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June 1995
(Combines June 1 and June 15 issues*)

eOONOMIG
COMMeNTORY
Federal Reserve Bank of Cleveland

SAIF Policy Options
by William P. Osterberg and James B. Thomson

/\si s part of the Financial Institutions
Reform, Recovery, and Enforcement Act
(FIRREA) of 1989, Congress mandated
a minimum coverage ratio of $1.25 of
insurance reserves per $100 of insured
deposits for the Bank Insurance Fund
(BIF) and Savings Association Insurance Fund (SAIF).1 The Federal Deposit
Insurance Corporation (FDIC), which
administers both funds, estimates that
the BIF's ratio will reach the mandated
125-basis-point coverage ratio by
midyear and that as a result, banks and
other BIF-insured depositories are likely
to see their average deposit insurance
assessment fall from 24 cents per $100
of domestic deposits to 4 cents by the
close of 1995.2

On the other hand, the SAIF ended 1994
far short of the estimated $8.6 billion it
would need to meet the minimum coverage ratio mandated in FIRREA. This
means that SAIF-insured thrifts will continue to be assessed premiums averaging
24.5 cents per dollar of domestic deposits
—six times that of BIF-insured institutions. This premium differential places
SAIF-insured thrifts at a competitive disadvantage to BIF-insured banks and
thrifts in deposit markets. It may also
have a negative impact on the quantity of
deposits held by SAIF-insured depositories, thereby compromising the ability of
the thrift industry to capitalize the SAIF.
In dealing with the problem, Congress
faces several policy choices: taking no
action, having taxpayers fund SAIF's
capitalization, merging the two FDIC
insurance funds, and employing various

intermediate strategies.3 While much of
the policy debate on the impending BIF/
SAIF premium differential has focused
on important issues such as fairness, the
competitive impact on thrifts, and the
consequent ramifications for the SAIF, a
larger issue looms: What is the public
policy objective served by savings associations?4 Only after policymakers
answer this question can they weigh the
options for dealing with the SAIF.
An additional concern surrounds the
Financing Corporation (FICO) bonds
authorized by the Competitive Equality
Banking Act of 1987 to partially recapitalize the now-defunct Federal Savings
and Loan Insurance Corporation Fund,
which the SATF was set up to replace.
This FICO obligation has impaired the
ability of thrifts to capitalize the SAIF. In
addition, the increasing probability that
the SAIF may soon be unable to meet its
obligation to make FICO interest payments could result in a SATF funding
solution that is expedient, but inconsistent with public policy objectives.
We contend that the option for dealing
with the SAIF problem should be chosen
based on policy objectives for savings
associations. To pursue a legislative
solution for the SAIF without appraising
the role of thrifts is putting the cart
before the horse. Some alternatives, such
as no legislative action, are likely to foster a decline in the savings and loan
industry. Others, such as a taxpayerfunded capitalization of the SAIF, may
help to preserve a role for specially chartered housing finance lenders. We also

The ability of the thrift industry to
capitalize the Savings Association Insurance Fund (SAIF) is becoming increasingly uncertain. By the end of the
year, SAIF-insured thrifts may face
deposit insurance premiums six times
greater than those assessed on banks
insured by the Bank Insurance Fund
(BIF). In fashioning a solution for the
SAIF problem, fundamental questions
about the policy objectives for savings
associations should be at the forefront
of policymakers' discussions.

discuss how policy choices for dealing
with the FICO problem should be driven
by the same principles applied to the
SAIF problem.

•

What about Thrifts?

As we argued in a previous Economic
Commentary, with the increased integration of financial markets and the consequent competition across industry
lines, there appears to be little justification for maintaining separate regulatory
structures and deposit insurance funds
for banks and thrifts.5 Despite being
restricted by the qualified thrift lender
test (65 percent of assets must be held in
mortgages or mortgage bank securities),
savings institutions are no longer the
predominant holder of home mortgages
(classified as one- to four-family mortgages in table 1). Moreover, the mortgage holdings of thrifts as a share of
total mortgage debt has been declining
for more than a decade (see figure 1).

* The Economic Commentary series will contain 20 issues starling this year. The sequence will remain semimonthly EXCEPT during June, July, November, and December, when we will publish a single
issue for the month.

As of the third quarter of 1994, banks
held nearly $123 billion more in home
mortgage loans, and almost $394 billion
more in total mortgages, than did savings institutions. But mortgage holdings
by banks and thrifts measure only one
aspect of the increased competition in
mortgage markets. Primary home mortgages held by secondary-market mortgage pools totaled $1,053 billion at the
end of 1994:IIIQ. These pools include
the Government National Mortgage
Association (Ginnie Mae), the Federal
Home Loan Mortgage Corporation
(Freddie Mac), the Federal National
Mortgage Association (Fannie Mae), the
Farmers Home Administration (FmHA),
and private mortgage pools. Advances in
communications and information technology have increased the ability of markets to bundle up mortgages and issue
securities against them. This market
innovation has essentially made the thrift
mortgage specialization obsolete.
However, there may still be social benefits associated with charter-related distinctions among depository institutions,
especially in the area of housing finance.
Hence, Congress needs to reassess the
public policy objectives associated with
a separately chartered housing finance
industry. Is the maintenance of the thrift
charter necessary to carry out those
objectives? And do the expected social
benefits arising from this industry justify
the level of subsidies that may be needed
to make it viable? While the answers to
these questions are beyond the scope of
this article, they are crucial for crafting a
consistent policy for the SAIF.

•

SAIF Policy Options

Three distinct policy options exist for
dealing with SAIF's capitalization: 1)
take no action now and deal with any
future problems when they become imminent; 2) merge the SAIF into the BIF;
and 3) capitalize the SATF.6 We discuss
these options in the context of underlying
policy objectives for thrifts.

Wait and See
If a separately chartered housing finance
provider is no longer necessary to meet
policy objectives, it may be attractive to
choose the wait-and-see course. Congressional action would be reserved for deal-

TABLE1

BANK AND SAVINGS ASSOCIATION
MORTGAGE HOLDINGS, 1994:IIIQ
(Millions of dollars)

Type of Mortgage Loan

Banks

590,244
38,130
320,568
22,408
981,350

One- to four-family
Multifamily
Commercial
Farm
Total

Savings Associations

466,414
65,611
55,058
292
587,375

SOURCE: Mortgage holdings at the end of 1994:IIIQ as reported in Federal Reserve Bulletin,
April 1995, Table 1.54, "Mortgage Debt Outstanding," p. A38.

FIGURE 1 MORTGAGE DEBT OUTSTANDING, 1982-94
Billions of dollars, end of period
5,000
All other
Mortgage pools or trusts
Savings institutions
Commercial banks

1982

1983

1984

1985

1986 1987

1989

1990 1991 1992 1993

1994

SOURCE: Board of Governors of the Federal Reserve System.

ing with a default on the FICO bonds or
with the impending financial collapse of
the SAIF. The deposit insurance premium differential between SATF- and
BIF-insured depositories would remain
until either the SAIF reached its minimum funding level or one of the aforementioned crises occurred.
Taking no action to reduce the BtF/SATF
differential will accelerate the shrinkage
of the thrift industry through two channels. First, BIF-insured institutions will
be able to compete deposits away from
SAIF members, causing the SAIFinsured part of the industry to shrink.
Second, some innovative SAIF-insured
thrifts have already found a way around
the current moratorium on switching
insurance funds. A number of institutions, including two of the largest California thrifts, have announced plans to
convert their deposits into BIF-insured
bank deposits. They propose to do this
by acquiring a bank charter and encouraging depositors to switch their accounts
from their SAIF-insured subsidiary to
their BIF-insured bank. Without pending

legislation to close this loophole, the
bulk of well-capitalized SAIF members
can be expected to follow.
The net effect of this policy option will
not be to eliminate specialized housing
lenders from the financial landscape, but
rather to effectively obliterate charterrelated distinctions among depository
institutions. However, this alternative is
not a panacea. First, the exodus of S ATF
members to the BIF could eventually
force the SAIF to default on the FICO
bonds and may limit congressional
options for dealing with the FICO problem. In addition, a large inflow of S ATF
deposits into the BIF could delay BIF's
capitalization and the reduction in premiums for BIF members. Thus, some of
the cost of the SAIF capitalization would
be passed on to current BIF members.
This wait-and-see strategy would also
undermine the viability of the SAIF
fund. As the SAIF assessment base
shrinks, the percentage of SAIF deposits
controlled by banking organizations

would rise.7 Furthermore, the remaining
SAIF institutions not controlled by
banks are likely to be ones that because
of size or precarious financial condition
are not able to exploit the BIF conversion loophole. The remaining assessment base may be inadequate to offset
large losses to the SAIF from future
thrift failures. Hence, policymakers may
eventually be faced with resolving an
underfunded, and possibly insolvent,
SAIF. Finally, if this option results in the
lion's share of SATF-insured deposits
being controlled by banking organizations, then one must seriously question
the rationale for having separate bank
and thrift deposit insurance funds.

Merge the Funds
This solution is consistent with a move
toward a generic depository institution
charter while allowing separate thrift
charters and housing-finance-related
subsidies if dictated by public policy
objectives.8 In our previous Economic
Commentary, we argued that "the historic rationale for separate regulatory
systems for banks and savings associations no longer seems valid, especially
given the intense competition between
banks and thrifts."9 A fund merger
would require setting up criteria for
SATF thrifts to join the BIF. Strict admission requirements that allowed only
strong, well-capitalized thrifts to switch
funds would be needed to minimize the
burden on current BIF members associated with the merger. Provisions would
also have to be made to recapitalize, sell,
or liquidate the remaining SAIF members that could not qualify for BIF insurance. This could ultimately require some
taxpayer monies or an additional assessment on BIF members.
Like the wait-and-see alternative, merging the funds would transfer some of
the burden of SAIF's undercapitalization to the banks. On the other hand, a
merger of the funds would allow for the
continuance of special-purpose charters
for housing finance lenders (which may
facilitate a further blurring of the distinction between banks and thrifts).
Therefore, merging the funds may be
less desirable than a taxpayer-funded
solution if there remains a strong public

policy purpose for having a separate
and distinct housing finance industry.

Capitalize the SAIF
If a separate regulatory structure and
subsidies are required to preserve the traditional role of savings associations, and
if the social benefits of doing so justify
the costs, then capitalizing the SAIF may
be the preferred choice. One option is a
savings-association-financed solution,
which might impose a one-time surcharge against thrift capital. Alternatively, Congress could choose a surtax
on the profits of current SAIF members
(or their parent companies or successor
firms). Either way, the burden of funding
the SAIF would remain with current
SAIF institutions, regardless of whether
they subsequently exited the fund.
At the other extreme, general taxpayer
monies could be used to rescue the SATF.
This solution should be considered only
if the benefits of maintaining the S ATF
ultimately accrued to society in general,
and not just to SATF-insured depositories. In this case, the cost of the policy
should be widely dispersed so that thrift
competitors are not asked to bear a disproportionate share of the burden.

•

The FICO Problem

A major stumbling block to a savings
association capitalization of the SAIF is
the $780 million of FICO interest payments, which currently consume approximately 45 percent of the fund's annual
assessment income.11 Without this drain,
the SAIF would be close to reaching the
minimum reserve coverage ratio.
Neglecting interest that the SAIF might
have earned on the FICO payments,
adding the five years of FICO assessments back into the SAIF would boost
the fund to more than $6.5 billion at the
end of 1994, leaving it only about $2 billion short of being fully funded.12
There is an additional issue related to
the FICO interest. In 1992, the FDIC
issued an interpretation of FIRREA
arguing that SAIF deposit insurance
assessments on thrift deposits by banks,
or those in thrifts that converted to statechartered commercial or savings banks
(which account for roughly 38 percent
of all thrift deposits), could not be used

to pay interest on the FICO bonds.13
Although this does not change the
impact of FICO on the capitalization
problem, it does materially affect the
SAIF's ability to service the debt. Debt
service will become increasingly difficult if the share of thrift deposits controlled by banking organizations continues to rise or if the SAIF's assessment
base shrinks. For example, if the SAIF's
assessment base available for FICO
interest service declined by $120 billion
in insured deposits, at current deposit
premium levels, the SAIF could not
meet its FICO obligation.14
The issue of FICO interest needs to be
addressed as part of the solution to the
SAIF's capitalization. Options being
debated include leaving the FICO
responsibility with SAIF-insured institutions, broadening it to include all depository institutions, and using general taxpayer funds.15 While each merits serious
consideration, the ultimate choice should
be consistent with the principles underlying the SAIF policy choices.

•

Conclusion

Less than two years after the SATF
began operations, questions have arisen
as to its viability and the ability of the
thrift industry to capitalize it. The
FDIC's recent announcement that the
BIF capitalization is nearly complete
and that bank deposit insurance premiums will be about one-sixth those
charged to SAIF-insured thrifts has
upped the ante considerably. Failure to
address issues surrounding the SAIF and
the FICO bonds could result in the
extinction of savings associations.
However, before policymakers deal with
the specifics of the SAIF problem, they
should address fundamental issues
regarding the future role of specially
chartered housing finance lenders. The
choice of any of the three distinct policy
options presented, or of some intermediate solution, should be based on the
underlying policy objectives associated
with maintaining a separately chartered
housing finance lender.

•

Footnotes

1. FIRREA allows the FDIC Board to set the
coverage ratio as high as $1.50 of insurance
reserves for every $100 of insured deposits.
2. The FDIC estimates that at the end of
1994, the BIF's reserve coverage ratio was
115 basis points (FDIC Press Release PR-2395, March 21, 1995). The SAIF ended 1994
with a balance of $ 1.9 billion, or roughly 28
basis points of reserves per dollar of insured
deposits.

7. The Oakar amendment to FIRREA, which
allows banking organizations to acquire
healthy thrifts, effectively prevents banks
from shifting deposits from the SAIF to the
BIF. Therefore, only savings associations not
controlled by the banking industry can exit
the SAIF.
8. For a thorough discussion of the issues
involved in merging the SAIF and BIF, see
Osterberg and Thomson (1993), footnote 5.
9. Ibid.

3. Recently, U.S. Representative John J.
LaFalce (D-NY) introduced 12 bills (HR
1470 through 1481) covering a range of these
policy options for resolving the SAIF funding

4. See Ricki Tigert Heifer, FDIC Chairman,
"Remarks before the Exchequer Club,"
March 15, 1995, p. 2.
5. See William P. Osterberg and James B.
Thomson, "Making the SAIF Safe for Taxpayers," Federal Reserve Bank of Cleveland,
Economic Commentary, November 1, 1993.
6. Of course, there are also a number of
mixed strategies available that combine elements of two or all three of the above options.

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland, OH 44101
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10. Note that the surcharge against capital
would be based on the assessable (for deposit
insurance) deposit base of each institution.
The surcharge could be expensed over two or
more years if payment would result in an
institution becoming undercapitalized.
11. See Heifer, footnote 4.
12. See FDIC Annual Reports 1990-1993,
Washington, D.C., and Heifer (ibid.).
13. See FDIC Annual Report 1991, Washington, D.C., p. 86.
14. At the time this was written, six SAIFinsured thrifts with $80 billion in deposits
were planning to acquire a bank charter and
convert their SAJF-insured thrift deposits

into BIF-insured bank deposits. See FDIC
Press Release PR-20-95, March 15, 1995;
and Daniel Kaplan, "Thrifts Seeking Lower
Premiums by Buying Banks," American
Banker, March 24, 1995.
15. It makes little difference if the money
allocated to pump up the SAIF is newly
appropriated or is left over from funds originally appropriated to the Resolution Trust
Corporation for thrift resolutions. Both are
taxpayer funds. For a discussion of the Resolution Trust Corporation, see Christopher J.
Pike and James B. Thomson, "The RTC and
the Escalating Costs of the Thrift Insurance
Mess," Federal Reserve Bank of Cleveland,
Economic Commentary, May 15, 1991.

William P. Osterberg is an economist and
James B. Thomson is an assistant vice president and economist at the Federal Reserve
Bank of Cleveland. The authors thank Joseph
Haubrich and Stanley Longhoferfor helpful
comments.
The views stated herein are those of the
authors and not necessarily those of the Federal Reserve Bank of Cleveland or of the
Board of Governors of the Federal Reserve
System.

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