Good morning Chairman Johnson, Ranking Member Bennett, and members of the Subcommittee. My name is Robert I. Gulledge, and I am chairman, president and CEO of Citizens Bank, a community bank with $75 million in assets, located in Robertsdale, Alabama. I also serve as Chairman of the Independent Community Bankers of America (ICBA) on whose behalf I appear today. Thank you for this opportunity to testify on the very important issue of deposit insurance reform.
I want to commend you, Chairman Johnson for scheduling this hearing and giving this matter priority attention. Deposit insurance is of enormous importance to community banks and their customers—and to the safety and soundness of our financial system.
Few would dispute that federal deposit insurance has been an enormously successful program, enhancing financial and macro-economic stability by providing the foundation for public confidence in our banking and financial system. It has done what it was established to do—it has prevented bank runs and panics, and reduced the number of bank failures. Even at the height of the S&L crisis, there was no panic or loss of confidence in our financial system. The financial system and our economy are stronger and less volatile because of federal deposit insurance.
But it has now been more than 10 years since the last systematic congressional review of our deposit insurance system, and it should be modernized and strengthened. In the past two decades since deposit insurance levels were last increased, inflation has ravaged the value of this coverage. Inflation has eroded the real level of deposit insurance coverage to less than half what it was in 1980. The less deposit insurance is really worth due to inflation erosion, the less confidence Americans will have in the protection of their money, and the soundness of the financial system will be diminished. Rejecting an inflation adjustment to deposit insurance levels, as the Federal Reserve and Treasury Department did in testimony last week before a subcommittee of the House Financial Services Committee, is a prescription for weakening a vital and successful U.S. government program.
The deposit insurance system currently remains strong, the industry is strong and the overwhelming majority of institutions are healthy, but as the FDIC states in its report "Keeping the Promise: Recommendations for Deposit Insurance Reform" (FDIC Report), there are emerging problems and room for improvement.
Now, while we can do it in a non-crisis atmosphere, is the time to consider comprehensive improvements to enhance the safety and soundness of our federal deposit insurance system and ensure that the effectiveness of this key element of the safety net is not undermined.
The major deposit insurance reform issues that have emerged and should be addressed in a comprehensive legislative package include:
These issues, plus others addressed in the FDIC Report, are discussed below.
Deposit Insurance Coverage Has Been Eroded By Inflation And Should Be Increased And Indexed For Inflation to Maintain Its Real Value
For community bankers, the issue of increased deposit insurance coverage has been front and center in the deposit insurance reform debate. More coverage would benefit their communities, and their consumer and small business customers. It would help address the funding challenges and competitive inequities faced by community banks and ensure that they have lendable funds to support credit needs and economic development in their communities. For community bankers, any reform package will fall far short if it does not include a substantial increase in coverage levels and indexation.
The ICBA strongly supports legislation introduced by Chairman Johnson and Rep. Joel Hefley (R-CO) to raise federal deposit insurance coverage levels. Both bills (S. 128 and H.R. 746) would increase FDIC coverage levels to around $200,000 and provide for automatic inflation adjustments (based on an IRS index) every three years rounded up to the nearest thousand dollars. Both bills have garnered substantial bi-partisan support. Thirteen Senators are on the Johnson bill, 7 Democrats and 6 Republicans. Sixty-six Representatives have signed onto the Hefley bill, including 28 Democrats, 37 Republicans and one Independent.
Coverage Levels Ravaged By Inflation
The general level of income, prices and wealth in the U.S. has been steadily increasing for decades. As a consequence, inflation is severely eroding the value of FDIC protection. The current deposit insurance limit is economically inadequate and unacceptable for today’s savings needs, particularly growing retirement savings needs as the baby-boomer generation reaches retirement age.
The real value of $100,000 coverage is only about half what it was in 1980 when it was last increased. Chart 1, which is attached, shows that simply adjusting for inflation, the $100,000 limit set in 1980 represents only $46,564 in coverage today. Worse yet, as Table 1 shows, today’s deposit insurance limit in real terms is worth $20,000 less than it was in 1974 when the deposit insurance limit was doubled to $40,000.
Looked at another way, in 1934, when federal deposit insurance was established, the coverage level was 10 times per capita annual income. Today, it is only four times per capita income. During the last two decades, while deposit insurance levels remained unchanged, financial asset holdings of American households have quadrupled, from $6.6 trillion in 1980 to $30 trillion in 1999.
Deposit insurance coverage levels have been increased six times since the program was created in 1934. But the increases have been made on an ad hoc basis with no predictability either on timing or the size of the increase. We need to first adjust coverage levels not touched in 20 years and move away from ad hoc increases to a system that is predictable and grows automatically with inflation.
The ICBA strongly supports the FDIC proposal to increase coverage levels to make up for inflation's devaluing effects by automatically adjusting the levels based on the Consumer Price Index. Using 1980 as the base year would raise coverage levels to nearly $200,000 (see Chart 2 attached); using 1974 as the base year—the year coverage levels were raised to $40,000—would boost coverage to around $137,000 today.
Gallup Poll Shows Consumers Want Increase
A recent survey conducted by The Gallup Organization on behalf of the FDIC revealed that federal deposit insurance coverage is a "significant factor" in investment decisions, especially to more risk-averse consumers and those making decisions in older and less affluent households. Fifty-seven percent of respondents said deposit insurance is "very important" in determining where to invest.
Six in ten respondents said they would be likely to put more of their household’s money into insured bank deposits if the coverage level of deposit insurance were raised. And six in ten said they would move their money into insured accounts as they neared retirement age or during a recession. The survey also showed that one in eight households keep more than $100,000 in the bank, and about one-third of all households reported having more than $100,000 in the bank at one time or another.
And importantly, the Gallup survey indicated that nearly 4 out of 5 (77%) respondents thought deposit insurance coverage should keep pace with inflation.
Small Business Customers Support Increase
Small businesses are key customers of community banks, which in turn are premier providers of credit to these businesses. A recent study commissioned by the American Bankers Association (ABA) found that half of small business owners think the current level of deposit insurance coverage is too low. When asked what actions they would take if coverage were doubled, 42 percent said they would consolidate accounts now held in more than one bank; 25 percent would move money to smaller banks; and 27 percent would move money from other investments into banks.
Consumers and small businesses shouldn’t be forced to spread their money around to many banks to get the coverage they deserve. As more and more institutions base pricing on the entire customer relationship, consolidating accounts enables customers to reap the benefits of pricing and convenience when holding more of their financial "wallet" at one institution. For small businesses, especially, aggregating their business with one bank can enhance their banking relationship. And equally important, customers should be able to support their local banks, and local economies, with their deposits.
Increased Deposit Insurance Will Help Support Local Lending
An adequate level of deposit insurance coverage is vital to community banks’ ability to attract core deposits, the funding source for their community lending activities. Many community banks face growing liquidity problems and funding pressures. It is harder to keep up with loan demand as community banks lose deposits to mutual funds, brokerage accounts, the equities markets and "too-big-to-fail" banks.
Deposit gathering is critical to community banks’ ability to lend because alternative funding sources are scarce. Due to their small size, unlike large banks, community banks have limited access to the capital markets for alternative sources of funding. As a consequence, community banks must rely more heavily on core deposit funding than large banks. To illustrate, at year end 1998, core deposits represented 72 percent of assets for banks of less than $1 billion in size, and only 43 percent of assets for banks over $1 billion.
The Federal Reserve’s recent observation that small banks have enjoyed higher rates of asset growth and uninsured deposit growth than large banks misses the point. Since 1992, deposit growth has lagged the growth in bank loans by about half—hence small banks are finding it harder to meet loan demand that supports economic growth. Average loan-to-deposit ratios are at historical highs and the ratio of core deposits to assets is declining as community banks fund a growing share of their assets with noncore liabilities such as Federal Home Loan Bank advances and other more volatile, less stable sources of funds such as brokered deposits. Federal Home Loan Bank advances are not a substitute for deposits. Bankers must pay higher rates for advances and other non-traditional funding than they do for deposits, putting pressure on net interest margins. Examiners are warning community banks against over-reliance on FHLB advances and other noncore funding sources.
Some banks have seen a surge in deposit activity during the last two reported quarters. The instability of the stock market has caused some weary investors to pull out of the equities market and return to the safety and stability of banks. But most observers believe this is an aberration that may not continue when the market turns back up. Moreover, this phenomenon provides deposits to banks in a down economy when loan demand is weakened; it does not help address the need for funding when loan demand is strong.
Large complex banking organizations (LCBOs) are acknowledged as presenting greater systemic risk to our financial system. The systemic risk exception to the least cost resolution requirement in FDICIA has never been tested. It is our belief, based on the historical record that LCBOs will never be allowed to fail because of this systemic risk factor. Government policy has fostered the establishment of ever-larger financial institutions further concentrating our financial system. Uninsured depositors in such institutions benefit from too-big-to-fail.
Federal Reserve spokesmen reject the notion that any bank is too-big-to-fail. The historical record, however, is to the contrary. Notably, the Secretary of the Treasury—not the Federal Reserve—has authority under FDICIA to make systemic risk determinations (after consultation with the President).
In our judgment, the issue is not that FDICIA does not require that uninsured depositors and other creditors be made whole, as the Federal Reserve testified last week, but rather that the determination of systemic risk does permit all uninsured depositors to be made whole—as they have been made whole during previous banking crises.
Increasing deposit insurance coverage would help level the playing field for community banks with large banks and large securities firms offering FDIC-insured products, while protecting the funding needs of Main Street America.
According to Grant Thornton’s "Eighth Annual Survey of Community Bank Executives," 77 percent of community bankers favor raising the insurance coverage from its current level of $100,000 in order to make it easier to attract and retain core deposits.
Full Coverage For Public Deposits
The ICBA also supports full deposit insurance coverage for public deposits.
Most states require banks to collateralize public deposits by pledging low-risk securities to protect the portion of public deposits not insured by the FDIC. This makes it harder for community banks to compete for these deposits with larger banks. Many community banks are so loaned-up that they do not have the available securities to use as collateral. And those that do have to tie up assets in lower yielding securities which could affect their profitability and ability to compete. In addition, collateralizing public deposits takes valuable resources away from other community development and lending activities.
As the FDIC noted in its report, "Raising the coverage level on public deposits could provide banks with more latitude to invest in other assets, including loans. Higher coverage levels might also help community banks compete for public deposits and reduce administrative costs associated with securing these deposits."
Providing 100 percent coverage for public deposits would free up the investment securities used as collateral, enable community banks to offer a more competitive rate of interest in order to attract public deposits, and enable local governmental units to keep deposits in their local banks as a valuable source of funding that can be used for community lending purposes.
ICBA strongly supports legislation, S.227 and H.R. 1899, introduced by Sen. Robert Torricelli (D-NJ) and Rep. Paul Gilmor (R-OH) respectively, to provide 100 percent coverage of public deposits.
Full Coverage For IRAs and Retirement Accounts
Today’s retirement savings needs require a deposit insurance limit higher than $100,000. Retirement accounts are long-term investments that over time can reach relatively large balances that exceed the FDIC coverage limit. Today, accumulating $100,000 in savings for education, retirement or long-term care needs is not a benchmark of the wealthy. With the graying of the population, safe savings opportunities are needed more than ever and an insured savings option is becoming even more crucial now that budget surpluses are reducing the supply of Treasury securities. Thus, raising the coverage level on IRAs and other long-term savings accounts could encourage depositors to invest more of these savings in insured bank deposits.
FDICIA Reforms Minimize Taxpayer Exposure
Critics of proposals to substantially increase and index coverage levels contend that the 1980 increase to $100,000 was unjustified and increased the resolution costs of the S&L crisis. Overlooked, perhaps, is the fact that the Federal Reserve Board advocated this increase at the very time its monetary policies were driving the prime rate over 20 percent to wring inflation out of the economy and Congress passed legislation deregulating interest paid on deposits. Also overlooked is the fact that the new $100,000 coverage limit helped stem depositor panic as thousands of thrifts holding long-term, fixed-rate loans failed from the resulting severe asset-liability mismatch.
Higher coverage limits will not necessarily increase exposure to the FDIC or taxpayers as some fear. A variety of factors serve to minimize any increase in exposure to the FDIC or taxpayers from bank failure losses due to an increase in deposit insurance coverage levels.
The reforms in bank failure resolutions instituted by the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)—including prompt corrective action, least cost resolution, depositor preference, and a special assessment when a systemic risk determination is made—are designed to reduce losses to the FDIC.
Prompt corrective action helps ensure swift regulatory action when a bank becomes critically undercapitalized so that losses do not increase while the bank’s condition further deteriorates. Least cost resolution requires that—except in the case where the systemic risk exception is invoked—the FDIC uses the least costly method when a bank fails to meet its obligations to pay insured depositors only. And depositor preference minimizes the FDIC’s losses by requiring that assets of the failed institution are first used to pay depositors, including the FDIC standing in the shoes of insured depositors, before other unsecured creditors are paid. And when a systemic risk determination is made, the FDIC must charge all banks an emergency special assessment to repay the agency’s costs for the rescue.
It is ironic indeed to hear policy makers talk about the moral hazard of increasing deposit insurance coverage to account for inflation when the trend of greater and greater deposit concentration in fewer and fewer banks that are likely too-big-to-fail because of systemic risk continues. The moral hazard, if any, created by inflation-indexing coverage pales in comparison to that presented by the increased number of LCBOs whose failure could have serious adverse effects and thus trigger the systemic risk exception of FDICIA. Systemic risk presents much greater loss exposure to the FDIC, and ultimately taxpayers, than does an increase in the coverage limit.
"Free Riders" Must Pay Their Fair Share
Currently, the FDIC is restricted from charging premiums to well-capitalized, highly rated banks so long as the reserve level remains above the 1.25 percent designated reserve ratio. As a result, 92 percent of the industry currently does not pay premiums, rapidly growing institutions do not pay their fair share for deposit insurance coverage, and the more than 900 banks that were chartered within the last five years have never paid premiums. According to the FDIC, this system underprices risk and does not adequately differentiate among banks according to risk.
By the end of the first quarter of 2001, Merrill Lynch and Salomon Smith Barney had moved a total of $83 billion in deposits under the FDIC-BIF umbrella through two banks that Merrill owns and six banks affiliated with Salomon Smith Barney, without paying a penny in deposit insurance premiums. This dilutes the FDIC-BIF’s reserve ratio, which is already lagging behind the FDIC-SAIF’s, which doesn’t face a similar inflow problem. Every $100 billion of insured deposit inflows drops the reserve ratio of the FDIC-BIF—which stood at 1.32 percent on March 31, 2001 (down from 1.35 percent on December 31, 2000)—about six basis points.
Once the 1.25 percent reserve ratio is breached, FDIC is required by law to assess all banks a minimum average of 23 cents in premiums unless a lower premium would recapitalize the fund within one year. How long it will be before the 1.25 percent designated reserve ratio is breached and premiums are triggered for all banks is not known. But today, past assessments on banks are subsidizing the insurance coverage for Merrill Lynch and Salomon Smith Barney! This inequitable situation must be remedied.
Because Merrill Lynch and Salomon Smith Barney own multiple banks, they can offer their customers more than $100,000 in insurance coverage. Merrill with two banks can offer $200,000 in FDIC coverage, and Salomon Smith Barney is offering each of its customers $600,000 in FDIC protection. This could have a significant negative impact on the funding base of community banks. Most community banks cannot offer their customers more than $100,000 in deposit insurance coverage in this manner. Additionally, these huge institutions are too-big-to-fail, giving them another advantage over community banks in gathering deposits.
If the FDIC were able to charge premiums to all banks, even when the reserve level is above 1.25 percent, it could collect premiums from Merrill Lynch and Salomon Smith Barney as they move deposits under the insurance umbrella. As it now stands, the FDIC is prohibited from charging them anything. Furthermore, if rapidly growing banks grew at a particularly fast rate, posing a greater risk, they could be charged premiums at a higher rate.
The FDIC, Federal Reserve and Treasury have all recommended that the current statutory restriction on the agency’s ability to charge risk-based premiums to all institutions be eliminated, and that the FDIC be allowed to charge premiums, even when the fund is above the 1.25 percent designated reserve ratio.
The recommendation to charge premiums to all banks, even when the fund is fully capitalized, faces controversy in the industry. However, we believe that in a carefully constructed, integrated reform package which includes substantial increases in deposit insurance coverage levels, bankers would be willing to pay a small, steady premium in exchange for increased coverage levels and less volatility in premiums. With a small, steady premium, bankers will be better able to budget for insurance premiums and avoid being hit with an unexpectedly high premium assessment during a downturn in the business cycle. Also, the premium swings will be less volatile and more predictable. It is also one way to extract some level of premiums from the free riders and reduce the dilution of the reserve ratio.
Risk Based Premium System Should Set Pricing Fairly
The current method of determining a bank’s risk category for premiums looks at two criteria—capital levels and supervisory ratings. The FDIC argues that this risk-weighting system is inadequate since it allows 92 percent of all banks to escape paying premiums when the fund is fully capitalized. The FDIC says that it cannot price risk appropriately under this method.
The FDIC has proposed a sample "scorecard" to charge premiums based on a bank’s risk profile. The FDIC is quick to point out that this example is not etched in stone, and the factors to be used to stratify banks by risk deserves more analysis and discussion. But the model can be used as a starting point.
The FDIC proposes to disaggregate the highest-rated category of banks that currently do not pay insurance premiums (92%) into three separate risk categories based on a scorecard using examination ratings, financial ratios and, for large banks, possibly certain market signals as inputs to assess risk.
Under this system, three premium subgroups would be created--42.7 percent of the currently highest-rated institutions would pay a 1 cent premium, 26.5 percent would pay 3 cents, while another 23 percent would pay a 6 cent premium. The eight percent of institutions that are currently charged premiums under the current system would fall into higher-risk categories and pay premiums ranging from 12 to 40 cents, as contrasted to the 3 to 27 cents they pay now. Under this example, the FDIC would collect $1.4 billion in annual premiums for an industry average of 3.5 cents.
The Treasury Department and the OCC have cautioned against making the risk-based premium structure unduly complex at this time, both in terms of assigning banks to risk categories and in setting premium rates for the various categories.
The ICBA and community bankers generally support a risk-based premium system. However, we believe more study is needed to determine the appropriate risk factors, risk weighting, and complexity to be used in the matrix. Reaching consensus on the factors to be used to stratify banks into risk categories and the premiums to be charged in the various categories will take more thought and discussion.
We are concerned that under the FDIC proposal, nearly 50 percent of banks that do not pay insurance premiums now would be paying either a 3 or 6 cent premium (before rebates) during good times. We are also concerned about charging unduly punitive premiums against weak institutions. We are concerned as well that this system could create a reverse-moral hazard by encouraging banks to squeeze risk out of their operations and in the process reduce the amount of lending they do in their communities. Banking is not a risk-free enterprise.
We do recommend, however, that while it would be appropriate for Congress to establish parameters or guidelines for the risk based premium structure, the details of the structure should be set by the FDIC through the rule-making process with notice and comment from the public. The FDIC is in a better position to judge the relative health of the insurance funds and the industry and can react more quickly to make changes in the premium structure as necessary.
Assessment Base: The Treasury Department has recommended that deposit insurance reform consider whether the existing assessment base, which is domestic deposits, be modified to account for the effect of a bank’s liability structure on the FDIC’s expected losses. The Treasury notes that in the event of bank failure, secured liabilities including Federal Home Loan Bank advances have a higher claim than domestic deposits on bank assets, and may increase the FDIC’s loss exposure.
If consideration is to be given to changing the assessment base at this time, then Congress should look beyond assessing deposits and secured liabilities, which discriminates against community banks, and consider all liabilities (excluding capital and subordinated debt). For years, community banks have paid assessments on close to 90 percent of their liabilities, since domestic deposits are their primary funding source, while the largest banks—the too-big-to-fail banks—pay on less than 40 percent of liabilities since their funding comes in large part from non-deposit liabilities. Experience has shown that all non-assessed liabilities, not just deposits and secured liabilities, have funded excess growth and troubled loans of banks that subsequently failed. If the assessment base were to be expanded, it must be done so equitably.
Premiums Should Be Smoothed Out And Volatility Reduced
The current statutory requirement of managing the funds to the hard 1.25 percent DRR can lead to volatile premiums with wide swings in assessments. As noted above, under the current system, well-capitalized and well run banks cannot be charged premiums so long as the reserve ratio is above the DRR of 1.25 percent. However, when the reserve level falls below 1.25 percent, the law requires the FDIC to charge an average of 23 cents in premiums unless the fund can be recapitalized at a lower premium in one year.
This means there could be substantial fluctuations in premium assessments, depending on the extent of bank failure losses. The current system is dangerously pro-cyclical with premiums the highest when banks and the economy can least afford it. Premiums could rise rapidly to 23 cents when economic conditions deteriorate, potentially exacerbating the economic downturn, precipitating additional bank failures and reducing credit availability by removing lendable funds from banks.
The FDIC, Federal Reserve and Treasury Department all recommend that the 1.25 percent hard target be eliminated, and the reserve ratio be allowed to fluctuate within a given range. The FDIC argues that the deposit insurance system should work to smooth economic cycles, not exacerbate them. For example, maintaining the current DRR of 1.25 percent as a target, the reserve ratio could be allowed to fluctuate between 1.15 percent and 1.35 percent. Regular risk-based premiums would be charged so long as the ratio is within that range.
However, in years when the ratio is below 1.15 percent, the FDIC suggests a "surcharge," for example, equal to 30 percent of the difference between the reserve ratio and 1.15 percent. Alternatively, in years when the ratio is above 1.35 percent, there would be a rebate equal to 30 percent of the difference between the reserve level and 1.35 percent. This would ensure that premiums rise and fall more gradually than under the current system.
The ICBA supports eliminating the hard 1.25 percent DRR and instituting a range within which the funds can fluctuate without penalty or reward as part of a comprehensive reform package. Under the current system, banks could be faced with steep deposit insurance payments when earnings are already depressed. Such premiums would divert billions of dollars from the banking system and raise the cost of gathering deposits at a time when credit is already tight. This in turn could cause a further cutback in credit, resulting in a further slowdown of economic activity at precisely the wrong time in the business cycle. The agency says it would be preferable for the fund to absorb some losses and for premiums to adjust gradually, both up and down, around a target range.
The FDIC also makes a strong case for maintaining 1.25 percent as the mid-point of such a range. The FDIC report showed that under various loss scenarios (no loss, moderate loss and heavy loss), the fund never drops below .80 percent and it never goes above 1.5 percent. Gradual surcharges and gradual rebates help to keep the fund within this range.
Rebates. Pricing and rebates go hand-in-hand. If premiums are charged to all institutions regardless of the fund’s size, rebates represent a critical safety valve to prevent the fund from growing too large. FDIC notes that in the best years, the rebate could result in a bank receiving a net payment from the FDIC. In an economy as relatively strong as we have today, more than 40 percent of banks would receive a net rebate.
Importantly, under the FDIC proposal, the rebates would be based on past contributions to the insurance fund, and not on the current assessment base. This would have two advantages. It would not create a moral hazard that would encourage banks to grow just to get a higher rebate. And it would not unjustly enrich companies like Merrill Lynch and Salomon Smith Barney, which have transferred large deposits under the insurance umbrella without paying any premiums.
We strongly support this recommendation on rebates. It is only fair to those institutions that have paid into the insurance fund for years. And it would prevent free riders like Merrill Lynch and Salomon Smith Barney from earning rebates on premiums they never paid.
Merge the BIF and SAIF As Part of Comprehensive Reform Plan
Historically, banks and thrifts have had their own insurance funds. The BIF and the SAIF offer identical products, but premiums are set separately. Since the S&L crisis, when many banks acquired thrift deposits, many institutions now hold both BIF- and SAIF- insured deposits. More than 40 percent of SAIF-insured deposits are now held by banks.
The FDIC, Federal Reserve and Treasury Department all recommend merging the BIF and the SAIF as part of a deposit insurance reform package. They note that the lines between S&Ls and banks have blurred to the point where it is difficult to tell them apart. They argue that merging the two funds would make the combined fund stronger, more diversified and better able to withstand industry downturns than two separate reserve pools. The FDIC says costs also would go down since it would not need to track separate funds.
The ICBA supports a merger of the BIF and SAIF so long as it is part of a comprehensive and integrated deposit insurance reform package that includes an increase in coverage levels.
In summary, Mr. Chairman, the ICBA believes it is critical to review the federal deposit insurance system now in a non-crisis atmosphere. An ongoing strong deposit insurance system is essential for future public confidence in the banking system and to protect the safety and soundness of our financial system. The effectiveness of this key government agency should not be permitted to be undermined or eroded away by a failure to preserve the value of its protection.
Deposit insurance is critical to thousands of communities across America that depend on their local community bank for their economic vitality. Without substantially increased deposit insurance coverage levels indexed for inflation, community banks will find it increasingly difficult to meet the credit needs of their communities and compete fairly for funding against too big to fail institutions and non-bank providers.
We believe that deposit insurance reform should be comprehensive. Coverage levels should be raised and indexed for inflation. The hard 1.25 percent designated reserve ratio should be scrapped in favor of a flexible range. The statutory requirement that banks pay a 23 cent premium when the fund drops below the DRR should be repealed. A pricing structure that fairly evaluates the relative risks of individual banks without undue complexity should be instituted. Full deposit insurance coverage should be accorded to public deposits. And IRAs, education savings and retirement accounts should be accorded higher coverage levels. We urge Congress to adopt such an integrated reform package.
We commend you, Mr. Chairman for moving the debate forward. The ICBA pledges to work with you, the entire committee, and our industry partners, to craft a comprehensive and integrated deposit insurance reform bill that can work and can pass.
Thank you, Mr. Chairman, for the opportunity to express the views of our nation’s community bankers.
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