DANIEL J. FORTE
Cites ‘free riders’
The U.S. Department of the Treasury submitted draft legislative language on deposit insurance reform to the U.S. Senate Banking Committee last week, in response to a request made by Senate Banking Committee Chairman Richard Shelby during a Feb. 26 committee hearing on deposit insurance reform.
The Treasury Department, in a cooperative effort with the Federal Reserve Board, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision, would merge the bank and thrift funds, allow the FDIC more flexibility to charge premiums and replace the statutory minimum ratio of reserves to insured deposits with a more flexible range.
Shelby requested that the five agencies work in cooperation to develop language that would best reflect the consensus presented in the agencies’ testimony, but the new language does not come without controversy.
“Deposit insurance is a critical component in the confidence of the banking system,” said David Floreen, senior vice president of government affairs and trust services for the Massachusetts Bankers Association. “How [deposit insurance reform] is paid for, the premium structure and who pays, and how it’s covered are the big issues. A lot of concern has been expressed about institutions with sizeable deposits that have not paid premiums at all.”
As Banker & Tradesman reported at the end of 2002, and MBA officials predicted, banks face considerable regulatory burdens from current banking legislation and the fight for market activity between small and large banks will continue – in this case with the new language of deposit insurance reform.
Daniel J. Forte, president of the MBA, told Banker &Tradesman in December that Deposit Insurance Reform in Massachusetts is unique in that state-chartered banks already have access to deposit insurance, but the biggest issue is that of “free riders,” or non-bank financial institutions that hold deposits but do not contribute to insurance funds.
“Big companies have poured deposits into insured banks,” Forte said at the time. “Those guys should pay more than the banks to compensate the banking industry for having diluted the funds.”
Bankers ‘Appreciative’
A House bill passed in March would merge the bank and thrift funds, allow the FDIC more flexibility to charge premiums, provide credits to institutions that paid steep assessments in the past and raise the coverage level by 30 percent, to $130,000 per account.
Now, after months of soliciting input from banks nationwide, the Treasury Department has submitted its legislative language on deposit insurance reform to the Banking Committee.
Shelby said this week that supporters of deposit insurance reform who want to see a bill this year should not seek to make too many changes to the Treasury proposal that was released last Monday.
The agency’s proposal allowed the FDIC to give cash rebates as soon as the ratio of reserves to insured deposits topped 1.5 percent ($1.15 for every $100 of insured deposits), permit the agency to give ongoing credits based on past payments into the funds and expand the reserve ratio’s range to as low as 1.15 percent.
The Treasury’s plan does include some new provisions, including the investigation of Federal Home Loan bank advances, which have been used by some banks and financial institutions for funding.
Another provision could raise late-payment fees for institutions that fail or refuse to pay assessments by charging banks 1 percent of their required assessment for each day the premium is not paid. Currently, institutions are charged $100 a day.
Banker & Tradesman sought comment from three Massachusetts banks – Sovereign Bank, Banknorth and FleetBoston Financial – but all were reluctant to talk to the new legislation.
Banking industry officials, however, are hoping for several more changes to the bill, specifically raising the $100,000 deposit insurance coverage level, according to a statement from American Bankers Association Executive Vice President Edward Yingling.
“We are particularly appreciative that the draft contains concepts we have promoted for several years now – a credit system to offset premiums, a historical basis for determining credits and a cap above which rebates could be paid,” said Yingling in a statement. “The ABA has stated from the beginning of the deposit insurance reform debate that the end result should not mean higher costs for the industry. While progress has been made with this draft, we will still work to make sure that the banking industry does not end up paying unnecessary premiums.”
Yingling said the Treasury can address bankers’ concerns by making the credit system permanent, providing a statutory maximum premium for the highest rated banks, amending the cap language to have a mandatory cap with rebates at 1.4 percent and amending the historical basis approach to make the calculations more certain.
If the Senate approves the bill, that version would have to be reconciled with the House version in a conference committee of senators and congressmen.
