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Remarks by
Ricki Tigert Heifer
Federal Deposit Insurance Corporation
before the
Government Affairs Conference
America's Community Bankers
Washington, D.C.
March 14, 1995

I grew up in Smyrna, Tennessee -- southeast of Nashville -- and
down the road a piece from Murfreesboro -- home of Middle
Tennessee State University - - a town of about 50,000 people now,
but one that was smaller when I was growing up. If you were
among my neighbors back then and you wanted a home mortgage, you
went to Murfreesboro Federal Savings and Loan — one of hundreds
of Federal S&L's created in the mid-193Os after Congress passed
the Home Owners Loan Act. In fact, from the beginning of 1934 to
m-i-^-193 5 -- hardly a boom time for any other business -- nearly
450 new federal savings and loan associations were chartered -and more than 300 state-chartered institutions were converted.
At that time, the newly created Federal Home Loan Bank Board
actively promoted the formation of new federal S&Ls by having its
employees go from town to town to persuade local businesspeople
to organize new institutions.
Murfreesboro Federal grew along with the town. Reflecting some
of the changes your industry has gone through, it is now known as
Cavalry Banking -- A Federal Savings Bank. Ed Loughry, Cavalry
Banking’s President and CEO, is here today. I have it on good
information that Cavalry Banking is still working to build
When I think of the Savings Association Insurance Fund, I think
of institutions like Cavalry Banking.
Of course, I also think of institutions like Great Western and
Home Sayings, too, and after the last two weeks or so, I must say
I am thinking about them a lot — as I have told Jim Montgomery
and Charlie Rinehart.
As I have said on a number of earlier occasions, the thrift
industry has a problem capitalizing SAIF and a SAIF problem is a
problem for the Federal Deposit Insurance Corporation. In other



created two types of institutions whose SAIF assessments cannot
be used to meet FICO interest payments -- so-called Oakar and
Sasser institutions. Because neither is both a savings
association and a SAIF member, the law says their SAIF premiums
cannot go toward the FICO obligation.
If things remain much as they have been in recent years, the SAIF
has been projected to capitalize in 2002. You know and I know,
however, that the assumptions under which that projection was
made are not now likely to come to pass -- and, in fact, these
assumptions were a baseline analysis against which alternative
assumptions could be measured, not predictions of certainty.
One thing is certain, however: the FICO obligation will run into
^■®kt service problems. It is a question of when, not a question
of whether. This is true regardless of whether the entire SAIF
assessment base were available to meet the FICO obligation or
only part of the base. Debt service problem on FICO bonds will
come much sooner without assessments from Oakar and Sasser
institutions. In fact, we have just now analyzed the fourth
quarter 1994 numbers, and they show that during all of 1994 Oakar
deposits jumped from $139.8 billion to 180.2 billion. While at
the end of the third quarter, 1994, Oakar institutions held 23
pa^cent of the SAIF assessment base, at the end of the fourth
quarter, they held 25.2 percent. Sasser institutions continued
to represent 7.4 percent of the base.
With. 33 percent
a third
of the SAIF-insured deposit base
unavailable to meet FICO obligations and with the deposit base
shrinking at 2 percent annually -- the average rate in recent
years -- there are likely to be debt service problems as early as
2005. If the base shrinks at 4 percent, the problems hit in
2001. At 6 percent, they hit in 1999. At 8 percent, they hit in
Like the crack in the radiator that triggers the recall of a make
and model of automobile, the FICO problem is a structural flaw.
It is embedded in the SAIF system. It will not go away by itself
-- and the FDIC has no legal authority to fix it. SAIF can be
fixed now -- or it can be fixed later -- but it must be fixed.
Let me suggest, however, that there is a certain urgency in the
We may soon see Bank Insurance Fund-insured institutions created
to receive deposits from savings institutions so that the
insurance coverage of those deposits could shift from SAIF to the
BIF. The motive behind creating these institutions, of course,
is to enjoy the lower insurance premiums that may apply to BIF
institutions later this year, if the FDIC Board votes a lower
premium rate for BIF-insured institutions. As you know, if
current conditions continue, we expect BIF to recapitalize at the



"Great,” said the reporter, "and how would you drain the oceans?"
Rogers replied:

"Don’t ask me, I ’m in policy, not operations."

It is easy to develop
we can always come up
will not work. It is
world -- the world in
is difficult.

policy in the abstract and in a vacuum -with simple and compelling answers that
coming up with an answer in the messy real
which Cavalry Banking does business -- that

Further, the SAIF/FICO problem illustrates the difficulties that
arise when you premise a solution on assumptions and the
assumptions later go awry. Of course, when facing an uncertain
future, the best we can do is make assumptions that are logical
and reasonable.
A number of policy prescriptions have been proposed to deal with
the SAIF/FICO problem. On the surface, some may appear feasible,
but they all carry with them disadvantages as well as advantages
-- and all would require legislation by Congress.
Basically, they all look to three groups to pay for the problem,
either separately or in combination. Those groups are the
savings associations, the commercial banks, and the taxpayers.
Several proposals require tapping the commercial banking industry
for funds to service the FICO obligation -- including a proposal
that this organization supports. On this point, the GAO report I
mentioned earlier notes: "Arguments have been made that any
option that involves the banking industry contributing to service
the FICO interest obligation is unfair to the industry. These
arguments contend that the FICO obligation was incurred during
the thrift crisis of the 1980s and, as such, is an obligation of
the thrift industry. However, there are also arguments that
those thrift institutions that comprise today's thrift industry
still exist because they are healthy, well-managed institutions
that avoided the mistakes made by many thrifts in the 1970s and
1980s that ultimately led to the thrift debacle. As such, they
argue, they should be no more responsible for the FICO interest
burden than the banking industry."
I agree wholeheartedly with that statement in the GAO report.
The banks and thrifts of today did not cause the S&L crisis. In
fact, we can all agree on this point -- and we are still left
with the question: What do we do about the FICO problem and an
undercapitalized SAIF?
Another proposal is to make Oakar and Sasser assessment revenue
available to meet FICO obligations. That approach would slow
capitalization of the SAIF, however, without solving the
fundamental problem. FICO bonds will run into debt service
problems regardless.



I do not expect your witness on Friday to be entirely
much less a saint — no offense, Jim Montgomery
kut my fellow FDIC Board members and I would appreciate it
9^®ahly if you were to give us the benefit of your best thinking
to help us work through this difficult problem — a problem that
we share.
1 can say at this point is that we are analyzing the options
costing them out. We do not have a solution — we have not
made any decisions - - w e are leaving the door open. While I do
not have a recommendation at this time, I do expect to come
forward with one, or several.
Thank you.