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108th Congress (2003-2004)

House Report 108-050

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FEDERAL DEPOSIT INSURANCE REFORM ACT OF 2003

19-006

108TH CONGRESS

REPORT

HOUSE OF REPRESENTATIVES

1st Session

108-50
FEDERAL DEPOSIT INSURANCE REFORM ACT OF 2003

MARCH 27, 2003- Committed to the Committee of the Whole House on the State of the Union and ordered to be printed
Mr. OXLEY, from the Committee on Financial Services, submitted the following
R E P O R T
together with
SUPPLEMENTAL AND DISSENTING VIEWS
[To accompany H.R. 522]

CONTENTS Page
Amendment 1
Purpose and Summary 20
Background and Need for Legislation 20
Hearings 23
Committee Consideration 23
Committee Votes 23
Committee Oversight Findings 23
Performance Goals and Objectives 24
New Budget Authority, Entitlement Authority, and Tax Expenditures 24
Committee Cost Estimate 24
Congressional Budget Office Cost Estimate
Federal Mandates Statement 31
Constitutional Authority Statement 31
Applicability to Legislative Branch 32
Section-by-Section Analysis 32
Changes in Existing Law Made by the Bill, as Reported 38
Supplemental and Dissenting Views

AMENDMENT

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

Sec. 1. Short title; table of contents.
Sec. 2. Merging the BIF and SAIF.
Sec. 3. Increase in deposit insurance coverage.
Sec. 4. Setting assessments and repeal of special rules relating to minimum assessments and free deposit insurance.
Sec. 5. Replacement of fixed designated reserve ratio with reserve range.
Sec. 6. Requirements applicable to the risk-based assessment system.
Sec. 7. Refunds, dividends, and credits from Deposit Insurance Fund.
Sec. 8. Deposit Insurance Fund restoration plans.
Sec. 9. Regulations required.
Sec. 10. Studies of FDIC structure and expenses and certain activities and further possible changes to deposit insurance system.
Sec. 11. Bi-annual FDIC survey and report on increasing the deposit base by encouraging use of depository institutions by the unbanked.
Sec. 12. Technical and conforming amendments to the Federal Deposit Insurance Act relating to the merger of the BIF and SAIF.
Sec. 13. Other technical and conforming amendments relating to the merger of the BIF and SAIF.

SEC. 2. MERGING THE BIF AND SAIF.

SEC. 3. INCREASE IN DEPOSIT INSURANCE COVERAGE.

SEC. 4. SETTING ASSESSMENTS AND REPEAL OF SPECIAL RULES RELATING TO MINIMUM ASSESSMENTS AND FREE DEPOSIT INSURANCE.

SEC. 5. REPLACEMENT OF FIXED DESIGNATED RESERVE RATIO WITH RESERVE RANGE.

SEC. 6. REQUIREMENTS APPLICABLE TO THE RISK-BASED ASSESSMENT SYSTEM.

SEC. 7. REFUNDS, DIVIDENDS, AND CREDITS FROM DEPOSIT INSURANCE FUND.

SEC. 8. DEPOSIT INSURANCE FUND RESTORATION PLANS.

SEC. 9. REGULATIONS REQUIRED.

SEC. 10. STUDIES OF FDIC STRUCTURE AND EXPENSES AND CERTAIN ACTIVITIES AND FURTHER POSSIBLE CHANGES TO DEPOSIT INSURANCE SYSTEM.

SEC. 11. BI-ANNUAL FDIC SURVEY AND REPORT ON INCREASING THE DEPOSIT BASE BY ENCOURAGING USE OF DEPOSITORY INSTITUTIONS BY THE UNBANKED.

`SEC. 49. BI-ANNUAL FDIC SURVEY AND REPORT ON ENCOURAGING USE OF DEPOSITORY INSTITUTIONS BY THE UNBANKED.

SEC. 12. TECHNICAL AND CONFORMING AMENDMENTS TO THE FEDERAL DEPOSIT INSURANCE ACT RELATING TO THE MERGER OF THE BIF AND SAIF.

SEC. 13. OTHER TECHNICAL AND CONFORMING AMENDMENTS RELATING TO THE MERGER OF THE BIF AND SAIF.

PURPOSE AND SUMMARY

H.R. 522, the Federal Deposit Insurance Reform Act of 2003, will preserve the value of insured deposits at insured depository institutions, advance the national priority of enhancing retirement security for all Americans, and ensure that the value, benefit and costs of deposit insurance are allocated equitably and fairly.

The bill merges the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF); increases the standard maximum deposit insurance limit from $100,000 to $130,000, and indexes it every 5 years for inflation; doubles the new coverage level for certain retirement accounts; and increases the coverage amount for in-State municipal deposits. Federally chartered credit unions are provided with parity in general standard maximum deposit insurance coverage, coverage for retirement accounts and municipal deposits.

H.R. 522 removes legal constraints on the authority of the Federal Deposit Insurance Corporation (FDIC) to charge risk-based premium assessments, so that all insured depository institutions pay for the value and benefit of deposit insurance fairly and equitably.

The legislation authorizes the FDIC to set the ratio of reserves to estimated insured deposits within a range of 1.15 to 1.40 percent, replacing the 1.25 percent `hard target' mandated by current law.

The bill also returns assessments in the form of refunds, credits, and dividends to insured depository institutions. Dividends are provided to qualified insured depository institutions whenever specified reserve ratios are exceeded.

Finally, the legislation directs the FDIC to study its administrative and managerial processes and alternative means for administering the deposit insurance system. These studies will ensure that the deposit insurance fund and the overall deposit insurance system are managed and operated as efficiently and as effectively as possible.

BACKGROUND AND NEED FOR LEGISLATION

Federal deposit insurance was created by Congress in 1934 and significantly modified in 1989 and 1991 in response to the savings and loan and bank crises. All banks and savings associations are required to carry Federal deposit insurance.

The National Credit Union Share Insurance Fund (NCUSIF) was created in 1970. This fund insures `share' accounts at credit unions and is administered by the National Credit Union Administration (NCUA). All Federally chartered credit unions must belong to NCUSIF; membership is optional for State chartered credit unions.

Deposit insurance makes deposits safe by assuring depositors that up to $100,000 will be available to them to cover their deposits even if their insured depository institution fails. It protects depositors from a sudden and unforeseen loss of wealth. It also protects the economy due to a loss of liquidity in the financial services system.

Currently, the FDIC provides deposit insurance through two funds, the BIF and the SAIF. These funds are maintained in the U.S. Treasury and both earn interest income from investment in non-marketable Treasury securities.

The Federal deposit insurance system has served the Nation well for the last 69 years--public confidence and stability in the Nation's banking system were preserved through one of the largest banking crises since the Federally insured deposit system originated. During the crisis of the 1980's and the 1990's, the FDIC and the Resolution Trust Corporation (RTC) resolved 2,362 failures of insured depository institutions involving more than $700 billion in assets, with no bank runs, no panics, no disruptions to the financial markets, and no debilitating impact on overall economic activity.

After conducting a comprehensive study of the overall deposit insurance system, the FDIC published a report in April 2001 (Keeping the Promise: Recommendations for Deposit Insurance Reform, April 2001), that identified 4 structural deficiencies that warranted legislative consideration:

(1) Deposit insurance is provided by two insurance funds at potentially different prices;

(2) Under current law, deposit insurance cannot be priced effectively to reflect risk;

(3) Deposit insurance premiums are highest at the wrong point in the business cycle; and

(4) The value of insurance coverage does not keep pace with inflation.

Hearings before the Subcommittee on Financial Institutions and Consumer Credit during the 107th Congress yielded a broad consensus among the Bush Administration, the Federal and State banking and thrift regulators, and industry and consumer groups that the deposit insurance system could be improved and strengthened to make it more responsive to the cyclical nature of lending and deposit taking activities and the post-Gramm-Leach-Bliley financial and economic environment.

Merging the BIF and the SAIF eliminates potential disparities in bank and thrift risk-based premium assessments and the administrative burden of maintaining and operating two separate funds.

Current law limits the ability of the FDIC to assess premiums on depository institutions above amounts needed to achieve and maintain the existing ratio of reserves to estimated insured deposits at 1.25 percent. Currently over 90 percent of the industry does not pay for deposit insurance, and more than 900 institutions that were chartered within the last 6 years have never paid any premiums. Current law also limits the FDIC's ability to charge riskier institutions, new entrants, and institutions growing at excessive rates appropriate premiums based on the risks they present to the fund. The current premium restrictions require safer institutions to subsidize riskier institutions unnecessarily, and new entrants and institutions that undergo significant growth are allowed to avoid paying premiums.

Further, the current system's `pro-cyclical' bias results in sharply higher premiums being assessed at `down' points in the economic cycle, when banks can least afford to pay them and the economy could most benefit from additional liquidity in the banking system.

These inequities are addressed in H.R. 522 by giving the FDIC greater discretion to identify the relative risks all institutions present to the deposit insurance fund and set appropriate risk-based premiums. With this authority, the FDIC can better manage the insurance fund relative to industry and economic cyclicality.

The current deposit insurance system's emphasis on maintaining the 1.25 percent designated reserve ratio (DRR) and the requirement that a 23 basis point premium be assessed whenever the DRR drops and remains below this level for a year is pro-cyclical and creates the potential for volatile premium swings. This problem would also more than likely result in the industry paying high premiums when both banks and the economy could least afford it, and it could sustain and deepen an economic downturn.

The legislation gives the FDIC the discretion to set the DRR within a range of 1.15 to 1.40 percent, addressing the system's volatility and avoiding sharp premium swings. This flexibility gives the FDIC better tools with which to manage the deposit insurance fund during various economic environments.

The Committee found that the overall value of basic insurance coverage had eroded over the last 23 years. If coverage had kept pace with inflation since 1980, when levels were last adjusted, it would now be at more than $200,000; and if it were adjusted for the $40,000 coverage level in effect in 1974 and indexed for inflation from that point forward, the level would be more than $140,000. The Committee believes that increasing the maximum standard deposit insurance amount to $130,000 is a modest step and indexing the new amount every 5 years appropriately restores and maintains the value of deposit insurance coverage.

The current deposit insurance scheme provides inadequate protection for in-State municipal deposits and certain retirement account deposits. The legislation doubles the coverage limit for insured retirement account deposits in order to enhance the retirement security of senior citizens and those planning for retirement. Coverage limits for in-State municipal deposits are also significantly expanded to ensure that more municipal deposits can be kept in local financial institutions and used to meet local credit needs.

In sum, this legislation will respond to these issues by:

preserving the value of insured deposits at insured depository institutions;

strengthening the Nation's insured depository institutions, especially small banks, thrifts, and credit unions;

ensuring that the Federal deposit insurance system does not harm the ability of insured depository institutions to meet the Nation's credit needs at all stages of the economic cycle;

ensuring that the Federal deposit insurance system remains strong and complements the Federal and State regulatory structure that helps to maintain the safety and soundness of the Nation's banks, thrifts, and credit unions;

advancing the national priority of enhancing retirement security for all Americans;

ensuring that the value, benefit and costs of deposit insurance are allocated equitably and fairly; and,

modernizing the Federal deposit insurance system by merging the BIF with the SAIF and reinforcing the risk-based nature of the system.

HEARINGS

The Committee on Financial Services held a legislative hearing on H.R. 522, the Federal Deposit Insurance Reform Act of 2003, on March 4, 2003, at which the Chairman of the Federal Deposit Insurance Corporation, Donald E. Powell, testified.

COMMITTEE CONSIDERATION

The Committee on Financial Services met in open session on March 13, 2003 and ordered H.R. 522 reported to the House with a favorable recommendation, with an amendment, by a voice vote.

COMMITTEE VOTES

Clause 3(b) of rule XIII of the Rules of the House of Representatives requires the Committee to list the record votes on the motion to report legislation and amendments thereto. No record votes were taken with in conjunction with the consideration of this legislation. A motion by Mr. Oxley to report the bill to the House with a favorable recommendation was agreed to by a voice vote.

The following amendments were considered:

An amendment in the nature of a substitute by Mr. Oxley, no. 1, making technical changes and clarifying several provisions to the bill, was agreed to by a voice vote, as amended.

An amendment to the amendment in the nature of a substitute offered by Mr. Ose, no. 1a, maintaining coverage at $100,000 per account and striking the inflation adjustment, part 1 (consisting of paragraphs 1 and 4), was not agreed to by a voice vote and part 2 (consisting of paragraphs 2, 3, 5, and 6), tripling coverage for retirement account from the base, was not agreed to by a voice vote.

An amendment to the amendment in the nature of a substitute offered by Mr. Meeks of New York, no. 1b, requiring a reduction in dividends and credits for depository institutions that substantially dilute fund reserves, was withdrawn.

An amendment to the amendment in the nature of a substitute offered by Mr. Gonzalez, no. 1c, requiring a bi-annual FDIC survey and report on the unbanked, was agreed to by a voice vote.

An amendment to the amendment in the nature of a substitute offered by Mr. Royce, no. 1d, striking increase in deposit coverage, was not agreed to by a voice vote.

COMMITTEE OVERSIGHT FINDINGS

Pursuant to clause 3(c)(1) of rule XIII of the Rules of the House of Representatives, the Committee made findings that are reflected in this report.

PERFORMANCE GOALS AND OBJECTIVES

Pursuant to clause 3(c)(4) of rule XIII of the Rules of the House of Representatives, the Committee establishes the following performance related goals and objectives for this legislation:

The bill will improve the deposit insurance system while keeping it well-funded, as well as reflect more accurately the risks to the fund that are imposed by institutions. As a result, the fund will be less susceptible to problems caused by changes in the economy and will better serve depository institutions and depositors.

NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES

In compliance with clause 3(c)(2) of rule XIII of the Rules of the House of Representatives, the Committee adopts as its own the estimate of budget authority, entitlement authority, or tax expenditures or revenues contained in the cost estimate prepared by the Director of the Congressional Budget Office pursuant to section 402 of the Congressional Budget Act of 1974 for H.R. 3717 in the 107th Congress and reprinted below as the Committee's cost estimate.

COMMITTEE COST ESTIMATE

The Committee adopts as its own the cost estimate prepared by the Director of the Congressional Budget Office pursuant to section 402 of the Congressional Budget Act of 1974 for H.R. 3717 in the 107th Congress and reprinted below as the Committee's cost estimate. The Committee further estimates that the estimated cost to the Federal government for fiscal year 2008 will be the same in both budget authority and outlays as fiscal year 2007.

CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

H.R. 3717--Federal Deposit Insurance Reform Act of 2002

Summary: H.R. 3717 would amend provisions of banking and credit union law to reform the deposit insurance system. Specifically, the bill would increase insurance coverage for insured accounts from $100,000 per account to $130,000 for most accounts (with higher levels of coverage for retirement accounts and municipal deposits). Over time, the coverage limit for insured deposits would increase to account for inflation. Those provisions of the bill would affect deposits held by banks and thrifts, which are insured by the Federal Deposit Insurance Corporation (FDIC), as well as those held by credit unions, which are insured by the National Credit Union Administration (NCUA). In addition, the bill would merge the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) to create a new Deposit Insurance Fund (DIF), to pay the claims of depositors of failed banks and thrifts. Finally, H.R. 3717 would amend the conditions under which banks and thrifts would pay insurance premiums to the FDIC, which administers the funds.

CBO estimates that H.R. 3717 would increase both the costs of resolving failed financial institutions and the income from premiums paid by financial institutions. During the 2003-2012 period, the additional premiums that would be collected under the bill would more than offset the added spending. On balance, CBO estimates that H.R. 3717 would reduce net direct spending by $700 million over the 2003-2012 period. Because H.R. 3717 would affect direct spending, pay-as-you-go procedures would apply.

H.R. 3717 contains an intergovernmental mandate as defined in the Unfunded Mandates Reform Act (UMRA), but CBO estimates that the costs, if any, to comply with the requirement would not exceed the threshold established in UMRA ($58 million in 2002, adjusted annually for inflation).

The bill also contains private-sector mandates as defined by UMRA. CBO estimates that the direct cost of those mandates would be well above the annual threshold specified in UMRA ($115 million in 2002, adjusted annually for inflation), but we do not have sufficient information to provide a precise estimate of the aggregate cost.

Estimated cost to the Federal Government: The estimate budgetary impact of H.R. 3717 is shown in the following table. The costs of this legislation fall within budget function 370 (commerce and housing credit). 



----------------------------------------------------------------------------------------------------------


                                          By fiscal year in millions of dollars--                         


                                                                             2003  2004  2005  2006  2007 


----------------------------------------------------------------------------------------------------------


DIRECT SPENDING                                                                                           


FDIC and NCUA spending under current law:                                                                 


Estimated budget authority                                                    -31   -33   -34   -35   -36 


Estimated outlays                                                           1,662 1,337 1,544 1,746 1,694 


Proposed changes to FDIC spending:                                                                        


Estimated budget authority                                                      0     0     0     0     0 


Estimated outlays                                                          -1,000  -400     0   -50   200 


Proposed changes to NCUA spending:                                                                        


Estimated budget authority                                                      0     0     0     0     0 


Estimated outlays                                                            -500    25    25  -125    25 


Total changes under H.R. 3717:                                                                            


Estimated budget authority                                                      0     0     0     0     0 


Estimated outlays                                                          -1,500  -375    25  -175   225 


FDIC and NCUA spending under H.R. 3717:                                                                   


Estimated budget authority                                                    -31   -33   -34   -35   -36 


Estimated outlays                                                             162   962 1,569 1,571 1,919 


----------------------------------------------------------------------------------------------------------


Basis of estimate

Two federal agencies are primarily responsible for the deposit insurance system. The FDIC insures the deposits in banks with the BIF and the deposits of thrifts with the SAIF. The National Credit Union Administration insures  the deposits in credit unions (referred to as shares) with the Share Insurance Fund. When a financial institution fails, the FDIC and the NCUA use the insurance funds to reimburse the insured depositors of the failed institution. These agencies then sell the assets of the failed institution and deposit any money recovered into the insurance funds. CBO estimates that H.R. 3717 would increase both the cost of resolving failed banks and the premiums paid by financial institutions. Over the 2003-2012 period, we estimate that the added premiums paid by financial institutions would more than offset the increase in outlays to resolve failed financial institutions. Adding these effects together, we estimate that enacting H.R. 3717 would result in a net decrease in direct spending of about $700 million over the 2003-2012 period. The major components of this estimate are explained below.

Increase in the cost of resolving failed financial institutions

H.R. 3717 would increase deposit insurance coverage from $100,000 to $130,000 for most accounts, and to $260,000 for employee benefit plans. Coverage for in-state municipal deposits would be the lesser of $5 million or 80 percent of any deposits above $130,000. Such increases would apply to deposits held by credit unions as well as banks and thrifts. In addition, the bill would require the FDIC and NCUA to increase deposit insurance coverage every five years beginning January 1, 2006, to account for inflation. (According to committee staff, the intent of section 3 of H.R. 3717 is to increase deposit insurance coverage in 2006 and 2011 to account for inflation. Despite a drafting error in this section, CBO assumes that such increases would occur.)

By 2003, we expect that insured deposits will total more than $3.2 trillion under current law. Based on information from the FDIC and the experience of past increases in deposit insurance coverage, CBO estimates that H.R. 3717 would increase the deposits insured by the FDIC by about $325 billion--or around 10 percent. CBO estimates that about $33 billion of that amount would result from new deposits attracted to banks and thrifts as a result of the expanded coverage, an increase of about 1 percent. We expect that the assets of failed banks and thrifts would increase correspondingly--by about 1 percent. In 2003, we expect assets of failed banks and thrifts to be $3.65 billion under current law; such assets would increase slightly under the bill.

By insuring deposits that are currently uninsured, the bill would increase the liability of the FDIC and NCUA without significantly increasing the assets of institutions that will fail in the future. Under current law, we expect the FDIC's net losses on failed institutions to total about $12.6 billion over the 2003-2012 period. (We project that gross losses of $51.0 billion would be offset, in part, by recoveries of $38.4 billion from disposition of the institutions' assets.) Based on historical patterns of losses from failed institutions, CBO estimates that increasing insured deposits by about 10 percent would increase losses by about 10 percent over the long term. But over the next 10 years outlays would grow more rapidly because disposal of the assets of failed banks often takes many years. As a result, CBO estimates H.R. 3717 would increase the FDIC's net outlays to resolve failed banks and thrifts by about $2.7 billion over the 2003-2012 period. Similarly, we estimate that enacting H.R. 3717 would increase NCUA's net outlays to resolve failed credit unions by about $100 million over the 2003-2012 period.

By increasing deposit insurance coverage, H.R. 3717 could reduce incentives of depositors to monitor the behavior of financial institutions. Over the long term, this could lead to increased risk-taking by those institutions and ultimately to higher losses. On the other hand, if the DIF incurs larger losses to resolve failed banks and thrifts, H.R. 3717 would give the FDIC the flexibility to set premiums so as to restore the balances in the fund over a few years, thus allowing the agency to recover from large losses without imperiling other institutions. This new authority could reduce future losses. CBO has no basis for estimating the magnitude of either of these effects. We expect, however, that any changes in the costs of resolving failed institutions would eventually be borne by banks and thrifts through premiums.

Increase in premiums paid to the FDIC by financial institutions

Several provisions of H.R. 3717 would affect the total amount of premiums collected by the FDIC. Increasing the size of insured accounts would lead to increased collections. Considered separately, merging the BIF and SAIF and providing the FDIC with increased discretion to set regulations for premium assessments would tend to reduce collections relative to CBO's baseline assumptions. Finally, establishing credits that certain institutions could use to pay the FDIC assessments in lieu of cash would also reduce collections.

The amount of additional premiums that banks and thrifts would pay through the combined effects of all these provisions of H.R. 3717 would depend on the DIF's balance in each year, which in turn would depend on the costs of resolving failed institutions. To estimate the effects of the bill's provisions on premium collections, CBO considered several thousand scenarios of the magnitude and timing of possible losses to the FDIC and resulting premiums collected under the bill. Because the fund balance in any given year depends on the losses of all prior years, each scenario included an estimate of losses over the entire 2003-2012 period. Applying a probability distribution to those loss scenarios, CBO estimated premium income to the government under H.R. 3717 reflecting the wide range of uncertainty about future costs of resolving failed financial institutions.

Overall, CBO estimates that the net effect of these provisions on deposit insurance premiums would be an increase in collections of about $2.8 billion over the next 10 years, slightly more than our projected increase in the FDIC's costs to resolve failed financial institutions. (We estimate that the FDIC will collect about $12 billion in premiums from members over the 2003-2012 period under current law.) Each of the bill's provisions that would have an impact on premium assessments is described below.

Increasing Deposit Insurance Coverage. Expanding deposit insurance coverage would result in increased premiums for the FDIC because premiums are based on the amount of insured deposits. CBO estimates that the increase in coverage would raise the amount of insured deposits by about 10 percent. But the bill would also give the FDIC more discretion in assessing premiums, which CBO expects would offset part of the impact of the increased coverage.

Increasing the FDIC's Regulatory Discretion. Under current law, the FDIC determines when to assess insurance premiums by calculating a figure known as the designated reserve ratio (DRR) for the BIF and SAIF. The DRR represents the ratio of the fund's balances to total insured deposits. Under current law, the FDIC is required to assess premiums so as to maintain the DRR at all times, but under the bill, the agency would be authorized to establish a restoration plan of up to three years to gradually collect sufficient premiums to maintain the DRR at the desired level.

Designated Reserve Ratio (DRR). The DRR is statutorily set at 1.25 percent of insured deposits. If the reserve ratio of either fund falls below that point, the FDIC assesses institutions that are covered by that fund until the reserve ratio reaches at least 1.25 percent. H.R. 3717 would eliminate the requirement that the DRR be 1.25 percent for the FDIC's insurance funds and, instead, allow the FDIC the discretion to set the DRR between 1.15 percent and 1.4 percent, inclusive. The bill would require the FDIC to set the DRR at least annually and at other times as it deems appropriate. The bill also would require the board of directors of the FDIC to consider increasing the DRR during more favorable economic conditions and reducing the DRR during less favorable economic conditions, notwithstanding the risk of loss that may occur under such conditions.

Based on the actions of the NCUA when it was given discretion to set such a ratio, CBO expects that the FDIC would set the DRR at 1.25 percent for 2003 and adjust it annually as conditions warrant. To maintain stability in the banking system, we expect the FDIC would set the DRR within a relatively narrow range around 1.25 percent, except under extreme conditions. In fact, the bill would require the FDIC to return some collections (referred to in the bill as dividends) if the reserve ratio of the DIF exceeds 1.35 percent. In this event, the FDIC would be required to refund half of the amount in the fund that is above the amount necessary to maintain 1.35 percent. If the DRR were to exceed 1.4 percent, the FDIC would be required to refund enough to institutions to reduce the ratio below 1.4 percent.

Restoration Plans. Under current law, the FDIC must charge assessments to return the funds to a level above the DRR within one year. H.R. 3717  could delay some of those assessments by allowing the FDIC to return the fund to a level above the DRR within three years.

If the FDIC projects that the reserve ratio of the DIF will fall below the DRR, H.R. 3717 would require it to establish a restoration plan to return the reserve ratio to the DRR within three years. If the FDIC projects that the reserve ratio of the DIF will fall below 1 percent, H.R. 3717 would require the FDIC to establish a restoration plan to return the reserve ratio to 1 percent within two years and return the reserve ratio to the DRR within three years thereafter. The flexibility to set restoration plans would reduce the assessment income of the FDIC because it could take up to five years to return to the DRR, and government collections would be below baseline levels during this period. On the other hand, this provision of H.R. 3717 might provide the FDIC the discretion necessary to recover from a large loss in the fund without imperiling other institutions.

Allowing the FDIC discretion over when premiums are charged would reduce total collections below the level that would be experienced without that discretion. However, CBO estimates that such reductions would be more than offset by the premium increases resulting from the increase in deposit insurance coverage.

Merging BIF and SAIF. H.R. 3717 would require the FDIC to merge the Bank Insurance Fund and the Savings Association Insurance Fund and create a new Deposit Insurance Fund. By 2003, CBO expects the net worth of the combined fund will be about $42 billion. By itself, merging the funds would delay the collection of premiums on institutions insured by the BIF. Although the BIF is much larger than the SAIF, the reserve ratio of the BIF is lower--1.26 percent--due to rapid growth in insured deposits and the costs of recent bank failures. Under current law, we expect the FDIC to begin charging fees to institutions insured by the BIF in 2003. The reserve ratio of the combined fund would be about 1.3 percent, and in the absence of other changes made by the bill, the FDIC would not have to assess higher premiums in 2003 to maintain the reserve ratio at the designated level.

Credits for Future Assessments. The bill would require the FDIC to provide certain banks and thrifts with credits against future assessments, based on their payments to the BIF or SAIF prior to 1997. CBO expects that the use of those credits would reduce the amount of future collections by the DIF.

Under the bill, credits would equal 12 basis points (0.12 percent) of the combined assessment base of the BIF and SAIF as of December 31, 2001. Based on information from the FDIC, CBO estimates that the credits would total nearly $5.4 billion. The credits would be allocated to each institution based on their market share as of December 31, 1996. Institutions established after that date would be ineligible for credits against their future assessments. The bill would prohibit institutions from using credits whenever the reserve ratio of the fund is less that the DRR or when the DRR is less than 1.25 percent.

H.R. 3717 also would limit the use of credits by institutions that are not well capitalized, or that exhibit financial, operational, or compliance weaknesses that range from moderately severe to unsatisfactory. Under the bill, such institutions could use no more in credits than the average assessment on all depository institutions for that period. In addition, because the least risky institutions (i.e., those that are well capitalized and do not exhibit those weaknesses) would be assessed no more than one basis point, their use of credits would be effectively constrained. Hence, CBO estimates that more than half of the credits would not be used during the 2003-2012 period and would be available to reduce collections by the FDIC in subsequent years.

Increase in premiums paid to NCUA by financial institutions

Under current law, credit unions must pay the NCUA 1 percent of their net change in deposits each year. The NCUA provides rebates to credit unions if the balance in the share insurance fund exceeds 1.3 percent of insured deposits. CBO estimates that the NCUA will collect net premiums of about $2.4 billion from its members over the 2003-2012 period.

Based on information from the NCUA, CBO expects that H.R. 3717 would extend insurance coverage to about $38 billion in currently uninsured deposits in 2003 and that the higher insurance levels would attract another $4 billion in new deposits that year. Because these added amounts would reduce the ratio of insured deposits to fund balances below 1.3 percent in 2003, H.R. 3717 would reduce the amount of the rebate that the NCUA would otherwise provide that year.

CBO estimates that, under the bill, the net premiums collected by the NCUA would increase by $700 million over the 2003-2012 period. About $500 million of that amount would be realized in 2003. The premiums collected for the expanded insurance coverage would more than offset the estimated additional costs to the NCUA of $100 million over the next 10 years.

Pay-as-you-go considerations: The Balanced Budget and Emergency Deficit Control Act sets up pay-as-you-go procedures for legislation affecting direct spending or receipts. The net changes in outlays that are subject to pay-as-you-go procedures are shown in the following table. For the purposes of enforcing pay-as-you-go procedures, only the effects through fiscal year 2006 are counted.

Section 252 of the Balanced Budget and Emergency Deficit Control Act exempts from pay-as-you-go procedures any changes in outlays resulting from the `full funding of, and continuation of, the deposit insurance guarantee commitment in effect under current estimates.' Increasing deposit insurance coverage is not part of the current guarantee commitment, and changing the premiums paid by banks and thrifts is not the type of change necessary for the continuation of the current guarantee commitment. Hence, CBO believes that the pay-as-you-go exemption for deposit insurance would not apply to H.R. 3717.





-----------------------------------------------------------------------------------------------------------------


                    By fiscal year, in millions of dollars--                                                     


                                                        2002   2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 


-----------------------------------------------------------------------------------------------------------------


Changes in outlays                                         0 -1,500 -375   25 -175  225  325  325  275  -50  225 


Changes in receipts                                                                                              


(9) Not applicable                                                                                               


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Estimated impact on state, local, and tribal governments: H.R. 3717 would preempt certain state laws regarding statutes of limitations by shortening the time allowed for insured depository institutions or the FDIC to file claims related to overpayments or late payments of assessments. Such a preemption would be an intergovernmental mandate as defined in UMRA. Because the mandate imposes no duty on states that would result in additional spending, CBO estimates that the costs of complying with the mandate would not exceed the threshold established in UMRA ($58 million in 2002, adjusted annually for inflation).

Estimated impact on the private sector: H.R. 3717 contains private-sector mandates as defined by UMRA. CBO estimates that the direct cost of those mandates would be well above the annual threshold established by UMRA for private-sector mandates ($115 million in 2002, adjusted annually for inflation). We do not have sufficient information to provide a precise estimate of the aggregate cost because of uncertainties about how certain regulations would be implemented.

Banks and savings associations

Commercial banks and savings associations must have federal deposit insurance. CBO, therefore, considers changes in the federal deposit insurance system that increase requirements on those institutions to be private-sector mandates under UMRA. Specifically, the bill would increase federal insurance coverage for insured depository accounts. That increase in coverage would require banks and savings associations to pay more in deposit insurance premiums.

H.R. 3717 also would change the conditions under which banks and savings associations would pay insurance premiums to the FDIC. Under current law, banks and savings associations in the lowest risk category do not have to pay any deposit insurance premiums when their deposit insurance fund (BIF or SAIF) is above the designated reserve ratio of 1.25 percent of insured deposits. The bill would require that all banks and savings associations pay premiums for deposit insurance regardless of the reserve ratio. In addition, the bill would authorize the FDIC to charge fees to banks and thrifts that increase their net deposits more rapidly than the FDIC determines to be appropriate. The FDIC has indicated that determining the criteria for deciding whether growth is inappropriate would be difficult. At this time, CBO has no basis for estimating the amount of such fees.

CBO estimates that, as a result of the increased deposit insurance coverage and the requirement that all banks and savings associations pay deposit insurance premiums regardless of the reserve ratio, those institutions would have to pay an additional $1 billion in premiums in fiscal year 2003. The additional premium payments would total about $2.1 billion over the first five years the mandate is in effect.

Credit unions

Because the bill would increase the coverage of insured accounts for federally insured credit unions, those credit unions would pay higher premiums. CBO estimates that those institutions would pay an additional $500 million in fiscal year 2003. The additional premium payments would total about $600 million for the first five years the increased coverage is in effect.

Estimate prepared by: Federal costs: Mark Hadley and Judith Ruud; impact on state, local, and tribal governments: Susan Sieg Tompkins; impact on the private sector: Judith Ruud.

Estimate approved by: Robert A. Sunshine, Assistant Director for Budget Analysis.

CONGRESSIONAL BUDGET OFFICE ESTIMATE


Pursuant to clause 3(c)(3) of rule XIII of the Rules of the House of Representatives, the cost estimate provided by the Congressional Budget Office pursuant to section 402 of the Congressional Budget Act of 1974 was not timely submitted to the Committee. The Chairman of the Committee will cause such estimate to be printed in the Congressional Record when it is available.

FEDERAL MANDATES STATEMENT


The Committee adopts as its own the estimate of Federal mandates prepared by the Director of the Congressional Budget Office pursuant to section 423 of the Unfunded Mandates Reform Act for H.R. 3717 in the 107th Congress and reprinted as the Committee's cost estimate.

ADVISORY COMMITTEE STATEMENT


No advisory committees within the meaning of section 5(b) of the Federal Advisory Committee Act were created by this legislation.

CONSTITUTIONAL AUTHORITY STATEMENT


Pursuant to clause 3(d)(1) of rule XIII of the Rules of the House of Representatives, the Committee finds that the Constitutional Authority of Congress to enact this legislation is provided by Article 1, section 8, clause 1 (relating to the defense and general welfare of the United States), and clause 3 (relating to the power to regulate foreign and interstate commerce).

APPLICABILITY TO LEGISLATIVE BRANCH


The Committee finds that the legislation does not relate to the terms and conditions of employment or access to public services or accommodations within the meaning of section 102(b)(3) of the Congressional Accountability Act.

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION


Section 1. Short Title; Table of contents

This section establishes the short title of the bill, the `Federal Deposit Insurance Reform Act of 2003,' and provides a table of contents.

Section 2. Merging the BIF and SAIF

This section amends provisions of the Federal Deposit Insurance Act to merge the Bank Insurance Fund and the Savings Association Insurance Fund. The section transfers each fund's respective assets and liabilities into a newly created Deposit Insurance Fund (DIF).

The section gives the FDIC at least 90 days after the bill is enacted to complete the merger of the BIF and SAIF. The effective date of the merger would be the first day of the next calendar quarter after the grace period elapses. For example, assuming the bill is enacted on March 10 the FDIC would have until June 8 to complete the merger, and all transactions would become operationally effective as of July 1.

Section 3. Increase in deposit insurance coverage

This section provides for a higher level of deposit insurance coverage and an inflation index for general depositors, individual retirement accounts, and municipalities. Further, it expands coverage to employee benefit plans. Credit unions are provided with complete parity in coverage with other insured depository institutions.

The section also eliminates the $100,000 deposit insurance limit on accounts at insured depository institutions and replaces it with a new standard maximum deposit insurance limit of $130,000.

The section further provides that, beginning January 1, 2006, the new standard maximum deposit insurance limit would be subject to a 5 year cost of living adjustment, calculated according to the Personal Consumption Expenditures Chain-Type Index (PCE) published by the Department of Commerce and rounded to the nearest $10,000. The FDIC and National Credit Union Administration (NCUA) Boards of Directors are required to publish the new standard maximum deposit insurance amount in the Federal Register and provide a corresponding report to Congress within 6 months of the new calculation. Also, the five year inflation-adjusted standard maximum amount would automatically increase unless a Congressional act provides otherwise. The new standard amount would take effect on January 1 of the year immediately succeeding the calendar year in which the new amount is calculated.

The section also requires institutions to provide pass through coverage for employee benefit plans. However, institutions that are not well-capitalized or adequately-capitalized may not accept employee benefit plan deposits.

The section also doubles the new standard maximum deposit insurance limit for certain retirement accounts to $260,000.

Finally, this section increases coverage for in-State municipal deposits to the lesser of $2 million or the sum of the new standard coverage amount plus 80 percent of the amount of deposits in excess of the new standard, and provides that no State may deny to insured depository institutions within its jurisdiction the authority to accept insured in-State municipal deposits, or prohibit the making of such deposits in such institutions by any in-State municipal depositor.

Section 4. Setting assessments and repeal of special rules relating to minimum assessments and free deposit insurance

This section allows the FDIC Board to set assessments in such amounts as it may determine to be necessary or appropriate in order to maintain the reserve ratio at the designated reserve ratio. This provision also eliminates the existing restrictions on the FDIC's authority to levy assessments on any institution above amounts needed to achieve and maintain the existing DRR of 1.25 percent. In effect, the minimum statutory rate (23 basis point cliff rate) is eliminated.

This section establishes a rate of not more than 1 basis point (exclusive of any credit or dividend) for those insured depository institutions in the lowest-risk category under the FDIC's risk-based assessment system.  This section also provides that no depository institution will be barred from the lowest-risk category solely because of size.  The one basis point rate  does not apply during any period in which the DIF's reserve ratio is less than 1.15 percent of aggregate insured deposits.

In testimony before the Subcommittee on Financial Institutions, FDIC Chairman Donald Powell stated that:

 Using the current system as a starting point, I believe that the FDIC should consider additional objective financial indicators, based upon the kinds of information that banks and thrifts already report, to distinguish and price for risk more accurately within the existing least-risk (1A) category. The sample `scorecard' included in the FDIC's April 2001 report represents the right kind of approach. (Hearing before the Subcommittee on Financial Institutions and Consumer Credit, Viewpoints of the FDIC and Select Industry Experts on Deposit Insurance Reform, Oct. 17, 2001, Serial no. 107-47, p. 5.)

This scorecard example showed the lowest-risk category, 1A+, contained approximately 42 percent of all banks.  The Committee looked to these examples, and the distribution of banks (including size, charter, and governance) within each of the 1A subcategories, as a basis for this provision.  This section provides a necessary balance between the expanded authority and discretion of the FDIC to charge all institutions premiums and assuring that top-rated institutions are not excessively charged.

The Committee envisions that this rate will be the starting point or base premium for the risk-based assessment schedule to be developed by the FDIC (with higher premiums associated with higher risk categories being set relative to this base rate).  Nothing in this provision precludes the FDIC from providing credits or dividends should the fund be at sufficient levels to warrant such an action.

The section also requires insured depository institutions to maintain all records that the FDIC may require for verifying the accuracy of any assessment for 3 years or, in the case of disputed assessments, until the dispute has been resolved, and increases fees for late assessment payments from $100 to 1 percent of assessments per day.

This section also provides for a 50 percent discount in the assessment rate for deposits attributable to `lifeline' deposit accounts and repeals section 232 of the Federal Deposit Insurance Corporation Improvement Act of 1991 that required that credits for such accounts be funded from congressional appropriations.

The bill repeals a number of provisions requiring the FDIC to set premiums on a semi-annual basis, replacing them with a provision granting the FDIC greater flexibility in the timing of those evaluations, so long as they are done at least once in a 12 month period. In granting this flexibility, the Committee intends that the FDIC should make these changes, absent extraordinary circumstances, in a manner that provides insured depository institutions with sufficient lead time to make reasonable budget preparations.

Section 5. Replacement of fixed designated reserve ratio with reserve range

This section eliminates the current 1.25 percent `hard target' DRR and provides the FDIC Board with the discretion to set the DRR within a range of 1.15 to 1.40 percent for any given year, using the following criteria as a basis for making these determinations:

(1) Present and future risk of losses to the deposit insurance fund;

(2) Economic conditions; and

(3) Any other factors the Board may determine to be appropriate.

The more flexible range for setting the DRR is designed to prevent sharp swings in the assessment rates for insured depository institutions.  In designating the reserve ratio, the FDIC must follow notice-and-comment rulemaking procedures, and is required to publish a thorough analysis of the data and projections on which the proposed DRR is based.

Section 6. Requirements applicable to the risk-based assessment system

This section directs the FDIC to collect information from all appropriate sources in determining risk of losses to the DIF. This provision does not authorize the FDIC to impose additional recordkeeping requirements on insured depository institutions.

The FDIC is required to consult with the appropriate Federal banking agency in assessing the risk of loss to the DIF with respect to any insured depository institution. This risk of loss evaluation may be done on an aggregate basis for institutions that are determined to be well-capitalized and well-managed.

The FDIC is also required to provide notice and opportunity for comment prior to revising or modifying the risk-based assessment system.

Section 7. Refunds, dividends, and credits from Deposit Insurance Fund

This section provides for refunds or credits of any assessment payment that was made by an insured depository institution in excess of the amount due the FDIC.

The section specifies two circumstances under which the FDIC is required to pay dividends to insured depository institutions:  (1) whenever the reserve ratio of the DIF equals or exceeds 1.35 percent of estimated insured deposits and is less than or equal to 1.4 percent of such deposits, the FDIC is required to pay dividends equal to 50 percent of the amount in excess of what is required to maintain the reserve ratio at 1.35 percent; and (2) whenever the reserve ratio of the DIF exceeds 1.4 percent of estimated insured deposits, the FDIC is required to pay dividends in the amount of the excess of what is necessary to maintain the ratio at 1.4 percent.

The requirement that when the DIF exceeds 1.35 percent and is less than or equal to 1.4 percent, the FDIC must provide a cash dividend equal to one-half the difference between the actual fund balance and the fund balance required to maintain a reserve ratio of 1.35 percent is intended to slow the fund's growth automatically as it approaches its upper limit and return dividends to institutions that could be used for lending and to provide other financial services in their communities.

The section also provides for a transitional credit of 12 basis points of the total assessment base as of December 31, 2001 (or about $5.4 billion) to eligible insured depository institutions based on their respective share or percentage of total industry insured deposits held as of December 31, 1996. Eligible insured depository institutions had to be in existence at December 31, 1996, or be a successor to such an institution, and paid a deposit insurance assessment prior to that date.

In addition to the transitional credit, this section directs the FDIC to promulgate regulations establishing an ongoing system of credits to be applied against future premium assessments.  Such credits will not be awarded, however, during any period in which (1) the reserve ratio of the DIF is less than the DRR; or (2) the reserve ratio is less than 1.25 percent of estimated insured deposits.  In determining the amount of any ongoing assessment credits, the FDIC is required to consider the factors for designating the reserve ratio and setting assessments outlined elsewhere in the statute.

For purposes of allocating dividends and credits, the FDIC is required to determine each insured depository institution's relative contribution to the DIF (or any predecessor deposit insurance fund), taking into account the institution's share of the assessment base as of December 31, 1996; the total amount of deposit insurance assessments paid by the institution after December 31, 1996; that portion of assessments paid by an institution that reflects higher levels of risk assumed by the institution; and such other factors as the FDIC deems appropriate. The FDIC's calculation, declaration and payment of dividends are made subject to notice-and-comment rulemaking.

For any insured depository institution that exhibits financial, operational or compliance weaknesses ranging from moderately severe to unsatisfactory at the beginning of the assessment period, credits may not exceed the amount equal to the average assessment on all insured depository institutions.

In promulgating regulations establishing a system for dividends and credits, the FDIC is required to include provisions allowing insured depository institutions a reasonable opportunity to challenge administratively the amount of their dividends or credits.

Nothing in this section precludes the FDIC from providing credits, over and above the mandated dividend requirement, should it so choose.

The Committee intends that the FDIC, in determining the appropriate distribution of dividends or ongoing credits, weigh a number of factors in its rulemaking process.  The calculation should recognize past contributions to the deposit insurance funds by incorporating the ratio determined for an institution in the calculation of the institution's one-time credit based on total assessment base at year-end 1996, as well as the actual assessments paid since that time.  In establishing the dividend and credit systems, the FDIC should also take into account and make adjustments that reflect the higher risk profiles of some institutions so that they are not rewarded for riskier behavior.  The FDIC is given the discretion to incorporate additional factors, through the rulemaking process, as it deems appropriate.

Initially, the Committee anticipates that the FDIC will establish a dividend account or similar mechanism for each insured depository institution. It is contemplated that when a dividend is declared, each institution would receive the same proportion of the total dividend declared as its dividend account bears to the sum of all institutions' dividend accounts for that declaration.  As an example of how this might work under such a scenario, the calculation of an institution's dividend account could be based on the balance in the fund multiplied by the institution's 1996 assessment base ratio (described above).  In addition, after reducing the amount of assessments paid to account for an institution's higher risk profile, and after considering other factors, the Corporation would incorporate the remainder in the calculation of the dividend account. In sum, it is the Committee's intent that the FDIC create and implement a robust system of dividends and ongoing credits based upon the various factors set forth in the bill.

Section 8. Deposit Insurance Fund restoration plans

Whenever the reserve ratio falls or is projected to fall below the low end of the range within which the FDIC is authorized to set the DRR, the FDIC is required, within 90 days, to establish and implement a plan for restoring the DIF to that level within ten years.  While such a restoration plan is in effect, the FDIC has the authority to restrict the use of assessment credits by insured depository institutions, but is required to apply to an institution's assessment an amount that is the lesser of the institution's assessment or 3 basis points of an institution's assessment base.  The FDIC must publish the details of its restoration plan in the Federal Register within 30 days of its implementation.

Section 9. Regulations required

This section provides that the FDIC has 270 days after the date of enactment to prescribe final regulations, after notice and opportunity for public comment, establishing the DRR, implementing increases in deposit insurance coverage, implementing the dividend requirement and the one time assessment credit, and providing for premium assessments under the amended Act.

Section 10. Studies of FDIC structure and expenses and certain activities and further possible changes to deposit insurance system

This section provides that within one year of enactment, reports must be submitted to Congress on the following issues:

(1) The efficiency and effectiveness of the administration of the prompt corrective action (PCA) program, including the degree of effectiveness of the Federal banking agencies in identifying troubled depository institutions and the degree of accuracy of the risk assessments made by the FDIC;

(2) The appropriateness of the FDIC's organizational structure for the mission of the FDIC, to take into account the current size and complexity of the business of insured depository institutions; the extent to which the organizational structure contributes to or reduces operational inefficiencies that increase operational costs; and the effectiveness of internal controls;

(3) The feasibility of establishing a voluntary deposit insurance system for deposits in excess of the maximum amount of deposit insurance for any depositor;

(4) The feasibility of privatizing all deposit insurance at insured depository institutions and insured credit unions; and,

(5) The feasibility of using actual domestic deposits rather than estimated insured deposits in calculating the DIF's reserve ratio and the DRR.

Finally, the section directs the FDIC (in consultation with the GAO) to conduct a study of the reserve methodology and loss accounting for insured depository institutions in a troubled condition over the period January 1, 1992 through December 31, 2002, and report its findings and conclusions to Congress within 6 months of the date of enactment.

Section 11.  Bi-annual FDIC survey and report on increasing the deposit base by encouraging use of depository institutions by the unbanked

This section requires the FDIC to conduct a bi-annual survey on efforts by insured depository institutions to bring the `unbanked' into the conventional finance system, and report its findings and conclusions to the House Committee on Financial Services and the Senate Committee on Banking, Housing and Urban Affairs, together with any recommendations for legislative or administrative action.

Section 12. Technical and Conforming Amendments to the Federal Deposit Insurance Act relating to the merger of the BIF and SAIF

This section makes numerous amendments to ensure the technical conformity of the Federal Deposit Insurance Reform Act to various provisions in the Federal Deposit Insurance Act and other banking laws, to include the authority of the DIF to borrow from insured depository institutions and the Federal Home Loan Banks.

In particular, this section repeals section 5(d)(2) of the Federal Deposit Insurance Act, dealing with exit fees collected from institutions leaving the Savings Association Insurance Fund (SAIF). The Committee intends that those funds be returned to the DIF upon the repeal of this provision.

Section 13. Other Technical and Conforming Amendments relating to the merger of the BIF and SAIF

This section ensures the technical conformity of the Federal Deposit Insurance Reform Act to various provisions in the Federal Deposit Insurance Act and other banking laws. Most notably, amendments conform the Federal Deposit Insurance Reform Act to the Balanced Budget and Emergency Control Act of 1985.

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED




SECTION 2704 OF THE DEPOSIT INSURANCE FUNDS ACT OF 1996


 [Struck out->][ SEC. 2704. MERGER OF BIF AND SAIF. ][<-Struck out]












































































































































































































































































































































































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FEDERAL DEPOSIT INSURANCE ACT


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SEC. 5. DEPOSIT INSURANCE.








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SEC. 6. FACTORS TO BE CONSIDERED.






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SEC. 11A. FSLIC RESOLUTION FUND.














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SEC. 14. BORROWING AUTHORITY.










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SEC. 24. ACTIVITIES OF INSURED STATE BANKS.










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SEC. 28. ACTIVITIES OF SAVINGS ASSOCIATIONS.






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 [Struck out->][ SEC. 31. SAVINGS ASSOCIATION INSURANCE FUND INDUSTRY ADVISORY COMMITTEE. ][<-Struck out]
































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SEC. 36. EARLY IDENTIFICATION OF NEEDED IMPROVEMENTS IN FINANCIAL MANAGEMENT.




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SEC. 37. ACCOUNTING OBJECTIVES, STANDARDS, AND REQUIREMENTS.








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SEC. 38. PROMPT CORRECTIVE ACTION.






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SEC. 43. DEPOSITORY INSTITUTIONS LACKING FEDERAL DEPOSIT INSURANCE.




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SEC. 49. BI-ANNUAL FDIC SURVEY AND REPORT ON ENCOURAGING USE OF DEPOSITORY INSTITUTIONS BY THE UNBANKED.




















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SECTION 6 OF THE INTERNATIONAL BANKING ACT OF 1978


INSURANCE OF DEPOSITS








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SECTION 207 OF THE FEDERAL CREDIT UNION ACT


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SECTION 232 OF THE FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991


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SECTION 5136 OF THE REVISED STATUTES OF THE UNITED STATES






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FEDERAL RESERVE ACT


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SECTION 255 OF THE BALANCED BUDGET AND EMERGENCY DEFICIT CONTROL ACT OF 1985


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SEC. 21A. THRIFT DEPOSITOR PROTECTION OVERSIGHT BOARD AND RESOLUTION TRUST CORPORATION.








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NATIONAL HOUSING ACT


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TITLE V--MISCELLANEOUS


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SEC. 536. CIVIL MONEY PENALTIES AGAINST MORTGAGEES, LENDERS, AND OTHER PARTICIPANTS IN FHA PROGRAMS.


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FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT OF 1989


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SEC. 951. CIVIL PENALTIES.








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TITLE XI--REAL ESTATE APPRAISAL REFORM AMENDMENTS


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SEC. 1112. FUNCTIONS OF THE FEDERAL FINANCIAL INSTITUTIONS REGULATORY AGENCIES RELATING TO APPRAISER QUALIFICATIONS.




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BANK HOLDING COMPANY ACT OF 1956


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SECTION 114 OF THE GRAMM-LEACH-BLILEY ACT


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SUPPLEMENTAL VIEWS


Section 4 of H.R. 522 contains a provision, originally authored by Congresswoman Waters, that gives depository institutions a 50 percent credit toward their premiums for deposits held in lifeline banking accounts.  These are accounts intended for persons who might otherwise not be able to afford access to basic banking services, such as free or low-cost checking and savings accounts. This is a vital provision that, for the first time, implements a provision of the Bank Enterprise Act enacted in 1991, giving financial institutions an incentive to provide low-cost basic banking services to consumers who might not otherwise have access to them. The inclusion of the lifeline account credit was critical to our support of the favorable reporting of H.R. 522, and we are strongly committed to do all that is necessary to retain it in the bill throughout the legislative process.

Barney Frank.

Maxine Waters.

DISSENTING VIEWS


H.R. 522, the Federal Deposit Insurance Reform Act, expands the Federal government's unconstitutional control over the financial services industry and raises taxes on all financial institutions. Furthermore, this legislation could increase the possibility of future bank failures. Therefore, I must oppose this bill.

I primarily object to the provisions in H.R. 522 which may increase the premiums assessed on participating financial institutions. These `premiums,' which are actually taxes, are the premier sources of funds for the Deposit Insurance Fund. This fund is used to bail out banks that experience difficulties meeting their commitments to their depositors. Thus, the deposit insurance system transfers liability for poor management decisions from those who made the decisions, to their competitors. This system punishes those financial institutions which follow sound practices, as they are forced to absorb the losses of their competitors. This also compounds the moral hazard problem created whenever government socializes business losses.

In the event of a severe banking crisis, Congress will likely transfer funds from the general revenue into the Deposit Insurance Fund, which could make all taxpayers liable for the mistakes of a few.  Of course, such a bailout would require separate authorization from Congress, but can anyone imagine Congress saying `No' to banking lobbyists pleading for relief from the costs of bailing out their weaker competitors?

Government subsidies lead to government control, as regulations are imposed on the recipients of the subsidies in order to address the moral hazard problem. This is certainly the case in banking, which is one of the most heavily regulated industries in America. However, as George Kaufman, the John Smith Professor of Banking and Finance at Loyola University in Chicago, and co-chair of the Shadow Financial Regulatory Committee, pointed out in a study for the CATO Institute, the FDIC's history of poor management exacerbated the banking crisis of the eighties and nineties. Professor Kaufman properly identifies a key reason for the FDIC's poor track record in protecting individual depositors: regulators have incentives to downplay or even cover-up problems in the financial system such as banking failures. Banking failures are black marks on the regulators' records. In addition, regulators may be subject to political pressure to delay imposing sanctions on failing institutions, thus increasing the magnitude of the loss.

Immediately after a problem in the banking industry comes to light, the media and Congress will inevitably blame it on regulators who were `asleep at the switch.' Yet, most politicians continue to believe that giving the very regulators whose incompetence (or worst) either caused or contributed to the problem will somehow prevent future crises!

The presence of deposit insurance and government regulations removes incentives for individuals to act on their own to protect their deposits or even inquire as to the health of their financial institutions. After all, why should individuals be concerned with the health of their financial institutions when the Federal government is insuring banks following sound practices and has insured their deposits?

Finally, I would remind my colleagues that the Federal deposit insurance program lacks constitutional authority. Congress' only mandate in the area of money, and banking is to maintain the value of the money. Unfortunately, Congress abdicated its responsibility over monetary policy with the passage of the Federal Reserve Act of 1913, which allows the Federal government to erode the value of the currency at the will of the central bank.  Congress' embrace of fiat money is directly responsible for the instability in the banking system that created the justification for deposit insurance.

In conclusion, H.R. 522 imposes new taxes on financial institutions, forces sound institutions to pay for the mistakes of their reckless competitors, increases the chances of taxpayers being forced to bail out unsound financial institutions, reduces individual depositors' incentives to take action to protect their deposits, and exceeds Congress's constitutional authority. I therefore urge my colleagues to reject this bill. Instead of extending this Federal program, Congress should work to prevent the crises which justify government programs like deposit insurance, by fulfilling our constitutional responsibility to pursue sound monetary.

RON PAUL.











 




 
  
     

        
 
          


          


          

         

      		
    





  
     

       

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