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TESTIMONY OF

RICKI HELFER, CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION

ON

THE "THRIFT CHARTER CONVERGENCE ACT OF 1995"

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
COMMITTEE ON BANKING AND FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES




10:00 A.M.
SEPTEMBER 21, 1995
ROOM 2128, RAYBURN HOUSE OFFICE BUILDING

Madam Chairwoman and members of the Subcommittee, thank you
for the opportunity to testify on proposed legislation to resolve
the difficulties facing the Savings Association Insurance Fund
(SAIF).

As you know from my prior testimony, these difficulties

pose a significant threat to the viability of the federal deposit
insurance system and the stability of the nation's financial
industry.

Madam Chairwoman and Congressman Vento, you and other

members of the Subcommittee are to be strongly commended for your
efforts to address the SAIF's problems.

The Federal Deposit Insurance Corporation (FDIC), the
Department of the Treasury, the Federal Reserve Board, the Office
of Thrift Supervision (OTS), and the Office of the Comptroller of
the Currency, have all testified before Congress this year on the
scope of the SAIF's difficulties and the need for timely
Congressional action.

I have appeared before this Subcommittee

twice on the matter, on March 23 and August 2.
SAIF's difficulties have been thoroughly aired.

The extent of the
Therefore, I

will limit my remarks this morning to summarizing what was said
on earlier occasions about why Congressional action is needed and
on the proposed legislation, the Thrift Charter Convergence Act
of 1995.

To summarize the FDIC's position on the proposed
legislation, the agency supports with just a few concerns the
portions of the bill aimed directly at resolving the SAIF's
difficulties.




The FDIC also supports in principle the portions

2

of the bill designed to bring about a merger of the bank and
thrift industries.

The FDIC, however, is concerned that

examination of the many issues inherent in a merger of the bank
and thrift charters could delay prompt action on the pressing
need to shore up the financial position of the SAIF.

Thus, if

the measures designed to bring about a merger of the bank and
thrift industries begin to impede efforts to resolve the serious
financial difficulties of the SAIF, we recommend that the
resolution of the SAIF's financial difficulties be separated for
more expeditious action.

A specific time frame for addressing

the remaining issues could be adopted at the same time.

Finally, the FDIC is concerned about changes the bill would
make in the agency's authority to set, collect, and retain
deposit insurance assessments.

The proposal could be interpreted

as permitting the FDIC to set premiums only to the extent
necessary to maintain the reserve ratio at the designated reserve
ratio or 1.25 percent of insured deposits.

Thus, in good

economic times when the reserve ratio is at 1.25, the bill might
force the FDIC to set premiums at zero for all insured
institutions.

The proposal would also require the FDIC to rebate

all assessment income in excess of the amount necessary to meet
the fund's designated reserve ratio.

These changes would strike at the underpinnings of the
principle of spreading risk over time and of the concept of risk-




3
based deposit insurance.

All insured depository institutions —

even those in unsafe or unsound condition or involved in
strategies likely to lead to losses to the insurance fund —
would be relieved of the requirement to pay insurance premiums if
the insurance fund were at or above its designated reserve ratio.
The FDIC believes that the purpose of the risk-based deposit
insurance system —

to discourage reckless uses of funds obtained

from deposits backed by the full faith and credit of the
government —

is sufficiently important to warrant a less

absolute trade-off between risk-based deposit insurance and the
designated reserve ratio.

In addition, the limitations in the bill on the FDIC's
authority to make assessments above 1.25 percent could prevent
the FDIC from collecting assessment income to meet debt service
obligations on the bonds issued by the Financing Corporation
(FICO).

THE SAIF'S DIFFICULTIES

As I have testified before, the SAIF faces three main
problems.

First, the fund is grossly undercapitalized.

As of

June 30, it had a balance of $2.6 billion, or only 0.37 percent
of insured deposits —

$6.27 billion below that amount necessary

to reach the 1.25 ratio.

In contrast, the balance in the Bank

Insurance Fund (BIF) on June 30 was $24.7 billion, or 1.288




4
percent of insured deposits.

At the current pace, the SAIF will

likely not reach the minimum reserve ratio of 1.25 percent of
insured deposits until the year 2002.

Second, On July l, 1995, the SAIF assumed the responsibility
from the Resolution Trust Corporation (RTC) for paying the costs
arising from any new failures of thrift institutions.

Although

the thrift industry currently appears to be in good health, one
large or several sizeable thrift failures could quickly deplete
the $2.6 billion balance in the fund.

The SAIF's vulnerability

to economic downturns and financial market instability is
increased because of asset and geographic concentrations in the
thrift industry.

As a result, the SAIF insures institutions with

similar asset portfolios, with large West Coast thrifts
accounting for nearly 20 percent of SAIF-insured deposits.

Third, almost half of current SAIF assessment revenue is
diverted from building the fund's balance to paying the interest
on the FICO bonds.

Congress established the FICO in the

Competitive Equality Banking Act of 1987 in an unsuccessful
to recapitalize the now defunct Federal Savings and Loan
Insurance Corporation (FSLIC).

Under current law, thè FICO

interest obligation has an annual call of up to the first $793
million in SAIF assessments until the year 2017, with decreasing
calls for two additional years thereafter.




5
Moreover, the differential between BIF assessment rates and
SAIF assessment rates that became effective June 1, 1995, will
give an incentive for thrift institutions to shift deposits from
the SAIF to the BIF.

As required by law, the FDIC has reduced

the average assessment rate for BIF-insured institutions to
approximately 4.4 cents per $100 of assessable deposits.

The

assessment rates for SAIF-insured institutions remain in the
range of 23 cents to 31 cents per $100 of assessable deposits.1
Because the SAIF's reserve ratio of 0.37 percent is well below
the designated reserve ratio of 1.25 percent, the FDIC is
required —

by law and by considerations of financial prudence -

to maintain a substantially higher assessment rate schedule for
the SAIF.2
!The vote by the FDIC Board of Directors to reduce the
deposit insurance premiums paid by most BIF members but to keep
the existing assessment rate schedule for SAIF members occurred
on August 8, 1995 (60 Fed. Rea. 42680, 42741, August 16, 1995).
The decisions closely resemble proposals that had been issued for
public comment earlier in the year. The new BIF assessment rates
were to be effective the first day of the month after the BIF
recapitalized. An analysis of the June 30, 1995, Call Report
data was completed in early September and showed that the BIF was
recapitalized at May 31. Accordingly, the new BIF assessment
rates were effective as of June 1. The BIF's recapitalization
was announced on September 5, 1995.
2Until January 1, 1998, if the SAIF remains below the
designated reserve ratio of 1.25 percent of insured deposits, the
FDIC Board of Directors has the authority to reduce SAIF
assessment rates to a minimum average of no less than 18 cents
per $100 of assessable deposits. Beginning January 1, 1998, the
minimum average rate must be 23 cents per $100 of insured
deposits until the SAIF achieves the designated reserve ratio.
Because of the SAIF's difficulties, including its extremely
undercapitalized condition, the Board at the August 8, 1995,
meeting noted in footnote 1 decided not to make any changes in
the SAIF assessment rate schedule. If the FDIC had reduced SAIF
assessment rates to a minimum average of 18 basis points, a




6

The premium differential of approximately 20 basis points
between BIF-insured and SAIF-insured institutions is a strong
incentive for SAIF members to reduce their exposure to the higher
SAIF rates.

A number of strategies —

such as shifting deposits

from SAIF-insured to BIF-insured institutions in the same holding
company structure —

are available to SAIF members inclined to

act on this incentive.

One effect of efforts to reduce exposure

to the SAIF rates could well be a reduction in the SAIF
assessment base to a level below what is necessary to support the
FICO interest payments.

That may occur as early as the next two

years.

In summary, the SAIF is in a troubled state.

It is

significantly undercapitalized and since July 1 has had
responsibility for paying the costs of thrift failures.

The

insurance premium disparity with the BIF, which is required by
law, is very likely to exacerbate the situation.

A comprehensive

solution to the SAIF's problems is beyond the authority of the
FDIC, and Congressional action is necessary.

If there is no

Congressional action, the continued undercapitalization of the
SAIF is virtually ensured, a default on FICO interest payments is
likely, and the insolvency of the SAIF is a possibility.

substantial premium differential between the BIF and the SAIF
would still have existed and debt service on the FICO bonds would
still be threatened.




7
PROPOSED LEGISLATION

Title I of the Thrift Charter Convergence Act of 1995
contains the measures that the FDIC believes are necessary to
resolve the SAIF's difficulties and which we recommended to the
Subcommittee in August.

Title I would also make certain changes

in the FDIC's authority concerning the making and collecting of
assessments.

Section 105 could prohibit the FDIC from setting

assessments in excess of the amount needed to maintain the
reserve ratio.

Section 104 would require the FDIC to rebate

assessment income in excess of the amount needed to meet a fund's
designated reserve ratio.

Title II is designed to bring about a common charter for the
bank and thrift industries.

No later than January 1, 1998,

federal savings associations would be required to convert to bank
charters, either national or state.

Federal associations that do

not voluntarily convert, or that go into liquidation, would be
automatically converted to national banks.

State savings

associations would not be required to convert but would be
treated as banks for the purpose of federal banking law.

Concerning savings and loan holding companies, Title II
would grandfather the activities of such existing companies.

The

insured depository institution subsidiary of a grandfathered
savings and loan holding company, however, would in effect have




8

to confine itself to its existing thrift business.

In addition,

the grandfathered privileges would be lost if there were a change
in ownership of the holding company.

Concerning the activities

of savings associations themselves, such activities not
permissible for banks could not be conducted after a two-year
transition period.

The appropriate supervising federal banking

agency could grant an institution up to two one-year extensions
beyond the initial transition period.

Title II would also permit existing mutual savings
associations converting to national banks to remain in mutual
form after the conversions.

Federal savings associations that

are currently members of the Federal Home Loan Bank system would
have to remain FHLB members.

The interstate branches of existing

savings associations that would not be permissible for banking
organizations would be grandfathered.

FDIC CONCERNS

The legislative proposal before the Subcommittee contains
many provisions that the FDIC supports.

Broadly, the proposal

would resolve the difficulties of the SAIF, a task that the FDIC
believes is imperative.

The proposal, however, contains several

issues about which the FDIC has concerns.




9
Curtailment of Assessment Authority

Section 105 of the proposed legislation could be interpreted
as explicitly limiting the FDIC's authority to make and collect
assessments.

The FDIC's Board of Directors could not set semi­

annual assessments in excess of the amount needed either to
maintain the reserve ratio of the insurance fund at the
designated reserve ratio or, if the reserve ratio is less than
the designated reserve ratio, to increase the reserve ratio to
the designated reserve ratio.

This provision also may prevent

the FDIC from collecting assessment income to meet the FICO
interest payments.

Moreover, such a limitation would conflict

both with the requirement for the FDIC to maintain a risk-based
assessment system and with the risk—spreading function of deposit
insurance.

The FDIC believes that the risk-based assessment system,
which was mandated by Congress in the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) under your
leadership, Madam Chairwoman, was an important advance in bank
supervision techniques and is an important tool for ensuring the
maintenance of a healthy and stable banking industry.

If the

^sfc-based assessment system became inoperative when an insurance
fund reached the designated reserve ratio, the discipline the
system is designed to foster would be lost.




10

Eliminating the FDIC's authority to allow the insurance fund
to fluctuate above the designated reserve ratio would also
substantially reduce the agency's ability to spread risk over
time and across injured parties.

The deposit insurance system

could be moved in the direction of a pay-as-you-go approach in
which expenses and revenues of the insurance fund may have to be
equated over a relatively short time horizon.

High insurance

premiums in times of economic difficulties could be required to
maintain the deposit insurance fund, but that would be precisely
at a time when financial institutions can ill afford high
premiums.

Consequently, the FDIC urges the Subcommittee to retain
current law with respect to its premium, setting authority.

The

bill's limitations on the FDIC's authority to collect assessments
above the designated reserve ratio could also prevent the FDIC
from collecting assessments to meet debt service obligations on
the FICO bonds, one of the purposes of this legislation.

We will

be happy to work with the Subcommittee to resolve this issue,
which may have been an inadvertent drafting error.

Rebate Authority

Section 104 would require the FDIC to rebate to insured
institutions amounts by which the actual reserves in a fund
exceed the balance required to meet the designated reserve ratio




11

at the end of a calendar year.

Each institution's rebate could

not exceed the total amount of assessments that the institution
paid in a year.

The FDIC believes that it should have discretionary
authority to rebate assessment revenue as a tool for managing the
fund at the target designated reserve ratio.

Rather than

providing discretionary rebate authority, however, Section 104
requires the FDIC to make rebates of assessment income in excess
of that needed to meet the designated reserve ratio.

Thus

Section 104 raises the same issues as the proposed curtailment of
assessment authority in Section 105.

Therefore, the FDIC requests that the discretionary rebate
authority it possessed for much of its history be restored.
Discretionary rebate authority would give the FDIC greater
flexibility in maintaining the balance in the insurance fund in
accordance with (1) the principle of spreading risks over time
and (2) the concept of risk-based insurance assessments.

Bank and Thrift Charter Merger Questions

A major concern of the FDIC is that consideration of the
many issues involved in eliminating the distinctions between bank
and thrift charters could delay action on the immediate problem
of the SAIF's financing.




The SAIF's difficulties could be dealt

12

with in a narrow piece of legislation devoted to the financial
issues affecting the SAIF, and the issues concerning the
elimination of distinctions between bank and thrift charters
could be examined with more deliberation than the current needs
of the SAIF permit.

A two-step process would meet the goals of

assuring a sound SAIF as soon as possible and providing
sufficient time to assure that other issues relating to the
thrift institutions are resolved thoughtfully, fully and finally.

The FDIC is not opposed to eliminating the distinctions
between bank and thrift charters —

far from it.

The FDIC

believes that the current charter distinctions no longer match
economic reality.
institutions —

Moreover, forcibly concentrating a class of

thrifts in this instance —

into a limited range

of activities with low profit margins is a prescription for
trouble, as the savings and loan crisis of the 1980s and early
1990s amply demonstrated.

Nevertheless, the elimination of bank and thrift charter
distinctions involves some difficult questions that may take a
fair amount of time to resolve.

The dual banking system is an

extremely important component of the nation's financial
structure.

State legislatures should have ample opportunity to

examine federal legislation that would change the nature of
state-chartered institutions.

The need to provide a speedy

resolution of the SAIF's difficulties should neither force




13
premature action on these questions nor be sidetracked by their
consideration.

The FDIC fully understands the competitiveness concerns
banks have in relation to thrift institutions and the unfairness
of requiring banks to share in the FICO obligations while
competing with thrifts that enjoy competitive advantages.

For

that reason, the FDIC supports resolution of the non-financial
issues in the legislation and the merger of the BIF and SAIF as
soon as possible commensurate with a thoughtful, fair, and
complete solution.

Unspent RTC Funds as Backup

As we testified in August, the FDIC continues to believe
that unspent RTC funds should be available as a backstop, or
reinsurance policy, for extraordinary, unanticipated losses until
the BIF and the SAIF are merged.

Projections by both the FDIC

and the Congressional Budget Office indicate that the need for
these funds is unlikely, and therefore the budgetary impact is
unlikely to be great.

Nevertheless, the prediction of losses to

the insurance funds, within a specified near-term timé horizon,
is very difficult.

Unspent RTC funds would serve as protection

against losses more severe than those now anticipated.

The

backup funds would also assure SAIF members that they would not
be asked to pay yet another special assessment to capitalize the




14
fund before its merger with the BIF.

Finally, the backup funds

would assure banks that at the time of merger, the SAIF balance
will not be diluted by SAIF losses, necessitating higher premium
rates to make up the difference.

SUMMARY

The FDIC believes that Congressional action to resolve the
problems of the SAIF is imperative.

I applaud you, Madam

Chairwoman, Congressman Vento, and other members of the
Subcommittee for the considerable attention you have given this
very important issue.

Accordingly, the agency urges expeditious

passage of the bill with the changes outlined in our testimony.

One of the changes the FDIC requests is the elimination of
the provision that can be interpreted as restricting the FDIC's
authority to set deposit insurance premiums to maintain the
designated reserve ratio on average over a reasonable
planning horizon.

A "pay-as-you-go” insurance system in which

the cost of the insurance event is borne entirely at the time the
event occurs does not accomplish the spreading of risk over time.
In addition, the provision could render the risk—based deposit
insurance system ineffective when the insurance fund reaches the
designated reserve ratio.

Charging all institutions the same

premium regardless of the risk each institution poses to the fund
penalizes well-managed and well-capitalized institutions.




15
Finally, the provision could prevent the FDIC from collecting
assessments to meet the debt service obligations of the FICO
bonds.

A second change requested by the FDIC is the alteration of
the provision giving the FDIC rebate authority.

The provision

would make exercise of the authority mandatory when assessment
income exceeds the amount necessary to meet the designated
reserve ratio.

To avoid making the deposit insurance system a

pay-as-you-go system and to preserve the incentives of risk-based
deposit insurance, the rebate authority should be discretionary.

The FDIC also supports the measures in the proposed
legislation designed to bring about a merger of the bank and
thrift charters.

The FDIC is concerned, however, that

consideration of the many issues involved in a merger of the
charters might delay action on the difficulties of the SAIF.
Moreover, states should be given an opportunity to examine and
amend laws related to chartering issues.

If a delay in enacting

the comprehensive legislative package appears likely, the FDIC
suggests that the matters be dealt with separately, with the
SAIF's difficulties being addressed as soon as possible and the
charter merger being examined at a pace that allows thorough and
complete resolution of all relevant issues, but within a
specified, reasonable time frame.




16

Thank you for the opportunity to testify on this critical
subject.




I would be please to answer any questions.