Is the gentleman through?
Mr. Shays. I am yielding back. Thank you, and I appreciate
your talking to me.
Mr. Bachus. Chairman Powell, we beg your indulgence, the
gentleman from Georgia would like to ask you one final
question.
Mr. Powell. Sure.
Mr. Bachus. Then that will conclude the hearing. We also
know that you have a plane to catch, so after this question,
feel free to hurry from the room and do not feel that you have
to stay here and talk to anyone. The Chairman of the full
committee, Mr. Oxley, and I both want to tell you publicly how
much we appreciate your professionalism and your ability. You
are a credit to the Bush Administration. You are a credit to
this country. We both strongly feel that you are a very good
Chairman for the FDIC and have done a wonderful job.
Mr. Powell. Thank you.
Mr. Bachus. Thank you.
Mr. Scott?
Mr. Scott. Yes, thank you very much, Mr. Chairman, and
thank you for your indulgence. I will be very brief, but I do
want to say that your appearance before the committee has been
very helpful and beneficial to me.
I was just wondering in looking at H.R. 522, I notice that
the maximum per account was raised from $100,000 to $130,000.
However, when we get to the retirement accounts, that number is
doubled to $260,000. I was just wondering, what data are you
basing that on, and is it just in the Senate to get more
Americans to invest and save for their retirement?
Mr. Powell. I do not think there is any magic in that
number, Congressman. History says that the Congress has been
willing to give a special incentive to those who save. The
Congress has decided that not only through 401(k)s and IRAs,
but in fact deposit insurance for retirement accounts was
raised in years past, ahead of the individual coverage. But we
would be happy to listen to any number.
Mr. Scott. Thank you.
Mr. Bachus. Part of the reason--I will also add that the
committee felt that in light of the history we had over the
last two or three years of people losing their retirement
security and retirement accounts, we felt good public policy
would be to protect those retirement securities for senior
citizens.
Mr. Scott. Thank you.
Mr. Bachus. This concludes our hearing. The hearing is
adjourned.
[Whereupon, at 3:45 p.m., the committee was adjourned.]
A P P E N D I X
March 4, 2003
[GRAPHIC] [TIFF OMITTED] T6853.001
[GRAPHIC] [TIFF OMITTED] T6853.002
[GRAPHIC] [TIFF OMITTED] T6853.003
[GRAPHIC] [TIFF OMITTED] T6853.004
[GRAPHIC] [TIFF OMITTED] T6853.005
[GRAPHIC] [TIFF OMITTED] T6853.006
[GRAPHIC] [TIFF OMITTED] T6853.007
[GRAPHIC] [TIFF OMITTED] T6853.008
[GRAPHIC] [TIFF OMITTED] T6853.009
[GRAPHIC] [TIFF OMITTED] T6853.010
[GRAPHIC] [TIFF OMITTED] T6853.011
[GRAPHIC] [TIFF OMITTED] T6853.012
[GRAPHIC] [TIFF OMITTED] T6853.013
[GRAPHIC] [TIFF OMITTED] T6853.014
[GRAPHIC] [TIFF OMITTED] T6853.015
[GRAPHIC] [TIFF OMITTED] T6853.016
[GRAPHIC] [TIFF OMITTED] T6853.017
[GRAPHIC] [TIFF OMITTED] T6853.018
[GRAPHIC] [TIFF OMITTED] T6853.019