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S. 3045


SEPTEMBER 26, 1990

Good morning, Chairman Riegle, Senator Garn and members of the

I am John Bovenzi, Deputy to Chairman Seidman.


Chairman extends apologies to the Committee for his absence, but
I am pleased to testify this morning on behalf of the Federal
Deposit Insurance Corporation concerning S. 3045.

S. 3045 would provide the FDIC with greater flexibility in
adjusting the rates paid by banks for federal deposit insurance.
The bill would change existing law by eliminating the current
ceilings on annual increases in the insurance premiums, or
assessments, paid by banks to the FDIC.

It would also remove

the existing overall cap on the assessment rate, and would
permit the FDIC to adjust the rate on a semiannual basis should
the need arise.

The FDIC supports each of these provisions.

Under existing law, the assessment rates to be applied in any
particular year are set .by statute, with a narrow grant of
authority to the FDIC to impose limited increases above the
statutory rate.

For the Bank Insurance Fund, or BIF, the

statutory rate for calendar year 1991 and thereafter is 15 cents
per $100 in deposits.

For the Saving Association Insurance

Fund, or SAIF, the statutory rate increases from 20.8 cents to
23 cents for 1991 through 1993, then decreases to 18 cents in

The Savings Association Insurance Fund rate decreases

again in 1998, to the statutory Bank Insurance Fund rate of
15 cents.

Existing law also establishes a reserve ratio —
insurance Fund balances to insured deposits —

or a ratio of

of 1.25 percent,

with provision for increase by the FDIC to 1.50 percent.

If the

FDIC increases the reserve ratio above 1.25 percent, investment
income on the assessments attributable to the increase will be
redistributed to Fund member institutions.

If the FDIC

subsequently determines that BIF or SAIF exceeds the appropriate
designated reserve ratio, the excess funds are to be credited to
the member institutions.

As you are aware, the Board of Directors of the FDIC has
recently proposed an increase in the assessment rate for banks.
This increase, if adopted by the FDIC, would result in a bank
assessment rate of 19.5 cents per $100 in deposits for calendar

At this time, we believe that this rate should be
We also believe, however, that it would be helpful if

the FDIC were granted more flexibility as to the timing and
amount of any future rate increases.

Accordingly, we generally support the changes that would result
from enactment of S. 3045.

Additional flexibility in assessing

premiums will allow us to do our job better.

Flexibility also

may facilitate bank discipline by allowing banks to immediately

feel the effects of poor industry performance —

this may

provide a strong incentive for more self-policing in the

However, the deposit insurance system cannot be fixed merely by
charging higher premiums.

We need to address the underlying

factors as to why the premiums are to be so high.

There are

problems in the deposit insurance system that need to be
addressed and there are problems in the banking industry itself,
which also need to be addressed.

In testimony yesterday before the House Banking Committee,
Chairman Seidman identified supervision, capital and risk
management as three areas that must be at the forefront of our
efforts to restore the deposit insurance system and the banking
industry to health.

Chairman Riegle, we welcome your just

released proposal on deposit insurance reform and intend to
review it carefully.

Hopefully, we will continue to move

forward with legislation reforming the deposit insurance system
and the banking system in order to effectively complement the
proposed legislation on deposit insurance assessments that is
before us today.

We appreciate the foresight of the Chairman and other members of
this Committee in introducing S. 3045.

If enacted


legislation will give us a head start in reforming the deposit

insurance system.

There are, however, several additional

considerations the Committee might wish to explore in its
deliberations on the bill.

First, S. 3045 is limited to assessments for the Bank Insurance

We recommend that the bill be amended to grant the FDIC

similar flexibility with respect to assessments for institutions
which are members of the Savings Association Insurance Fund.
Under existing law, the FDIC has no authority to alter SAIF
rates until 1995.

We urge that S. 3045 be amended to retain

parity in the FDIC's discretion to adjust BIF and SAIF rates.

Second, we recommend that the legislation remove provisions in
existing law that mandate rebates of assessments.

We would

prefer an approach similar to that contained in the Department
of Treasury's proposal which provides the FDIC with the
discretion to give rebates, taking into account the need to
build up fund reserves to withstand future periods of unusual

From 1950 through 1983 FDIC income from assessments

exceeded expenses and insurance losses.

As a result, the FDIC

was required to rebate a portion of that surplus back to the
banks in the form of a credit against future assessments.
rebates totalled $6.7 billion over the 24-year period.
accumulated interest foregone equalled $24.9 billion.


Thus, had

these rebates not taken place, the Bank Insurance Fund today
would have an additional $31.6 billion, and would have stood at
approximately $45 billion at the end of 1989.


Third, the Committee might wish to consider including minimum
assessment rates for the two Funds, at levels similar to those
prescribed as minimum annual assessment rates under existing

One potential benefit of a statutory minimum is that it

provides guidance as to the minimum rates Congress considers to
be appropriate.

Another benefit is that it establishes a base

rate that would be applicable in the absence of FDIC action.

In summary, the FDIC believes that the increased flexibility
granted by S. 3045 is a positive step.

We urge that it be

extended to cover SAIF assessments as well as BIF assessments,
that it provide greater discretion with regard to rebates, and
that a minimum assessment rate be included.

I will be pleased to answer any questions the panel may have.