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Suggested Opening for West Virginia Bankers Association Good evening. It is a pleasure to be part of the West Virginia Bankers -- Group 1. meeting tonight. A number of years ago, my father told me that there are 3 things in life that you should never do. 1. Never eat at a place called Mom's. 2. Never play cards with a guy called Doc. 3. And, never talk to a group of bankers about limiting federal deposit insurance. (after the laughter settles) Tonight I would like to discuss with you regulatory reform of the financial services industry and at the same time try out the third thing in the list of nevers. At the heart of any package of regulatory reform is an overhaul of the deposit insurance system. Sneech Outline West Virginia Bankers Association Il;4.ay 1,199O I. Introduction tr. Deposit Insurance System & Regulation a-long and controversial history to 1886 troduced until finally enacted in the e bacË is of the Great Depression, but only ned out in the last decade guarantee bank depo loss." oduced at the state level in early 1800s from abrupt fluctuations in tíank isturbance) es to can d. protection we want to afford depositors and how much exposure we want to subject taxpayers ance regulations to protect the insurance d ãgainst unfair subsidies to poorly ps in a fast-paced world lated interlópers to unfairly b. compete fluctïrations in inflation highlighted the inflexibility ol a rigid system of rules and régulations Price Stabilityand Sound Banking A. Credit analvsis 1. decisiôns to timit bank risk are based on a. the value of collateral in secured loans b. and on proiections of the ratio of a borrower's current assets to curreht liabilities in unsecured loans of working capital -2- 2. unexpected price chanses can invalidate assumptions underlvins the lóan; thö standardíof loan evaluation can de preserved ríndär conditions of price stability Price instabilitv 1. accounts'for many of the problems of financial irætitutions here and abroad, but also for the plight of U.S. deposit insurance r a. bank managers and shareholders are not penalized for poor managemeñt since depositors are all but ûnconcerned ririth rßK r risk (flat fee) t risks IV. ady tr,aentives of managers, take greater and gieater Deposit Insurance Reform To restore proper market discipline, federal deposit insurance coverage must be mõreèorrectly priced-or limited t the insurance t should be strictlv observed to uninsured clairírants when B. that the current statutory limit should be reduced a. for those who desire more protection, co-insurance could b. c. exist above the limit the Banking Act of 7933 included a permanent plan for co-insuranðe that was never instituttd istent with the maior on of depositors fíom the average insured deposit account in both banks and thrifts is õnly about $8,OOO V. Closure and the "Too Big To Fail" Doctrine A. Strict enforecment of not extend insurance 1. exceptions are 2. in pärticular, t -3- B. Failure of any organization carries many negative connotations, but what does it really mean? 1. does not méan that the assets disappear 2. assets are relocated and put to moiö efficient use 3. existance of failure remoïes the need for taxpayers to prop up an unhealthy institution 4. threat of failure strengthens market forces and discipline VL Loosening of the RegulatoryReins A. Onlv after reform of deposit insurance and the allowance of failure for badly-managed institutìons can market incentives be expected to perfórm financial services industry be freed from rs alike would be forced to more share in the outcomes of their decisions n deposits would be based on the t onä deposit insurance subsidy C. Role of government authorities would change 1. wõuld not be an enforcer of rules and iestrictions, but monÍtor that prescribed financial obseËved highest financial condition without any restrictions on their e b. c. institutions falling short would be subject to some restrictions those institutions that failed to meet some minimum standards would be given 90 days to recapitalize and reorsanize or be closéd bv the suDervrsor governme"nt authorities would'not onli¡ supervise, but would also ñelp disseminate information so that markèts can make well-informed decisions VII. Conclusion A. reform should be undertaken soon Comprehensive 1. -we will never find the "best" time to institute reforms 2. present state of thrift industry should not deter efforts B. Reform should be based on re-installation of market forces 1. deposit insurance limited 2. "TBTF" doctrine done awaywith 3. regulations loosened C. Fed can contribute to sound inancial services industry by adopting a monetary policy that pursues zero inflation
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