Good morning. I am pleased to convene the first meeting of the Financial Institutions Subcommittee of my chairmanship on a topic that has been of great interest to me for many years. Federal deposit insurance is one of the cornerstones of our banking and financial system. This insurance helps give depositors the confidence they need to participate in Americaís financial institutions. Since I began service in Congress in 1987, we have seen some real ups and downs in the banking industry, and it is a great privilege today to chair a hearing on a matter of such importance to our nationís bankers, and indeed to our nation as a whole.
I would first like to recognize Ranking Member Bennett, and thank him for his participation at todayís hearing. It is a great pleasure to work with Senator Bennett on banking issues. He has a very distinguished business background, and I value his insights. I would also like to recognize Chairman Sarbanes, who conducts all his hearings with such dignity and thought. I hope I can live up to the high standards that he sets for the Senate Banking Committee.
As everyone in this room knows, or will surely find out in short order, comprehensive deposit insurance reform is enormously complex. I will resist the opportunity to recite a history of banking reform, and steer clear of too many statistics -- at least until the question and answer period. While the body of literature on deposit insurance is vast, I would note that there appears to be more consensus than disagreement on potential reforms.
At todayís hearing, industry will respond to the FDICís recommendations for comprehensive reform of the federal deposit insurance system. The FDIC, in my view, has identified some significant weaknesses in the current system.
In particular, it is hard to argue with the FDICís observation that the current system is pro-cyclical: that is, in good times, when the funds are above the designated reserve ratio of 1.25%, 92% of the industry pays nothing for coverage; but in bad times, institutions could be hit with potentially crushing premiums of up to 23 basis points. I think most industry members agree that this so-called ďhard targetĒ presents a real threat to their businesses.
Of course, this means that any movement in the funds down toward 1.25 increases the anxiety level of bankers and regulators alike, whether that movement comes from fast growth of certain institutions, or from institutional failures like we saw last Friday in the case of Superior Bank of Illinois. The numbers are still preliminary, but cost estimates of the failure start at $500 million, which could reduce the SAIF ration by 7 basis points. I say this not to be alarmist. But I would urge caution against becoming complacent in good times, and resisting changes that simply make sense over the long term and have the potential to enhance the stability of our system.
I am particularly interested in hearing from the witnesses about their positions on premiums. I would note that there is unanimity among the federal banking regulators that institutions should pay regular deposit insurance premiums, though not with respect to how we should determine those premiums.
Now, I understand that 92% of the industry is free from current premium payments, and it certainly presents an interesting psychological and political challenge to persuade folks to pay for something they currently get for free. On the other hand, I am not the first to note that very few things in life are, in fact, free. If youíre getting something of value, eventually you have to pay for it. The question isnít whether youíll have to pay up; itís when and how much.
I am also interested in hearing comments about the erosion in value of deposit insurance. My position is well known: I believe we need to increase, and index, coverage levels. Over the last 20 years, coverage values have decreased by more than half, and previous increases were unpredictable both in terms of amount and timing. I expect to hear a spirited debate on this topic, and believe it should be included in any discussion of comprehensive reform.
I would urge everyone involved in this debate to take a step back and recognize that when we talk about deposit insurance, we are talking about the foundation of our financial system. It is simply irresponsible to take a short-term approach, or to politicize the issues. And while I am open to persuasion on just about any component of reform, I am firm in my belief that we all share the common goal of a safe and sound banking system.
As many of you know, I am committed to ensuring that our small banks and thrifts --which play such an important role in states like South Dakota -- have the tools they need to survive. I am also well aware of the value that our larger banks, thrifts and bank holding companies bring to this country. I believe my strong support of financial modernization speaks for itself, and would simply add that I am committed to finding a reform package that considers the needs and interests of all members of our financial services community.
Now, some might argue that it will be impossible to craft changes to our deposit insurance system that will bring all the interested parties together. I reject this argument. First, every single bank and thrift in this country benefits from our world-class deposit insurance system, and it is in everyoneís interest to find an acceptable set of changes. Second, I believe that our witnesses will tell us that the industry is in fact close together on many of the core reform issues. Finally, the regulators themselves have said they are approaching consensus on many issues. I am optimistic that we will be able to develop a sound comprehensive reform policy.
I would like to hear what my colleagues and our witnesses have to say, and would invite Ranking Member Bennett to make an opening statement.