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F D IC : S IX A L T E R N A T IV E S TO T H E P R E S E N T
D E P O S IT IN SU R A N C E S Y S T E M .

A d d re ss* by
¿7

R o b e rt E . B a r n e tt, C h a irm a n
F e d e r a l D e p o sit In su ra n c e C o rp o ra tio n
b e fo r e the
N e b r a s k a C o rre sp o n d e n t B an k C o n fe re n c e ,
^ L in c o ln , Nebrarfdca.
S e p te m b e r 24, 1976,

FEDERAL DEPO SIT IN S U R A N C E C O RPO R ATIO N , 5 50 Seventeenth St. N.W., Washington, D.C. 20429




202-389-4221

In a re c e n t sp e e c h I d i s c u s s e d the a d e q u a c y and f a i r n e s s of the
c u r r e n t d e p o s it in s u r a n c e s y s t e m , and d e s c r ib e d in d e t a il how th e F D IC
d e a ls w ith bank f a i l u r e s and the b a s e s f o r o u r d e c is io n s in h an d lin g fa ilin g
b a n k s.

A fte r p oin tin g out the in e q u ity in the p r e s e n t s y s t e m f o r c e r t a in

u n in su re d d e p o s it o r s , I w ent o n to c o n s id e r b r ie f ly th e r a tio n a le f o r the
one a lt e r n a t iv e n o r m a lly s u g g e s t e d - - 100 p e r c e n t d e p o s it in s u r a n c e .
T o d ay I intend to e x p lo r e m o r e th o ro u gh ly the a r g u m e n ts and im p lic a tio n s
not only of 100 p e r c e n t d e p o s it in s u r a n c e , but a l s o of o th e r a lt e r n a t iv e s
to the p r e s e n t s y s t e m , so m e of w hich m a y b e m o r e d e s i r a b l e than 100
p e r c e n t in s u r a n c e .
The b a s i c p u r p o se of d e p o s it in s u r a n c e i s to p r o te c t the ban k in g
s y s t e m a g a in s t d e s t r u c t iv e ru n s on d e p o s it s a s w e ll a s to p r o te c t the
d e p o s it o r s t h e m s e lv e s .

With r e s p e c t to the la t t e r , m o s t d e p o s it o r s h av e

f a r e d e x tr e m e ly w e ll in th e 531 in s u r e d b a n k s w hich h av e b e e n c lo s e d s in c e
the e sta b lish m e n t of th e F e d e r a l D e p o sit In s u r a n c e C o r p o r a tio n .

A bout

9 9 .8 p e rc e n t of a l l d e p o s it o r s , l a r g e o r s m a l l , fu lly r e c o v e r e d th e ir
d e p o s it s a lm o s t im m e d ia te ly .

Out of $4 b illio n in d e p o s it s a t f a ile d b a n k s

th rou gh 1975, a p p r o x im a te ly $267 m illio n w a s lo s t o r i s e x p e c te d to b e
lo s t .

Of th is am o u n t, u n p ro te c te d d e p o s it o r s h av e o r w ill r e c o v e r a ll

but ab ou t $13 m illio n , th e C o r p o r a tio n a b s o r b in g the r e m a in d e r .
T he h igh r e c o v e r y r a te f o r d e p o s it o r s i s a ttr ib u ta b le m a in ly to
the f a c t th at o v e r $9 out of e v e ry $10 in d e p o s it s w e re in bank f a i l u r e s
w hich w e re h an d led by p u r c h a s e and a s s u m p tio n t r a n s a c t io n s , t r a n s a c t io n s




-

2

-

in w hich th e F D IC p r o v id e s a s s i s t a n c e en ab lin g a n o th e r ban k to a s s u m e
a l l of the f a ile d b a n k 's l i a b i l i t i e s , in e ffe c t, p ro v id in g 100 p e r c e n t i n s u r ­
a n c e both to u n in su re d and in s u r e d d e p o s it o r s a lik e . S u b o rd in ate d c r e d it o r s
and equ ity i n v e s t o r s g e n e r a lly l o s e m o s t o r a l l of t h e ir in v e s tm e n ts in
e ith e r a p ay o ff o r a p u r c h a s e and a s s u m p tio n .
T he p r e s e n t law , h o w e v e r, r e s t r i c t s o u r a b ility to a r r a n g e a
p u r c h a s e and a s s u m p tio n in a ll c a s e s . It r e q u ir e s th at w e a r r a n g e an
a s s u m p tio n only w hen the c o s t of doin g so i s l e s s to the F D IC than a
p a y o ff.

In ad d itio n , of c o u r s e , the F D IC h a s to b e a b le to fin d a b u y e r

and in so m e c a s e s , p a r t ic u la r ly in u n it b an k in g s t a t e s , th at h a s p ro v e d
im p o s s ib le .

In N e b r a s k a , f o r e x a m p le , of the eigh t f a i l u r e s s in c e the

th e F D IC w a s c r e a t e d a ll h av e b e e n p a y o ffs , w ith the atten d an t d i s r u p ­
t io n s , r a t h e r th an a s s u m p t io n s .
N e v e r t h e le s s , sin c e O cto b e r of 1974, w hen the F D IC m a d e th is
p o lic y e x p lic it, only fo u r of tw e n ty -e ig h t bank f a i l u r e s h av e b e e n h an d led
by p a y o ff r a th e r th an p u r c h a s e and a s s u m p tio n .
B y r e s o r t in g to p u r c h a s e and a s s u m p tio n s w h e n e v e r p o s s ib le , w e
h av e p ro v id e d d e fa c to 100 p e r c e n t in s u r a n c e f o r a ll d e p o s it o r s in m o s t
b a n k s in re c e n t y e a r s . What w e h av e not p ro v id e d i s eq u ity , f a i r n e s s ,
and lo g ic in d e te rm in in g w hich a r e to b e the few d e p o s it o r s who do not
h av e 100 p e rc e n t in s u r a n c e .

T h o se in s t a n c e s w h e re d e p o s it o r s h av e

e x p e r ie n c e d l o s s e s in p a y o ffs h av e r e fle c t e d s p e c i a l c ir c u m s t a n c e s fr o m




the F D I C 's stan d p o in t - - not n e c e s s a r i l y f r o m the d e p o s i t o r s '.

T h at

i s , th e r e w e r e s o m e c a s e s w h e re it w a s not p o s s ib le o r a p p r o p r ia t e
to a r r a n g e f o r a p u r c h a s e and a s s u m p tio n b e c a u s e o f the lo c a tio n of
the b an k , o r b e c a u s e of th e s t a t e 's b r a n c h and h old in g co m p an y la w s ,
o r b e c a u s e the F D IC co u ld n ot g e t a g oo d f i x on l i a b il i t ie s b e c a u s e of
pending la w s u its o r s u s p e c te d fr a u d .

U n c e rta in ty and p o te n tia l c o s t

c o n s id e r a tio n s m a y h a v e a ffo r d e d lo g ic a l r e a s o n s f o r a p a y o ff in su ch
c a s e s a s f a r a s th e F D IC w a s c o n c e r n e d .
w e re not n e c e s s a r i l y a t fa u lt.

H o w e v e r, u n in su re d d e p o s it o r s

T hey w e r e u n lu ck y .

I r e c o g n iz e th at t h e s e

w e re l a r g e d e p o s it o r s who p r e s u m a b ly a r e s o p h is tic a te d an d k n o w le d g e a b le
enough to s c r u t in iz e the co n d itio n of th e ban k b e fo r e m ak in g t h e ir d e p o s it,
but th at p ro b a b ly d id not h e lp .

T h e s o p h is tic a te d d e p o s it o r i s m o r e lik e ly

to b e a b le to d e te c t p o o r m a n a g e m e n t w hich w ill p ro b a b ly le a d to a p u r c h a s e
and a s s u m p tio n th an fr a u d w hich i s m o r e lik e ly to le a d to a p ay o ff.
If w e a lm o s t h av e 100 p e r c e n t d e p o s it in s u r a n c e and th e p r e s e n t
s y s t e m a p p e a r s to w o rk in an a lm o s t ra n d o m w ay in i t s tr e a tm e n t of
d e p o s it o r s - - s i m i l a r d e p o s it o r s g e ttin g t r e a t e d d iffe r e n tly in d iffe r e n t
c a s e s -why not p r o te c t th o se in n o cen t u n in su re d d e p o s it o r s by g oin g to
100 p e r c e n t d e p o s it in s u r a n c e ? L e t 's e x p lo r e the p o s s ib ilit y .
F i r s t , th e fiv e m o s t o b v io u s a r g u m e n ts in su p p o r t of su ch a c h a n g e :
1.

O n e-h u n d red p e r c e n t d e p o s it in s u r a n c e w ould p ro v id e p ro te c tio n

to th o se d e p o s it o r s w h o se d e p o s it s a r e not now fu lly p r o te c t e d .

T h is ca n

be done w ith only m in im a l a d d itio n a l c o s t to the F D IC , i f p a s t e x p e r ie n c e




i s an y g u id e .

T he a d d itio n a l c o s t to th e F D IC of p a y o ffs m a d e th ro u g h ­

out th e C o r p o r a t io n 's h is t o r y , i f none o f the l o s s h ad b e e n b o rn e by
u n in su re d d e p o s it o r s and the s a m e b a n k s h ad f a ile d , w ould b e ab o u t
$13 m illio n .

L e t m e i n s e r t a c a v e a t a t th is p oin t, h o w e v e r.

If one o r

m o r e of th e r e c e n t l a r g e ban k f a i l u r e s h ad b e e n p a y o ffs , th e am o u n t of
l o s s to u n in su re d d e p o s it o r s w ould b e m u ch l a r g e r an d, t h e r e f o r e , th e
c o s t of m o v in g to fu ll in s u r a n c e m u ch m o r e c o s tly to th e F D IC .

If ju s t

one b an k f a i lu r e , U. S . N a tio n a l B an k in San D ie g o , C a lif o r n ia , had
b e e n r e s o lv e d w ith a p a y o ff r a t h e r than a p u r c h a s e and a s s u m p tio n , the
c o s t to u n in su re d d e p o s it o r s w ould h a v e i n c r e a s e d f r o m $13 m illio n to
$88 m illio n .
2.

With 100 p e r c e n t d e p o s it in s u r a n c e , d e p o s it o r s w ould h av e

no n eed to w ith d raw fu n d s fr o m b a n k s w ith p r o b le m s , and ru n s on su ch
b a n k s w ould not be lik e ly to c a u s e a f a i l u r e . U n d er o u r p r e s e n t s y s t e m ,
when a ban k g e ts in to d iffic u lty o r i s e x p o se d to a d v e r s e p u b lic ity , so m e
u n in su re d d e p o s it o r s ten d to f le e , e x a c e r b a tin g th at d iffic u lty .

We m u s t

r e m e m b e r , w hen c o m p a r in g b a n k s w ith o th e r c o r p o r a t io n s , th a t m u ch
of ban k li a b i l i t i e s a r e p a y a b le on d em an d and f r e e to le a v e in r e s p o n s e
to a d v e r s e p u b lic ity .

O n e-h u n d red p e r c e n t d e p o s it in s u r a n c e sh ou ld

lim it d e p o s it o u tflo w s in a d v e r s e c ir c u m s t a n c e s , th u s p ro v id in g m o r e
tim e to w ork out a so lu tio n f o r the p r o b le m bank o r f o r m a n a g e m e n t
to tu rn the ban k aro u n d .

Of c o u r s e , not a ll d e p o s it o u tflo w s w ould b e

f o r e s t a l l e d s in c e d e p o s it o r s ty p ic a lly w ant to do b u s in e s s w ith b a n k s




- 5 -

th a t ca n p ro v id e lo a n s and o th e r s e r v i c e s , and th e tro u b le d bank i s ap t
to b e l e s s a b le to s e r v e i t s c u s t o m e r s .
We e x p e c t th at th e s e f a c t o r s w ould le a d to a re d u ctio n in the
n u m b e r of bank f a i l u r e s , but th a t i s by no m e a n s a s s u r e d .

What i s

m o r e c e r t a in i s th at th e r e w ould b e fe w e r p a y o u ts. T he p u r c h a s e and
a ssu m p tio n p r o c e d u r e co u ld b e u s e d in a lm o s t e v e ry f a i l u r e i f d e p o s it s
a r e in s u r e d in fu ll.
3.

O n e-h u n d red p e r c e n t d e p o s it in s u r a n c e w ould h av e a b e n e fic ia l

im p a c t on c o m p e titio n am o n g b a n k s .

A t p r e s e n t , in stitu tio n s d e e m e d to

b e m o r e so lid o r m o r e c o n s e r v a tiv e h a v e an a d v a n ta g e in c o m p e tin g f o r
d e p o s it s .

T h is i s a s i t sh ou ld b e .

H o w e v e r, d e p o s it o r s m a y not b e a b le

to d iffe r e n t ia t e a c c u r a t e ly am o n g b a n k s a c c o r d in g to r i s k an d, f o r so m e
d e p o s it o r s , s i z e b e c o m e s a p ro x y f o r s o u n d n e s s .

O r d e p o s it o r s m a y

sim p ly a s s u m e th at we w ill not a llo w a l a r g e ban k f a i l u r e to r e s u lt in
a p a y o ff.

S t a t i s t i c a lly , th e r e i s s o m e su p p o r t f o r th at p o sitio n , a s

e v id e n ce d by the fo llo w in g : D u rin g th e p e rio d 1971 to the p r e s e n t , of
th e b a n k s th at c lo s e d , 30 h ad l e s s than $21 m illio n in d e p o s it s .

T w e lv e

of th e se w e r e p aid out, 16 w e r e a c q u ir e d by a th ird p a rty in an F D IC a s s i s t e d p u r c h a s e and a s s u m p tio n t r a n s a c t io n , and tw o b e c a m e D e p o sit
In su r a n c e N a tio n a l B a n k s.

Only one of the se v e n f a ile d b a n k s betw een

$21 m illio n and $100 m illio n w a s p aid out, and none of the fiv e w ith m o r e
than $100 m illio n in d e p o s it s w a s p aid out.




-

6

-

T he p r e s e n t s y s t e m , then , g iv e s a d e c id e d c o m p e titiv e ed g e to
v e r y l a r g e b a n k s.

O n e-h u n d red p e r c e n t d e p o s it in s u r a n c e w ould p ro b a b ly

im p r o v e th e c o m p e titiv e p o sitio n s of s m a ll v s . l a r g e b a n k s and of new v s .
e s t a b lis h e d in s t itu t io n s .

O v e r tim e th is w ould o r d in a r ily b e e x p e c te d to

r e d u c e the le v e ls of c o n c e n tr a tio n in b an k in g , and to le a d to m o r e c o m p e t i­
tiv e m a r k e t s fo r b an k in g s e r v i c e s .
4.

B e c a u s e , a s I h av e m e n tio n e d , we w ould not n eed to f e a r

p ro v o k in g ru n s on tro u b le d b a n k s, f u lle r p u b lic d i s c l o s u r e o f a d v e r s e
in fo rm a tio n on a b a n k 's fin a n c ia l co n d ition co u ld b e m a d e .

T h is w ould

le a d to m o r e in fo rm e d b u s in e s s d e c is io n s b y i n v e s t o r s and c u s t o m e r s of
the b an k , and so m e of the c o n t r o v e r s y ab o u t p r o p e r bank d i s c l o s u r e co u ld
b e e lim in a te d .

T h e F D IC h a s b e e n c o n c e r n e d th at in re c e n t y e a r s the

c a p it a l m a r k e t s h av e b e c o m e l e s s open to b a n k s, p a r t ic u la r ly to s m a l l e r
b a n k s.

F u lle r d i s c l o s u r e w ould m a k e it e a s i e r f o r w e ll- r u n b a n k s to open

t h e s e m a r k e t s , and to open th e m a t r e a s o n a b le r a t e s .

L a r g e c u sto m e rs

co u ld b e c o m e m o r e co n fid en t th a t t h e ir b u s in e s s w as s a f e in s m a l l e r
b a n k s i f th ey h ad m o r e d i s c l o s u r e of the co n d itio n of th e b an k .
5.

If we h ad 100 p e r c e n t d e p o s it in s u r a n c e , p le d g in g r e q u ir e m e n ts

f o r s t a t e and lo c a l g o v e rn m e n ts co u ld p r e s u m a b ly b e e lim in a te d .

S ta te

and lo c a l g o v e rn m e n ts a lr e a d y h av e p r e f e r r e d tr e a tm e n t w ith r e s p e c t to
t h e ir d e p o s it s in b a n k s.

T h ey now h av e in s u r a n c e c o v e r a g e of $ 1 0 0 , 000,

and th e r e m a in d e r , in m o s t s t a t e s , i s p ro te c te d by p le d g in g r e q u ir e m e n ts .
T h o se b a n k e r s and o th e r s who v iew p le d g in g r e q u ir e m e n ts a s an im p e d im e n t




to th e e ffic ie n t u t iliz a tio n of b an k a s s e t s , an d a re d u c tio n in ba.nk
liq u id ity , w ould count i t s e lim in a tio n a s an a d v a n ta g e of 100 p e r c e n t
in s u r a n c e c o v e r a g e .

T h o se T r e a s u r e r s of p u b lic b o d ie s and o th e rs

c o n c e r n e d w ith th e m a r k e t f o r s t a t e and lo c a l g o v e rn m e n t s e c u r i t ie s
p ro b a b ly w ould v iew th e e lim in a tio n of p le d g in g r e q u ir e m e n ts a s an
u n d e s ir a b le a s p e c t of 100 p e r c e n t d e p o s it in s u r a n c e .

T h e r e a r e o th e r

te c h n iq u e s f o r p ro v id in g a co n tin u in g m a r k e t f o r m u n ic ip a l s e c u r i t i e s ,
h o w e v e r, th a t p ro b a b ly w ould b e e ffe c tiv e even if p le d g in g r e q u ir e m e n ts
w e r e e lim in a te d .

M u n ic ip a litie s m a y b e a b le to im p r o v e t h e ir m a r k e t s ,

f o r e x a m p le , b y p ro v id in g f u lle r d i s c l o s u r e o r b y m o v in g to t a x a b le ,
s u b s id iz e d b o r r o w in g s .
L e t m e tu rn to the o b v io u s a r g u m e n ts a g a in s t 100 p e r c e n t d e p o s it
in s u r a n c e :
1.
o p e r a t io n s .

U n in su re d d e p o s it o r s p la c e lim it s on the r i s k i n e s s of bank
W hile th e r e i s s o m e d e b a te ab o u t how e ffe c tiv e su c h in flu e n c e

i s an d no h a r d e v id e n c e i s a v a ila b le , few w ould deny th a t, to a d e g r e e at
l e a s t , th is in flu e n c e e x i s t s .

With 100 p e r c e n t in s u r a n c e , b a n k s an x io u s

to i n c r e a s e t h e ir r i s k by b id d in g a g g r e s s i v e l y f o r d e p o s it s and lo a n s
m ig h t b e a b le to do so w ithout an y m a r k e t r e s t r a i n t s .
No b a n k e r w an ts to l o s e m o n ey o r f a i l , but s o m e w ould b e w illin g
to ta k e on c o n s id e r a b le r i s k i f th ey c o n s id e r e d p o te n tia l r e w a r d s in the
fo r m of gro w th an d e a r n in g s to b e s u ffic ie n t.

T h is w eigh in g of r i s k and

re w a rd w o rk s in m o s t s e c t o r s o f o u r e co n o m y w h e re m o s t of the r i s k i s
a s s u m e d by eq u ity i n v e s t o r s .



W here le v e r a g e i s so u g h t, le n d e r s r e s t r a i n

- 8 -

the ex ten t of o v e r a ll r i s k by im p o sin g r e s t r i c t i o n s , e, g . , h ig h e r
in t e r e s t r a t e s , and lim itin g a v a ila b le fu n d s a s r i s k i s i n c r e a s e d .
In th e b an k in g s y s t e m , h o w e v e r, d e p o s it o r s p ro v id e m o s t of the
fu n d s.

With 100 p e r c e n t d e p o s it in s u r a n c e , th e r e w ould b e lit t le r e a s o n

f o r l a r g e d e p o s it o r s to im p o s e su ch m a r k e t c o n s t r a in t s .

A g g re ssiv e

h ig h - r is k o r ie n te d b a n k s , t h e r e f o r e , w ould b e a b le to b id s u c c e s s f u ll y
f o r s i z a b le a d d itio n a l t im e d e p o s it s a t m o d e r a te ly e le v a te d i n t e r e s t
r a t e s , w h ich u n d e r c u r r e n t c o n d itio n s m ig h t h av e b e e n a v a ila b le to th em
only a t p ro h ib itiv e r a t e s o r not a t a l l .

U n d er 100 p e rc e n t in s u r a n c e ,

then , a ll of th is a d d itio n a l e x p o s u r e to l o s s w ould b e b o rn e by th e d e p o sit
in s u r a n c e fund.
L e t m e e m p h a siz e th a t the a r g u m e n t i s not th at m o s t o r ev en m an y
b a n k e r s w ould b e h av e i r r e s p o n s i b l y i f w e h ad 100 p e r c e n t d e p o s it i n s u r ­
an ce.

R a th e r , it i s th a t 100 p e r c e n t d e p o s it in s u r a n c e w ould s ig n ific a n tly

r e d u c e the m a r k e t r e s t r a i n t s th a t m an y b e lie v e p r e s e n t ly lim it the am ount
of d e p o s it s a v a ila b le to th e o v e r ly r is k y , o v e r ly a g g r e s s i v e , o v e r ly
o p tim is tic and s e l f - s e r v i n g o p e r a tio n .

Of c o u r s e , th e r e w ould s t i l l b e

so m e c o m p e titiv e f o r c e s w o rk in g in th e d ir e c tio n of sound bank o p e r a tio n s.
M any d e p o s it o r s , p a r t ic u la r ly l a r g e b u s in e s s f i r m s , a r e a t t r a c t e d to a
ban k by i t s a b ility to p ro v id e s e r v i c e s e ffic ie n tly and to g r a n t c r e d it when
n ee d e d .

A bank w h o se co n tin u ed e x is t e n c e i s in q u e stio n i s h in d e re d in

th is c o m p e titio n f o r c u s t o m e r s .
2.

S in c e u n d e r 100 p e r c e n t d e p o s it in s u r a n c e the e x p o s u r e of the

F D IC fund m a y i n c r e a s e , the C o r p o r a tio n m a y n eed a u th o rity to r e s t r i c t



- 9 -

le v e r a g e o r the c o m p o sitio n of bank a s s e t p o r tfo lio s in o r d e r to o ffs e t
the g r e a t e r r i s k e x p o su r e and c o s t s .

S o m e p o s s ib le r e s t r i c t i o n s w ould

b e lim ita tio n s on c a p it a l r a t i o s , lim ita tio n s on a s s e t c o m b in a tio n s o r
so m e fo r m of both.

T r a d itio n a lly , th e F D IC h a s n ot so u gh t a d d itio n a l

p o w e rs o v e r b an k le v e r a g e o r a s s e t c o m p o sitio n .

In f a c t , w e h av e ten ded

to fa v o r b r o a d e r len d in g and in v e stm e n t p o w e rs f o r b a n k s.

L ik e w is e ,

m o s t b a n k e r s h av e o p p o se d the m ix of i n c r e a s e d in s u r a n c e and in c r e a s e d
r e g u la tio n , f e a r in g th a t r e g u la to r y r e s t r i c t i o n s m ig h t b e m o r e c o s tly than
th e b e n e fits of 100 p e r c e n t d e p o s it in s u r a n c e .
O v er the l a s t y e a r o r s o , s e v e r a l l a r g e b a n k s h a v e gon e to m a r k e t
to r a i s e v e r y s i z a b le am o u n ts of c a p it a l.

O b v io u sly , w e a r e p le a s e d to

s e e th a t, b e c a u s e i n c r e a s e d ban k c a p it a l b e c o m e s p a r t of the c u sh io n fo r
th e d e p o s it in s u r a n c e fund.

To s o m e exten t t h e s e c a p it a l i s s u e s m a y

h av e r e s u lt e d fr o m in fo r m a l p r e s s u r e f r o m the s u p e r v is o r y a g e n c ie s , but
I w ould not w ant to e x a g g e r a te o u r in flu e n c e in th e s e d e c is io n s .

The

m a jo r f a c t o r p ro b a b ly w a s th e b a n k 's c o n c e r n th at c a p it a l r a tio s p lay a
r o le in the c o m p e titiv e b a ttle f o r l a r g e d e p o s it s .

In a w o rld of 100 p e rc e n t

d e p o sit in s u r a n c e , h o w e v e r, b a n k e r s m a y b e a b le to a t t r a c t fu lly in s u r e d
l a r g e d e p o s it s w ith v e r y low c a p it a l r a t i o s .

S in c e b a n k e r s w ill not h av e

the s a m e in c e n tiv e to m a in ta in th is c u sh io n of c a p it a l p ro te c tio n f o r the
d e p o sit in s u r a n c e fund, w e m a y n eed a u th o rity to im p o s e m in im u m c a p it a l
r e q u ir e m e n ts (o r m in im u m liq u id ity r e q u ir e m e n ts , o r m o r e c o n tro l o v e r
ty p e s of in v e s tm e n ts ).




-

3.

10

-

A s lon g a s th e r e a r e no ru n s o r liq u id ity p r e s s u r e s on b an k s

in d iffic u lty , s u p e r v is o r s m ig h t b e r e lu c ta n t tp c l o s e b an k s that a r e
in so lv e n t o r o p e r a tin g in an e x c e s s iv e ly r is k y fa s h io n .

T h is r a i s e s a

v e r y im p o rta n t i s s u e c o n c e rn in g b an k f a i l u r e s and in s u r a n c e .
w ant a situ a tio n in w hich a bank can n ot f a i l ?

Do w e

T h at i s , do w e w ant to

k e e p in e ffic ie n t, m a r g in a l b a n k s open in d e fin ite ly ?

X do not think s o ,

and 100 p e rc e n t d e p o sit in s u r a n c e d o e s not n e c e s s a r i l y le a d to th at
r e s u lt .

B u t th e r e i s a le g it im a te c o n c e r n th at s u p e r v is o r s m a y b e

r e lu c ta n t to c l o s e a ban k th at co u ld o th e r w ise co n tin u e to o p e r a te
in d e fin ite ly .

S u p p o se a s t a t e s u p e r v is o r c o n c lu d e s th at a ban k , on the

b a s i s of e x a m in e r c l a s s i f i c a t i o n s and m a r k e t d e p r e c ia tio n of s e c u r i t i e s ,
i s in so lv e n t.

U n der p r e s e n t c o n d itio n s, su ch a ban k i s c lo s e d on an

a s s e t v a lu a tio n b a s i s , o r te n d s to l o s e d e p o s it s , fin d s it d iffic u lt to
b o rr o w F e d e r a l fu n d s, and i s c lo s e d on a liq u id ity b a s i s in a r e la tiv e ly
s h o r t t im e .

With 100 p e rc e n t d e p o s it in s u r a n c e , d e p o s it o r s w ill not

sh y aw ay fr o m su ch a ban k and liq u id ity p r e s s u r e s w ill b e a b s e n t.

In

su ch a c a s e , h um an n a tu re m ig h t w e ll le a d the s u p e r v is o r to d e la y tak in g
a c tio n to c l o s e th e b an k .

He m a y not intend to d e la y in d e fin ite ly , but

it m ig h t a p p e a r d e s i r a b l e to d e la y u n til a f t e r the n ext e le c tio n o r u n til
the s u p e r v i s o r 's t e r m i s u p .

T he te m p ta tio n to le a v e su ch p r o b le m s to

o n e 's s u c c e s s o r i s g r e a t , and i s not u n r e a s o n a b le .

A fte r a l l , p e rh a p s

the e x a m in e r 's lo an c l a s s i f i c a t i o n s w e r e too h a r s h , o r p e rh a p s the
m a r k e t w ill tu rn aro u n d and e lim in a te the d e p r e c ia tio n in the bond




11

p o r tfo lio o r m a y b e so m e th in g e l s e w ill c o m e up to im p r o v e the b a n k ’ s
co n d itio n .

W h atever th e r e a s o n , i f s u p e r v is o r s r e a c t in th is w ay , the

r i s k of f a ilu r e f o r in e ffic ie n t, in c o m p e te n t, o r c ro o k e d o w n e rs and
m a n a g e r s w ill b e s u b s t a n t ia lly d e c r e a s e d .
4*

In view of the g r e a t e r r i s k s w hich b an k s m ig h t tak e and the

lo n g e r tim e b e fo r e they a r e c lo s e d , the u ltim a te l o s s e s to the in s u r a n c e
fund m ig h t b e l a r g e .

In f a c t , o u r p a s t e x p e r ie n c e of v e r y lim ite d l o s s e s

m a y not be a t r u e in d ic a tio n of the p o te n tia l r i s k s u n d e r 100 p e rc e n t
d e p o sit in s u r a n c e .

I m en tio n ed e a r l i e r th at if o u r p a s t ban k f a i l u r e s h ad

in v o lv ed 100 p e r c e n t d e p o s it in s u r a n c e the a d d itio n a l c o s t to the F D IC
w ould only h av e b een ab o u t $13 m illio n .

B u t th a t w a s in a w o rld in w hich

in so lv e n t b a n k s w e r e c lo s e d p ro m p tly and in w hich the p ru d e n c e of
u n in su re d d e p o s it o r s m a d e it d iffic u lt f o r c ro o k e d o r in c o m p e te n t b a n k e r s
to o b tain d e p o s it s .

If l a r g e d e p o s it o r s , w ith no f e a r of l o s s , co u ld put

la r g e am o u n ts of fu lly in s u r e d fu n d s in the h an d s of s w in d le r s , in c o m p e ­
te n ts, o r s w in g e r s , o u r l o s s e s co u ld be m u ch l a r g e r than p a s t e x p e r ie n c e
su g g e sts.
W here do th e s e p r o s and c o n s le a d u s w ith r e s p e c t to a p o sitio n
on 100 p e r c e n t d e p o s it in s u r a n c e ?

A llow m e to duck th at q u e stio n fo r

the p r e s e n t and s u g g e s t o th e r a lt e r n a t iv e s than 100 p e r c e n t d e p o sit
in s u r a n c e f o r d e a lin g w ith the in e q u itie s of the p r e s e n t s y s t e m .
I s e e a t l e a s t fo u r o r fiv e a lt e r n a t iv e s :
1.

It i s c l e a r th at w e c a n a c h ie v e a ll the b e n e fits of 100 p e rc e n t

d e p o sit in s u r a n c e by ad o p tin g a p o lic y of a lw a y s a r r a n g in g f o r p u r c h a s e



-

12

-

and a s s u m p tio n t r a n s a c t io n s in the c a s e of bank f a i l u r e .

We c a n do so

n e a r ly a ll the tim e now, bu t th e r e a r e so m e s itu a tio n s in w hich e x istin g
s ta t u te s do not a llo w u s to u s e th e a s s u m p tio n te ch n iq u e .

T h ere a r e

s o m e c a s e s w h e re the am o u n t of u n in su re d l i a b il i t ie s i s so g r e a t , o r the
v a lu e of the b a n k 's b u s in e s s i s so low , th at no p o te n tia l a s s u m in g bank
i s w illin g to o ffe r a p re m iu m s u ffic ie n t to m e e t the sta tu to r y t e s t th at
an a s s u m p tio n t r a n s a c t io n c a n b e a s s i s t e d by the F D IC only if the c o s t
to th e F D IC w ill b e l e s s than in a p ay o u t.

In c a s e s of s u s p e c te d fr a u d ,

w e m u s t b e c o n c e r n e d th a t th e r e a r e l i a b il i t ie s th a t do not a p p e a r on the
b a n k 's b o o k s, w hich w e o b v io u sly do not w ant to u n d e rw r ite .

In o th e r

c a s e s an a s s u m p tio n m a y a p p e a r u n d e s ir a b le b e c a u s e th e p o te n tia l
a c q u ir in g b an k a lr e a d y h a s too l a r g e a s h a r e of the m a r k e t , and an
i n c r e a s e in th at s h a r e w ould h av e a n tic o m p e titiv e e ffe c t s on b an k
stru c tu re .
In s o m e of t h e s e c a s e s , w e c a n av o id a p ayou t (and a v o id th e
d isr u p tio n to the lo c a l co m m u n ity fr o m a ban k c lo s in g ) b y u sin g a p r o ­
v is io n of o u r law w hich a llo w s u s to p ro v id e a s s i s t a n c e d ir e c t ly to a
fa ilin g b an k to k e e p it o p e r a tin g .

T h is p r o v is io n a llo w s u s to p ro v id e

su c h a s s i s t a n c e , h o w e v e r, only when the co n tin u ed e x is te n c e of the
fa ilin g ban k i s " e s s e n t i a l " to i t s co m m u n ity .

O b v io u sly , th e r e a r e

v e r y few c a s e s in w hich th a t fin d in g c a n b e m a d e - - m f a c t , w e h av e
s u c c e s s f u lly u s e d th a t se c tio n only fo u r t im e s in the h is t o r y of the
F D IC .




13

To a c c o m p lis h a l l th e e ffe c ts of 100 p e rc e n t d e p o s it in s u r a n c e by
a p u r c h a s e and a s s u m p tio n in e ach f a ile d bank c a s e , w e n eed a ch an ge
in the law su ch th a t the F D IC w ould b e r e q u ir e d to a r r a n g e an a s s u m p tio n
in a l l c a s e s o r , if an a s s u m p tio n p r o v e s i m p o s s ib le , to p ro v id e d ir e c t
a s s i s t a n c e to k e e p th e ban k in o p e ra tio n .

A c tu a lly , I b e lie v e w e cou ld

a c c o m p lis h ab o u t the s a m e r e s u lt w ith only v e ry m in o r sta tu to r y c h a n g e s
w hich w ould g iv e th e F D IC B o a r d o f D ir e c t o r s g r e a t e r d is c r e t io n in
a r r a n g in g a s s u m p tio n s o r in p ro v id in g d ir e c t a s s i s t a n c e to open b a n k s.
S o m e w ould o b je c t to putting g r e a t e r d is c r e t io n a r y au th o rity in the h an d s
of th e F D IC B o a r d on th e s e m a t t e r s w ithout a l s o h av in g c l e a r e r C o n g r e s ­
sio n a l d ir e c tio n a s to the p o lic y to b e fo llo w e d .
2.

One of th e s im p le r p r o p o s a l s , and p e r h a p s th e m o s t p r o m is in g ,

i s to p ro v id e 100 p e r c e n t in s u r a n c e of d em an d d e p o s it s and lim it in s u r a n c e
on tim e d e p o s it s , if any in s u r a n c e i s p ro v id e d fo r su ch d e p o s its a t a ll, to
so m e th in g l e s s than $1 0 0 , 0 0 0 .

L a r g e C D 's f o r w hich R e g u la tio n Q c e ilin g s

a r e not a p p lic a b le w ould c a r r y only lim ite d in s u r a n c e , o r , p e r h a p s , none
at a ll.

Such " d e p o s i t s , " in m o s t c a s e s , a r e r e a lly m on ey m a r k e t i n s t r u ­

m e n ts and lo g ic a lly co u ld b e d is tin g u is h e d fr o m d e p o s it s .
e x a m p le , h a s long a r g u e d th at they a r e s e c u r i t i e s .

The S E C , f o r

K eep in g th e s e fu nds

at r i s k w ould r e ta in so m e m a r k e t d is c ip lin e f o r b a n k s, s in c e it w ould
p la c e lim it s on th e a b ility of the ban k o p e ra tin g at h igh r i s k to b id
s u c c e s s f u lly f o r fu n d s on a r e g io n a l and n a tio n a l b a s i s .
One a p p e a l o f th is p r o p o s a l i s th at it w ould not r e p r e s e n t a s u b ­
sta n tia l d e p a r tu r e fr o m p r e s e n t de fa c to a r r a n g e m e n ts .




U n le ss a bank

* 14 „

f a i l s v e ry su d d en ly (p e rh a p s a s a r e s u l t of so m e hind of fr a u d o r
th e ft), d em an d d e p o s it o r s g e n e r a lly c a n g e t out q u ick ly by c lo s in g
a c c o u n ts, re d u c in g b a la n c e s to the le v e l pf th e ir o u tstan d in g lo an o r
b o rro w in g an am o u n t e q u iv a le n t to t h e ir d em an d b a la n c e ,

U n d er

p r e s e n t a r r a n g e m e n t s , p e r h a p s u n fo rtu n a te ly , d em an d d e p o s it o r s
fre q u e n tly p r o te c t t h e m s e lv e s by g e ttin g out, fu r th e r e x a c e r b a tin g the
b a n k 's p r o b le m .

If d em an d b a la n c e s w e r e 100 p e rc e n t in s u r e d , p r o t e c ­

tio n fo r t h e s e d e p o s it o r s w ould not r e q u ir e the outflow of d e p o s it s .
C D 's w ould run o ff in p e r io d s of a d v e r s e p u b lic ity , bu t th is w ould b e a
fu n ctio n of the m a tu r ity s t r u c t u r e of th e b a n k 's C D 's , r a th e r than a
su d d en c o lla p s e .

T he tro u b le d ban k w ould g e n e r a lly h av e m o r e tim e

to w ork out i t s p ro b le m and th e p v e r a ll d e p o s it outflow w ould be l e s s .
3.

A th ird a p p ro a c h to w a rd exp an din g d e p o s it in s u r a n c e , one

a lr e a d y s u g g e s t e d , w ould b e to co m b in e 100 p e rc e n t d e p o s it in s u r a n c e
w ith m in im u m c a p it a l r a t i o s , lim ita tio n s on a s s e t c o m p o sitio n o r so m e
co m b in a tio n of the tw o.

A t th e p r e s e n t t im e , th e s u p e r v is o r y a g e n c ie s '

attitu d e to w a rd c a p it a l a d e q u a c y i s not s u b je c t to e x p lic it r u l e s ,

M any

v a r i a b le s a r e c o n s id e r e d in d e te rm in in g w h eth er a b a n k 's c a p it a l i s
a d e q u a te , in clu d in g su c h f a c t o r s a s s u b je c t iv e a s the q u a lity of the b a n k 's
m a n a g e m e n t.

We m a y u r g e s o m e b a n k s to i n c r e a s e t h e ir c a p it a l (o r

t h e ir liq u id ity ), but so m e m a y not do so , e ith e r b e c a u s e th ey a r e not
a b le to o r b e c a u s e th ey do npt a g r e e w ith o u r a s s e s s m e n t .

A c tu a lly ,

the s u p e r v is o r y a g e n c ie s tend to b e m o s t s u c c e s s f u l in th is a r e a when




15 -

the ban k n e e d s a g e n c y a p p r o v a l in co n n e ctio n w ith so m e a p p lic a tio n
(sa y fo r a b ra n c h o r h old in g co m p an y a c q u is itio n ).

A ls o , so m e b a n k e r s

a r e m o r e e a s i ly in tim id a te d by the e x a m in e r o r by the a g e n c y than o th e r s .
R u le s and s t a n d a r d s a r e th us not a lw a y s e v en ly im p le m e n te d o r a d h e re d
to .

A s a r e s u lt , s u p e r v is o r y s t a n d a r d s do not a lw a y s s e e m u n ifo rm --

w ith in a s w e ll a s betw een a g e n c ie s .
In view of th is situ a tio n , p e r h a p s it w ould b e d e s i r a b l e if a ll
in s u r e d b an k s w e r e r e q u ir e d to a d h e r e to an e x p lic it m in im u m c a p it a ld e p o s it o r c a p it a l- lo a n r a tio . Such a r e q u ir e m e n t w ould not n e c e s s a r i l y
h av e to b e r e la te d to d e p o s it in s u r a n c e . H o w e v e r, the im p o s itio n of
su ch a sta n d a r d co u ld m e s h w e ll w ith a m o v e to w a rd 100 p e r c e n t d e p o sit
in s u r a n c e , and w ould p ro b a b ly b e n e c e s s a r y if th e r e i s 100 p e rc e n t
in s u r a n c e .

B a n k s w ould b e p re v e n te d fr o m u sin g th e exp an d ed in s u r a n c e

to exp an d t h e ir le v e r a g e d r a s t i c a l ly .
4.

A m o d e s t v a r ia tio n on th is a lt e r n a t iv e w ould be to allo w b an k s

to g et exp an d ed o r 100 p e r c e n t in s u r a n c e if they m e e t so m e m in im u m
c a p it a l r a tio o r o th e r s t a n d a r d .

H o w e v e r, it w ould b e c r u c ia l u n d e r

su ch a flu c tu a tin g s y s t e m th at th e r e b e no doubt o r m isc o n c e p tio n in
the d e p o s it o r 's m in d a s to w h eth er h is d e p o s it w a s fu lly in s u r e d .
5.

A n o th er p r o p o s a l w ould co m b in e exp an ded o r 100 p e rc e n t

d e p o s it in s u r a n c e w ith a s y s t e m of v a r ia b le r a te in s u r a n c e p r e m iu m s .
T he id e a of a v a r ia b le r a t e in s u r a n c e p re m iu m h a s b e e n d i s c u s s e d
p e r io d ic a lly , p a r t ic u la r ly by a c a d e m ic e c o n o m is ts , and not n e c e s s a r i l y




-

16

-

in co n ju n ctio n w ith exp an d ed d e p o s it in s u r a n c e .

W hile th e r e i s no

n e c e s s a r y lin k b etw een th e two c o n c e p ts -- the p r o p o s a l f o r a v a r ia b le
r a te p re m iu m ca n b e a n a ly z e d on i t s own - - th e v a r ia b le r a te p re m iu m
co u ld c o n c e iv a b ly p ro v id e a su b s titu te f o r the m a r k e t d is c ip lin e th at i s
lo s t u n d er 100 p e r c e n t d e p o s it in s u r a n c e .
The a d v a n ta g e of a v a r ia b le r a te in s u r a n c e p re m iu m in th is se ttin g
i s th at p r e m iu m s a r e g e a r e d to r i s k .

The c o n s e r v a tiv e ly run b an k w h o se

o p e r a tio n s p o se litt le r i s k to the in s u r a n c e fund i s r e w a rd e d w ith a low
p re m iu m r a te and v ic e v e r s a , j u s t a s now the c a p it a l r e q u ir e m e n ts s e r v e
a s a ro u gh a p p r o a c h to the s a m e end.
It i s e x tr e m e ly d iffic u lt to put r i s k of f a i l u r e on an ything lik e
an a c t u a r i a l b a s i s .

We h av e not h ad th a t m an y f a i l u r e s d u rin g the p a s t

fo u r d e c a d e s an d, d e s p ite the s u b s t a n t ia l e ffo r ts in r e c e n t y e a r s to z e r o
in on th o se v a r i a b le s p ro v id in g e a r ly w arn in g ab o u t f a i l u r e s , few , if an y,
w ould a tte m p t to c o n s tr u c t and defen d a r a tio n a l p re m iu m s y s t e m b a s e d
on r e s e a r c h th at h a s b e e n c o m p le te d so f a r .

S im ila r ly , w h ile w e tr y

v e r y h a rd to s t a n d a r d iz e o u r c r i t i c i s m of a s s e t s , th e r e i s s u ffic ie n t
v a r ia tio n b etw een re v ie w s to m a k e it u n fa ir to b a s e any fin e ly tuned
s y s t e m on an a s s e t - c l a s s i f i c a t i o n fo u n d atio n .
I w ould not n e c e s s a r i l y ru le out the id e a of v a r ia b le r a te i n s u r ­
a n c e p r e m iu m s b e c a u s e a r a tio n a l, a c t u a r ia lly - s o u n d s y s t e m can n ot b e
c o n str u c te d .

It m ig h t be f e a s i b l e to e s t a b lis h a s im p le , s e e m in g ly

a r b i t r a r y s y s t e m th at h a s th e e ffe c t of putting b a n k s in to , s a y , th r e e ,




- 17 -

fo u r o r fiv e r i s k c a t e g o r i e s .

T h e s e m ig h t b e b a s e d on a few s im p le

r a t io s r e la tin g su ch v a r i a b le s a s c a p it a l r a t i o s , a s s e t m ix , in co m e
r a t i o s , e tc . , w ithout a tte m p tin g to d efen d the p r e m iu m s in a c t u a r ia l
te rm s.

R a th e r, they w ould b e r e la te d to th in g s th e s u p e r v is o r s c o n ­

s i d e r r e le v a n t and t h e ir le v e l w ould b e s e t so a s to b r in g ab ou t so m e
d e s ir e d r e s u lt in t e r m s of bank p o r tfo lio s .

I n s o f a r a s a bank p la c e d

into a h ig h - r is k c l a s s w a s unhappy ab o u t th at, it cou ld a d ju s t i t s p o lic ie s
to ch an ge i t s r i s k c a te g o r y .

In th at s e n s e , th e r e co u ld b e an e lem en t

of c h o ic e in su ch a s y s t e m .
If p r e m iu m s w e r e s e t s u ffic ie n tly h igh f o r b a n k s in the h ig h e st
r is k c a te g o r y , the s y s t e m m ig h t h av e a s e lf - r e g u la t in g q u a lity su ch th at
the d is c ip lin e of the u n in su re d d e p o s it o r m ig h t not b e n e c e s s a r y , and
su ch a s y s t e m of in s u r a n c e p r e m iu m s cou ld j?ie sh w ith 100 p e rc e n t
d e p o sit in s u r a n c e .
I r e c o g n iz e th a t th e p r e m iu m s s e t u n d e r su ch a s y s t e m , and the
le v e ls of p a r t i c u la r fin a n c ia l r a t i o s , w ould b e e s s e n t ia lly a r b i t r a r y .
B u t th a t i s not so f a r re m o v e d f r o m o u r p r e s e n t s y s t e m .

The le v e l of

p r e m iu m s a t the p r e s e n t tim e a p p e a r s a d e q u a te f o r the p r e s e n t r i s k s
of th e b an k in g s y s t e m , but w e can n ot b e s u r e th at it i s p r e c is e ly c o r r e c t
o r even an y w h ere n e a r so m e h y p o th e tic a l " c o r r e c t " le v e l.

A ls o , u n d e r

the p r e s e n t s u p e r v is o r y s y s t e m , w h ile w e a tte m p t to c o a x m an y b a n k s
to r a i s e c a p it a l, the r e s u lt s a r e c e r ta in ly not u n ifo rm , and the f i g u r e s
w e a im at a r e e s s e n t ia lly a r b i t r a r y - - e x c e p t th at w e know " m o r e i s
b e tte r. "



, 18 *

How s te e p w ould the v a r ia b ly r a t e s t r u c t u r e h av e to go to d i s ­
c o u r a g e e x c e s s r is k - t a k in g w h ile s t i l l k e e p in g o y e r a ll p re m iu m in c o m e
in ab ou t th e s a m e r e la tio n s h ip to d e p o s it s a s e x i s t s to d a y ?

How do you

a p p r a is e the c a p it a l p o sitio n and a s s e t m ix pf a b^nk w h p re h a lf it s
r e s o u r c e s a r e in fo r e ig n brancifr.es?

Should we b a $ e p r e m iu m s on s u b ­

s i d i a r y b a n k s o r sh o u ld th ey b e a p p lic a b le f o r an e n tire h oldin g co m p an y
sy ste m ?

A ll th e s e a r e q u e s tio n s th a t w ould h a y e tp b e a n sw e r e d b e fo r e

v a r ia b le p re m iu m r a te in s u r a n c e co u ld b e ad® pie<h

L e t m e co n clu d e n ot w ith a s e le c t io n o r a d v o c a c y of a p a r t ic u la r
p o sitio n but w ith so m e few a d d itio n a l c o m m e n ts ab ou t the p r e s e n t s y s t e m .
I h av e h e a r d c o m p la in ts fr o m s m a l l b a n k s th a t th e p r e s e n t s t r u c t u r e of
d e p o sit in s u r a n c e and a s s e s s m e n t i s

tp s m a l l b&nk s .

the s a m e c la im m a d e by l a r g e b an k s»

X h av e h e a rd

P e r h a p s w e c a n s im p ly a s s u m e

th at if both s m a ll and l a r g e b a n k s think the p r e s e n t s y s t e m i s u n fa ir to
th e m , then it m u st b e p re tty go o d .

B u t X think the i s s u e i s m o r e c o m p li­

c a te d th an th at.
S m a ll b a n k s a r g u e th at w e p ro v id e 100 p e rc e n t in s u r a n c e fo r
l a r g e b a n k s bu t not s m a ll b a n k s in th at w e h a v e n e v e r h ad a payou t
of a la r g e bank w ith l o s s e s to u n in su re d d e p o s it o r s , w h e r e a s w e h av e
had su ch t r e a tm e n t of s m a ll ban k f a i l u r e s ,

T he s m a l l b a n k s a r g u e

th at th is in h ib its th e ir a b ility to c o m p e te f o r l a r g e (Jo p p sits, A l a r g e




- 19 -

d e p o s it o r m a y d e c id e to put h is u n in su re d d e p o s it in a l a r g e b an k ,
not n e c e s s a r i l y b e c a u s e it i s b e t t e r run o r a so u n d e r in stitu tio n , but
b e c a u s e of h is b e lie f th a t in c a s e of d iffic u lty th e F D IC w ill not allo w
a p ay o ff in a l a r g e b an k situ a tio n .
do su p p o r t th is a r g u m e n t.

A s X m e n tio n e d e a r l i e r , s t a t i s t i c s

T h e F D IC h a s p aid off only one f a ile d b an k

w ith d e p o s it s o v e r $41 m illio n , th at a $67 m illio n T e x a s b an k , even
though fifte e n b a n k s of o v e r $41 m illio n h av e e ith e r f a ile d o r r e q u ir e d
F D IC a s s i s t a n c e to sta y open.
L a r g e b a n k s s o m e t im e s c o m p la in ab o u t the f a c t th a t d e p o s it
in s u r a n c e p r e m iu m s a r e b a s e d on the to ta l d o m e s tic d e p o s it s of the
b an k , not ju s t on in s u r e d d e p o s it s .

T h u s a ban k w ith a l a r g e p e r c e n ta g e

of it s d o m e stic d e p o s it s ab o v e $ 4 0 , 000 p a y s a p re m iu m th at i s h ig h e r
in p ro p o r tio n to th o se in s u r e d d e p o s it s than a s m a l l bank w ith fe w e r
u n in su re d d e p o s it s .

O r ig in a lly , th is w a s done in te n tio n a lly to p ro v id e

f o r a su b s id iz a tio n of th e in s u r a n c e fund by a f a r g e b an k f o r th e b e n e fit
of s m a ll b a n k s.

S in c e w e now h a v e a w o rld in w hich l a r g e b a n k s ca n and

do f a i l, it d o e s not a p p e a r th a t l a r g e ban k p r e m iu m s a r e s u b s id iz in g the
c o s t of s m a ll bank f a i l u r e s .

F u r t h e r m o r e , l a r g e b an k s h a v e m an y

c o r r e sp o n d e n t a c c o u n ts , and c l e a r l y b e n e fit fr o m a stro n g ban kin g
sy ste m .

S m a ll b a n k s a l s o a r g u e th at the a s s e s s m e n t s y s t e m i s e q u itab le

s in c e , in p r a c t ic e , l a r g e b a n k s h av e h ad 100 p e rc e n t d e p o s it in s u r a n c e
and h e n ce it i s only r e a s o n a b le th at th ey p ay in s u r a n c e p r e m iu m s on one
h un dred p e r c e n t of t h e ir d e p o s it s .