Daniel J. Forte

That funny little decal placed on bank doors and teller windows across the country to reassure patrons that individual accounts are insured by the Federal Deposit Insurance Corp. for up to $100,000 may be changing soon if the head of the FDIC has his way. But don’t expect the change to come without substantial input from both legislators and lobbyists.

Donald E. Powell, chairman of the FDIC, is a proponent of a bill that would reform deposit insurance. In February, Sen. Tim Johnson, D-S.D., introduced legislation that called for several changes. Among the proposed revisions are raising deposit insurance limits, increasing coverage for retirement savings such as IRAs and ridding the system of so-called “free riders” – those financial institutions that don’t pay premiums but are nonetheless covered by FDIC insurance.

“While the current system is not in need of a radical overhaul, flaws in the system could actually prolong an economic downturn, rather than promote the conditions necessary for recovery,” said Powell in recent testimony before Congress.

Although the Massachusetts banking community is in favor of some of the provisions of the bill, it would rather see no legislation enacted than passage of the bill with all of its current provisions in place, said Daniel J. Forte, president of the Massachusetts Bankers Association. As originally written, the bill could end up costing banks more, he said.

“Basically, the less that’s done [to revamp deposit insurance], the better, for a variety of reasons,” he said.

Since 1934, the FDIC has insured deposits in banks to prevent bank runs such as those that occurred during the Great Depression. Occasionally, the amount for which each account is insured is raised, most recently in 1980 when the limit was elevated to $100,000. To maintain the payout fund, banks pay a premium into the fund to preserve the designated reserve ratio. The reserve ratio may not fall below 1.25 percent. If it does, the FDIC may require additional premiums from banks. There are two reserve funds, one for the Bank Insurance Fund and one for the Savings Association Insurance Fund. At the end of 2001, the BIF rate had fallen to 1.26 percent while the SAIF rate stood at 1.37 percent. The FDIC will decide by May 1 whether to assess premiums for the BIF. The reform bill would combine the two funds, a move of which most banking industry observers are in favor. The BIF’s falling rate is attributed by industry watchers to dilution by free riders, “the Merrill Lynches of the world, the Dean Witters of the world that have uninsured cash management accounts,” said Forte. “They have begun to move uninsured deposits over to the BIF fund without being charged any entrance fee to the fund; therefore their deposits are diluting the fund.”

The reason non-banks, as well as de novo banks, are not charged a premium is because there are sufficient funds built up in the reserves. Those banks that are not at substantial risk of failing – 92 percent of the banks in the country – are no longer assessed fees. The proposed legislation would charge a fee to banks and non-banks covered by BIF upon their entrance to the program to ensure they pay their fair share.

“Essentially, the banks that were in existence before 1997 endowed the funds, and newcomers are not required to contribute to the ongoing costs of the deposit insurance system. Since 1996, more than 900 new banks and thrifts have joined the system and never paid for the insurance,” Powell told Congress.

Additionally, the demand for extra funds by the FDIC when the designated reserve ratio, or DRR, falls below 1.25 percent generally coincides with economic slumps, when banks can least afford to pay excess premiums.

“They [the FDIC] would like to eliminate the fixed 1.25 percent reserve level and create a designated range from 1.15 to 1.4 percent,” said Forte. “Their argument being that during bad times, they would regulate to the lower end of that range and in good times, let the fund begin to build up to the 1.4 percent so that you’re charging less during bad times and more during the good times.”

Forte said that provision might be acceptable if the exact language of the bill ensures that, in the long run, banks won’t be assessed more than in the current system.

“In some ways, if it ain’t broke, don’t fix it. While the current system isn’t perfect, it hasn’t been bad, so we do worry about the long-term costs to our members going forward,” said Forte.

Limiting Factors

Other provisions of the bill include increasing the insurance coverage limit from its current cap of $100,000 per account.

“Our recommendation is simple: the coverage limit should be indexed from the present level of $100,000 to ensure that the value of deposit insurance in the economy does not wither away over time,” said Powell.

The index would be tied to inflation and Powell explained the FDIC is not recommending more coverage, rather that the coverage sustain the same value over time.

“If you look at the 1980 increase from $40,000 to $100,000, in 1980 dollars the insurance limit today is worth only $47,000,” said David Barr, spokesman for the FDIC. “You can see over time it had been eroded. By indexing it, you would ensure that the deposit limit would not lose value over time,” he said.

But as it stands, the bill proposed increasing the insured amount to a hard number of $130,000. “The FDIC isn’t endorsing raising the limit; our support is behind indexing,” said Barr.

Forte said the impetus behind raising the limit to a fixed figure rather than attaching the amount to an index comes from banks primarily in the Midwestern states seeking to attract more core deposits. Attracting core deposits hasn’t been a problem in New England and in testimony last week before Congress, Federal Reserve Chairman Alan Greenspan said many people simply open multiple accounts to ensure all of their deposits are insured.

But Forte is concerned that if the amount is raised, there may be substantial added costs that would be shouldered by the banking industry.

“The other comment we have on that is, if the banking industry is losing core deposits primarily to mutual funds, and they [mutual funds] have no insurance whatsoever, how is higher insurance coverage really going to help us?” he said. In particular, 86 percent of banks in Massachusetts already have additional deposit insurance coverage through the Depositor’s Insurance Fund created in Massachusetts after the stock market crash and Great Depression. “We’d be paying for something that would have no benefit for us because we’re already paying for the excess coverage at the state level,” Forte said. “We’ve had no real call for increased coverage by even the members that don’t have the excess deposit insurance coverage because it’s just very expensive to make that increase.”

If anything, Forte would rather see the insurance limit tied to inflation. “That way, if you grow gradually over time, the expense wouldn’t be exorbitant and that would respond to some of the banks that would like to see higher coverage in the long run,” he said. The bill proposes reassessing the rate every five years.

Although the bill passed the House with stronger language for possible rebates for banks when the DRR exceeds 1.35 percent, there was an addition proposed by Rep. Maxine Waters, D-Calif., that is unsettling to Forte. She proposed banks that offer basic banking accounts be assessed premiums for those deposits at 50 percent less than other deposits, in essence providing motivation for banks to offer those types of accounts,

Forte is against the provision. “Our concern is that as you begin to use FDIC reserves for quasi-social engineering issues, does that open the fund up for a variety of uses and ultimately weaken the fund in the long term? There’s no differentiation of risk, and if the premium reserve level is going to be diluted because of that it needs to be strengthened somewhere else, so it somewhat defeats the point of the FDIC [reform].”