Chairman Johnson, Ranking Member Bennett, Chairman Sarbanes and Members of the Committee: I am very pleased to be here today to discuss the reform of FDIC insurance coverage for retirement savings and to join the expanding discussion of deposit insurance reform that the FDIC launched more than a year ago with the release of its Options Paper.
Justifications for Mandatory Federal Deposit Insurance
Although the subject matter of this hearing is coverage levels for retirement accounts, I will begin my testimony with a few general comments about insurance coverage. In brief, mandatory federal deposit insurance serves three distinct public purposes.
First, deposit insurance provides individual borrowers a convenient way to save that, for all practical purposes, is risk-free. Without mandatory deposit insurance, members of the general public would have to expend time and effort ascertaining and comparing the current solvency and future prospects of particular depository institutions in search of low-risk depositories. At a minimum, this process would impose costs on many members of society. In addition, some individuals - most likely the least wealthy and least well-educated - would make mistakes in evaluating the creditworthiness of particular institutions and might expose themselves to unwanted risks. Mandatory federal deposit insurance eliminates this problem by extending a federal guarantee to effectively all deposits up to the current coverage limit of $100,000.
Second, deposit insurance reduces the likelihood of irrational runs on healthy depository institutions. Before the advent of deposit insurance, financial downturns occasionally triggered liquidity problems for depository institutions. These panics caused problems for otherwise healthy institutions and also had adverse macro-economic consequences, most notably a rapid contraction of the money supply. While other public programs also combat liquidity crises, deposit insurance ameliorates the problem because individuals with deposits of less than the FDIC coverage limit have no need to withdraw funds from FDIC-insured institutions even in the face of financial distress.
Third, federal deposit insurance can effect visions of the proper structure of our political economy. Throughout the financial history of the United States, public sentiment and political leaders have favored a decentralized and fragmented financial services industry. Federal deposit insurance can advance this preference by helping smaller, less diversified depository institutions compete with larger, national organizations. The presence of federal deposit insurance coupled with many other legal rules - notably, historical restrictions on geographical expansion - explain why the banking industry in the United States is so much less concentrated than comparable sectors of the financial services industry in other industrialized countries.
The Case for Increasing Current Coverage Limits
As I understand the current debate, proponents of higher coverage levels base their case on an assertion that the current coverage of $100,000 per deposit no longer satisfies the first (collective action) and third (political economy) justifications for deposit insurance. At this point, few are arguing that macro-economic considerations warrant higher coverage levels.(1) The task of evaluating the two lines of argument being advanced by proponents of expanded coverage is complicated, and I can not provide the Committee a definitive assessment of either claim. I would, however, offer the following preliminary thoughts.
First, as a general matter, I think the burden should be on the proponents of expanded FDIC coverage to make a compelling case for the extension of federal protection. I would not understand this burden to be overwhelming - indeed, as explained below, I believe that the burden may well be satisfied in the case of retirement savings - (2)but I do think that a sensible premise is that government insurance programs should be maintained at the minimum level necessary to achieve specific public goals. Placing the burden of persuasion on proponents of expanded coverage helps effect this principle.
Second, I would accept the political case for expanded deposit insurance coverage as a legitimate consideration. I would, however, be mindful that government intervention to maintain existing industry structures can be costly - both in promoting efficient financial services firms and in retarding innovation. In addition, it is possible that intervening developments - such as adoption of the Community Reinvestment Act of 1977, expanded access to capital markets for small companies, and improvements in anti-trust oversight - now address concerns over monopolization of sources of credit that underlay public antipathy to large-scale financial institutions in the past.(3) So, before accepting the political case for expanding federal deposit insurance, I would recommend that Members of Congress consider both the economic costs of such a decision and the possibility that other statutory regimes adequately address the concerns underlying our historical preference for local banking institutions.
Arguments that the current level of FDIC insurance is too low to provide an adequate amount of risk-free savings for individuals are, in my view, the most difficult feature of the current debate over expanded FDIC insurance coverage. For the most part, recent testimony has assumed that coverage levels should be inflation-adjusted, and then focused on selecting an appropriate historical point in time to accept for determining an inflation-adjusted baseline for future deposit insurance coverage.(4) Analytically, this approach is unsatisfying, as it provides no explanation why one should choose one particular baseline as opposed to many plausible alternatives. As a theoretical matter, one could imagine a number of considerations that should influence the optimal level of deposit insurance coverage: the financial sophistication of the general public, the level and distribution of financial assets, the availability of reliable information about the solvency of depository institutions, and a host of other factors, including the cost and moral hazard impact of deposit insurance. Over time, one would expect that these factors would change and thus the optimal level of deposit insurance coverage would also rise and fall.(5) Balancing these evolving features of our financial environment is a daunting task.
In lieu of offering the Committee any original analysis of this subject, I would propose instead to point Members and the Committee staff to a paper on deposit insurance recently written by Gillian Garcia, an economist with the IMF.(6) In an effort to establish an international benchmark for deposit insurance coverage, Garcia recommends, as a rule of thumb, deposit insurance coverage equal to one or two times per capita GDP. (7) (Two times per capita GDP for the United States would be approximately $70,138.80 in 2000.(8)) Elsewhere, Garcia reports ratios of deposit insurance coverage to per capita GDP for 66 selected countries, and finds that only 28 have explicit deposit insurance coverage greater than two times per capita GDP. Of these, only two countries have explicit deposit insurance coverage greater than the current U.S. level (Italy and Norway).(9)
While there is nothing magical about the Garcia analysis of deposit insurance coverage, the work does suggest one informed analyst's view of the issue, and also offers a comparative dimension to the topic, suggesting that current FDIC coverage levels are at or near the top of explicit governmental insurance schemes. To be sure, Garcia's survey does not report implicit coverage levels - which may be substantial and even unlimited in some countries. Moreover, it is possible that considerations of political economy unique to the United States justify coverage levels higher than those found in other industrialized countries. Still, for me at least, the Garcia analysis raises questions about the appropriateness of raising general coverage levels at the present time.
Special Features of Retirement Savings
The one area in which I think a strong case may be made for raising current FDIC coverage levels is the area of retirement savings. Numerous trends increase the importance of retirement savings for American citizens. Greater life expectancy, earlier retirements, potential shortfalls in our principal public insurance program (Social Security), all counsel for a greater importance of private savings for retirement. It is, moreover, quite reasonable to posit that some members of the general public will want to be able to place their retirement savings in a simple, safe, and familiar investment vehicle, such as a depository institution.(10) Finally, if we accept the premise that the government has a role in ensuring the availability of such a vehicle for amounts sufficient to provide adequate retirement security, then I think the case for raising the level of FDIC coverage for retirement accounts has been made. Essentially, the argument is an extension of the first (collective action) justification for deposit insurance in the special case of retirement savings.(11)
The Amount of Retirement Savings Coverage: Theoretical and Practical Considerations
But what level of coverage is appropriate for retirement savings? Clearly an unlimited support for retirement accounts seems inappropriate, both because there is no strong governmental interest in protecting all of the retirement savings of the very wealthy and because the extension of retirement savings coverage could distort competition among different sectors of the financial services industry. But, is there a principled way to provide a benchmark comparable to what Garcia advances for general coverage levels? Recognizing that there is no clearly right answer, I offer the following rough cut at the question.
I approach this problem with the premise that the government should offer sufficient deposit insurance coverage so that a household with up to the median level of income should have access to an absolutely safe investment vehicle for retirement. I would implement this concept as follows. I start with the median household income in the United States, which was approximately $42,000 in 2000.(12)
Within the financial planning industry, a typical target for retirement income is 80 percent of pre-retirement income. So, under this measure, a household at the median level of household income would need $ 33,600 of income per year during retirement. Although one could argue that FDIC insurance for retirement savings should be set to cover retirement savings sufficient to finance this full amount, I think it is important to recognize that Social Security provides substantial retirement savings for most Americans, particularly those at lower income levels. For current purposes, I think it would appropriate to assume Social Security replacement rates of forty percent of pre-retirement income,(13)
leaving only forty percent to be covered by private savings or $16,800 of income per year.
Formulated in this way, the question is how much retirement savings would an individual need to supply $16,800 of inflation-adjusted income in retirement? To answer this question, one must make assumptions about life expectancy and real rates of industry. Using what I consider to be plausible estimates of these factors, I have calculated that a retirement savings balance of approximately $250,000 would be an appropriate target level of coverage.(14) To put this in relationship to median household incomes, a $250,000 coverage level would suggest a retirement savings coverage target of roughly six times median household income. In comparison, our current coverage level of $100,000 is just a shade under 2.4 times median household income.(15) The ratio between the level of coverage I propose for retirement savings($250,000) and current FDIC coverage ($100,000) is, coincidentally, the same 2.5 to 1.0 ratio that prevailed between 1974 and 1980, the only previous time that the FDIC has offered different coverage levels for retirement savings.(16)
Having proposed a plausible target for retirement savings coverage, let me immediately add several caveats. This back-of-the-envelop calculation includes numerous assumptions about replacement rates, assumed life expectancies, rates of return, and Social Security coverage. All of these assumptions are subject to debate, and different assumptions would generate different target levels. What I've offered is my best guess of how a retirement savings coverage level might be justified based on my own notions of the government's appropriate role in the field. Others - particularly those representing other sectors of the financial services industry - may well have different views.
On a more practical dimension, I should stress that these coverage levels dramatically exceed the current levels of retirement savings of most Americans. According to recent Census Bureau data, middle-income American households do not now accumulate anything close to $250,000 of retirement savings. For example, the median net worth of householders in early retirement years (65 to 69) was $106,408 in 1995, but the largest median investment was in home ownership not financial assets.(17) Accordingly, the theoretical case for retirement savings of roughly one quarter of a million dollars seems well beyond the current capabilities of most average Americans.(18) To some degree, this unfortunate financial fact moots the debate over retirement savings coverage. However, some individuals will have accumulations at the level envisioned,(19) and for others a governmental policy endorsing retirement savings on the order of six times median household income may offer some encouragement to increase retirement savings, particularly if financial institutions publicize the level of coverage.
Issues of Implementation in Developing a Separate Coverage Level for Retirement Savings
To the extent that the Committee pursues the concept of adopting a separate coverage level for retirement savings, there are a number of additional issues of implementation that need to be addressed.
Which Tax-Favored Vehicles to Cover? First, there is the matter of defining the concept of retirement savings. Most discussion of the subject refers to Individual Retirement Accounts (IRAs) and Keogh Plans, but it is not clear that these are the only categories to which expanded FDIC coverage should extend. Historically, these plans were individualized accounts, distinct from traditional defined benefit pension plans. But Keogh Plans are a relatively minor component of overall retirement savings. IRAs are much more important, but largely because they are the depositories of roll-overs from employer-based plans. (I would expect that the overwhelming majority of IRA accounts that exceed the current $100,000 FDIC insurance coverage levels are roll-over IRAs.(20)) If extended FDIC coverage is to reach these roll-over accounts, it is not clear why it should not also extend to other tax-favored individual account plans - most notably 401(k) and 403(b) plans - that many employers maintain. After all, if the public needs a risk-free investment vehicle for roll-over IRAs, a similar argument(21) should apply to extending such protections to comparable retirements accounts maintained through employers, as well as privatized Social Security accounts (should they ever be created).(22) At a minimum, the Committee should carefully consider which tax-favored savings vehicles are to be eligible for supplemental FDIC coverage for retirement savings.
Retirement Savings in Other Forms. An analogous question arises as to whether the extended coverage should even be limited to tax-favored vehicles. While tying coverage extension to categories of retirement savings already defined in federal law and administered through the ERISA agencies has some appeal, there are also several drawbacks to this approach. To begin with, tax incentives are most important to wealthy American, who have higher marginal tax rates and greater proclivities to saving. If extended coverage is limited to tax-free forms of savings, the benefit will be skewed towards upper-income Americans, even though the justification for extending coverage is largely based on concern for the less advantaged and less sophisticated. Consider further that the principal source of wealth of middle class Americans is home equity. For elderly households that sell their homes upon retirement, this equity might easily be converted into a bank account and used to support the households in retirement. But retirement savings of this sort would not typically be covered through expanded FDIC insurance coverage limited to tax-preferred retirement accounts. Nor would it cover the proceeds from the sale of a small business or many other kinds of savings.
Problems of Expanding the Definition of Retirement Savings. The problem with expanding the definition of retirement savings is that a liberal definition could threaten to convert extra coverage for retirement savings into an across-the-board increase in federal deposit insurance coverage, at least for individuals. Particularly, if depositors could open "retirement savings" accounts at multiple institutions, the potential for unlimited coverage would be real. One could imagine various ways to deal with this problem - for example, limiting individuals to only one retirement savings account throughout the banking system or at least throughout networks of affiliated banks. But drafting such rules would require considerable care and likely delegation to the Federal Deposit Insurance Corporation for implementing regulations.(23)
Potential for Abuses with Retirement Savings Account. On the assumption that the technical issues of designing a viable system of expanded FDIC insurance for retirement savings can be overcome and balances in these accounts grow over time, the Committee should be mindful that these accounts may become the subject of unscrupulous business practices. For a variety of reasons, bank-based retirement savings accounts are likely to attract less sophisticated individuals, who may be less inclined to keep track of prevailing interest rates or move accounts - particularly retirement savings accounts - to other institutions.(24) Knowing these characteristics of bank-based retirement savers, bankers may be tempted to lower the interest rate paid on retirement savings accounts. To the extent that the federal government would be implicitly endorsing bank-based retirement savings through the expansion of FDIC coverage for retirement accounts, I think attention should be given to ensuring that these accounts offer an appropriate rate of return. While direct regulation of interest rates would be excessive, one could imagine a statutory requirement that, to be eligible for expanded FDIC insurance coverage, retirement savings accounts would have to pay an interest rate no lower than an inflation-adjusted government bond. Such a floating average would set a floor beneath with interest payment could not fall, but would leave ample room for free market competition above that level. Again, responsibility for implementing regulations to establish an appropriate minimum rate of interest could be delegated to the FDIC.
Educational Aspects of Expanding Retirement Savings Coverage. As mentioned above, an ancillary benefit of expanding FDIC coverage for retirement savings accounts is the possibility that such a reform could encourage the American public to save more for retirement - even suggesting a target level of six times pre-retirement income as an appropriate savings goal. Financial supervisors in other jurisdictions - most notably the new Financial Services Authority in the United Kingdom - have recently been given explicit charges to educate the general public on such matters. In my view, it would desirable if legislation adopting a higher level of FDIC coverage for retirement savings also included an educational component - either to be conducted directly by government agencies or through some public-private alliance. While expanded FDIC coverage may marginally strengthen retirement savings in the United States, the primary mechanism for solving the problem will have to come through personal decisions made by millions of individual savers. Government sponsored education can help Americans meet that challenge.
Retirement Savings and the Debate Over Deposit Insurance Coverage
Let met conclude with a few words about the relationship between retirement savings and the broader debate over deposit insurance coverage. As explained above, compelling theoretical arguments support the expansion of FDIC insurance coverage for retirement savings. However, the task of structuring an appropriate extension - that is, an extension likely to reach low and middle income savers - is not trivial. And it is possible that the practical problems of implementing such a regime will prove so substantial as to derail the entire effort. At this point, I can offer no clear prediction as to how these tradeoffs balance.(25) However, to the extent that the Committee can devise a sensible approach to extending FDIC coverage for retirement savings, I think the case for raising the basic coverage levels is greatly reduced. As I mentioned earlier, the strongest argument for a general increase in FDIC coverage is that the public's needs for deposit insurance have increased over time. The most compelling component of this argument relates to an increased need for risk-free investment vehicles for retirement savings. To the extent that expanded FDIC coverage addresses this concern, the need for a general increase in FDIC coverage is much diminished and the appropriate level for indexed general deposit insurance perhaps even somewhat reduced.
Thank you very much.
1. The absence of attention to the macro-economic role is sensible. In modern times, similar liquidity crises have occasionally occurred at the state level when state deposit insurance systems run into financial troubles. However, in the past two decades, these state systems have disappeared, and almost all depository institutions are now insured at the federal level. To the best of my knowledge, there have been no recent, system-wide liquidity crises at federally-insured depositories, even during the thrift and banking crises of the 1980's and early 1990's or the disruptions in stock markets after September 11th or October of 1987. Indeed, during periods of financial crisis, funds now tend to flow into depository institutions not out.
2. Among other things, expanded federal deposit insurance coverage tends to raise the FDIC's costs when banks fail and may also increase the moral hazard problems associated with federal deposit insurance.
3. I would further distinguish arguments in favor of expanded deposit insurance that are based on a perceived need to offset the "too-big-to-fail" policy said to support larger financial institutions. Enhancing deposit insurance coverage to counteract the effect of the "too-big-to-fail" policy is, in my view, a dubious proposition. First, there is considerable doubt that the policy remains in effect. In 1991, the FDIC Improvements Act established important procedural and political constraints on large bank bailouts. In addition, a number of substantive reforms - from prompt corrective action to heightened oversight of inter-bank lending - reduce the likelihood of Continental Illinois-style bailouts. Moreover, to the extent that larger banks are still implicitly supported by a lingering "too-big-to-fail" policy, Congress could consider addressing that problem directly rather than making a compensatory increase in deposit insurance coverage for small banks.
I would be similarly skeptical of arguments for expanded deposit insurance coverage based solely on the fact that other sectors of the financial services industry have grown faster than depository institutions in the past two decades. It is by no means clear that maintaining the market share of depository institutions in 1980 is an appropriate goal of public policy. Indeed, growth in other sectors, such as money market mutual funds, could well indicate that these alternative forms of saving better suit the needs of an increasing number of consumers.
4. For example, if the current level of coverage ($100,000 per deposit) were used as a baseline, the real level of coverage would be much lower than if the value of deposit insurance coverage back in the early 1980's were used. For a good review of the relative value of federal deposit insurance coverage, see FDIC Options Paper 31-43 (Aug. 2000) (available at http://www.fdic.gov/deposit/insurance/initiative/OptionsPaper.html). See also Alan S. Binder & Robert F. Wescott, Reform of Deposit Insurance: A Report to the FDIC (Mar. 20. 2001) (available at http://www.fdic.gov/deposit/insurance/initiative/reform.html) (discussing indexing FDIC coverage levels to median income).
5. For example, within the United States over the past twenty years, the assets of depository institutions as a percentage of GDP has increased from 56.6 percent in 1980 to 81.5 percent in 2000, suggesting that an increase in real FDIC coverage may be in order. On the other hand, financial sophistication of the general public and the availability of information about depository institutions (via the Internet among other sources) has probably also improved, suggesting the need for less governmental paternalism and perhaps even less deposit insurance coverage today than in the past.
6. See Gillian Garcia, Deposit Insurance and Crisis Management (IMF Working Paper, Mar. 2000) (available at http://www.imf.org/external/pubs/ft/wp/2000/wp0057.pdf).
7. Garcia also contends that the coverage limit may be set with more precision by examining the distribution of deposits by size, proposing that coverage limit should be set to include the majority of the total number of deposits (roughly 80%), but only the total value of deposits of a minority (roughly 20%).
8. This figure is based on an estimated 2000 per capita GDP of $35.069.40 as reported in the 2001 World Economic Outlook Database, October 2001, available at http://www.imf.org/external/pubs/ft/weo/2001/02/data/index.htm (last accessed 10/29/01). According to the WEO estimates, two times per capita GDP for the United States would be $67,953.60 in 1999, $72,024.80 in 2001, and $74,455 in 2002.
9. Gillian Garcia, Deposit Insurance - A Survey of Actual and Best Practices (IMF Working Paper, April 1999).
10. The triple requirements of simplicity, safety and familiarity are essential to my argument because the general public already has safe alternatives - investments in government bonds or bond funds - that are not familiar, as well as familiar investments - splitting retirement savings among a number of banks - that are not simple.
11. Many experts agree that expanded coverage of retirement savings is unlikely to create additional moral hazard problems as the kind of person who is apt to invest retirement savings in bank deposits is unlikely to seek out high-risk, high-return institutions. See Letter from FDIC Chair Donna Tanoue (April 2001). See also Testimony of Jeff L. Plagge Before the Subcommittee on Financial Institutions of the Senate Committee on Banking, Housing, and Urban Affairs (Aug. 2, 2001).
12. For recent census data on median income of households in the U.S., see http://www.census.gov/hhes/income/income00/incxrace.html (avail. Oct. 31, 2001). I use household income because retirement savings often must support a household rather than an individual.
13. See C. Eugene Steuerle & Jon M. Bakija, Retooling Social Security for the 21st Century 06 (1994) (reporting Social Security replacement rates for different categories of workers).
14. For this purpose, I assume a real rate of return of 3.0 percent - roughly the current payment rate on inflation-adjusted long-term government bonds - and a life expectancy of 20 years. Obviously, individual experience will vary, particularly on the dimension of life expectancies. But for purposes of setting targets, I think these are reasonable estimates. In addition, the use of the median household income (as opposed to some lower level) is probably a generous statement of the government's obligation in this area.
15. Note that the methodology proposed in the text assumes that deposit insurance coverage levels should be adequate to cover the maximum balance necessary to finance a targeted level of retirement income. For any particular savers, these balances would be present only on the eve of retirement - before the balances would still be in an accumulation phase and afterwards the balances would decline as withdrawals occurred. One could imagine a lower coverage level that would provide only partial protection of a $250,000 retirement savings account at its point of peak accumulation. If, for example, the coverage level were set at $200,000, much of the time, even our median household achieving the proposed savings targets would be fully covered, but for a certain number of years, up to $50,000 of savings would be uninsured. In practice, such a saver would not be exposed to a complete loss of this $50,000, as depositors typically only lose a relatively small fraction of the balances of uninsured accounts and legislative reforms of the past decade make it likely that these loss exposures will remain small - perhaps on the order of 10 percent of uninsured balances or less.
16. At that point, the nominal coverage levels were $100,000 for retirement savings and $40,000 for general FDIC coverage. See Testimony of Jeff L. Plagge Before the Subcommittee on Financial Institutions of the Senate Committee on Banking, Housing, and Urban Affairs (Aug. 2, 2001). In real terms, however, the coverage level for retirement savings is quite similar to the one I propose.
17. See http://www.census.gov/hhes/www/wealth/1995/wealth95.html (avail. Oct. 31, 2001).
18. See, e.g., FDIC Roundtable Discussion of Deposit Insurance Reform 22 (May 2000) (available at http://www.fdic/deposit/insurance/initiative/transcript/index.html) (citing Federal Reserve Board study indicating that bank retirement accounts of people making more than $100,000 were typically only $2,400 and ranged up to only $93,000).
19. For example, the FDIC Options paper suggests that "several . . . financially unsophisticated" depositors in recently failed banks had retirement accounts in excess of the current $ 100,000, see FDIC Options Paper, supra note 4, at 36. The FDIC paper does not, however, indicate the extent of the losses imposed on these accounts. See supra note 14 (discussing the relevance of loss rates on uninsured portions of retirement savings accounts).
20. Traditional IRAs have always been limited to relatively low annual contributions. Even if an individual had invested the full $2,000 annual contribution allowed for IRA accounts for most of the past twenty-five years, that individual's account balances would only recently have reached the current $100,000 threshhold. Based on existing data about the actual size of IRA accounts, I would expect that very few individuals have been such active savings in IRA accounts. While recent changes in tax laws substantially loosen restrictions on IRA savings, it is unclear how many low-and middle-income savers will take advantage of these opportunities. For a median income saver to get to the $250,000 level proposed above, and annual contribution of roughly $3300 a year over forty years would be required. That level of savings assumes an annual contribution of approximately eight percent of median household income per year. For most workers, who start their working careers with much lower levels of income, the savings rates would have to be higher. For these reasons, I am not sure that I can concur in FDIC Chair David Powell's assertion that "middle-income families routinely save well in excess of [the current $100,000 FDIC] limit." See Statement of Donald E. Powell Before the Subcommittee on Financial Institutions and Consumer Credit of the House Committee on Financial Services (Oct. 17, 2001) (available at http://www.fdic.gov/news/news/speeches/chairman/sp170ct01.html).
21. One difference is that participants in employer-sponsored enjoy some protection under ERISA's fiduciary rules. However, these safeguards are limited, and do not ensure that employees will place their retirement savings in low-risk, cost-effective savings vehicles.
22. To the extent that the Committee does consider extending expanded FDIC insurance coverage to other tax-favored retirement plans, some attention would have to be given to ensuring that the coverage levels applied to beneficiaries of these plans and not the plan trustees. Several years ago, after the failure of the Executive Life Insurance Company, a wave of litigation arose over comparable questions of coverage under state insurance guaranty funds. See Howell E. Jackson & Edward L. Symons, The Regulation of Financial Institutions ch. 7 (1999).
23. The practice of financial conglomerates dividing deposit balances among two or more affiliated banks is a problem that goes beyond the issue of retirement savings coverage. To the extent that federal banking law increasingly disregards the corporate separateness of affiliated banks, see Howell E. Jackson, The Expanding Obligations of Financial Holding Companies, Harv. L. Rev. (Feb. 1994). I believe there are strong arguments for treating affiliated banks as a single unit for purposes of deposit insurance coverage. (The larger question of whether all insurance coverage levels should be based on total individual accounts or on the current bank-by-bank basis is beyond the scope of this testimony.)
24. As others have noted, holders of IRA and Keogh bank accounts are unlikely to engage in aggressive shopping for higher rates. This is the principal reason why experts believe that expanded coverage for retirement savings is not likely to increase moral hazard problems of deposit insurance.
25. An important area of future research is the actual distribution of current and potential
bank-based retirement savings accounts. In my view, the best argument in favor of expanded insurance
coverage for retirement savings is based on the notion that substantial numbers of unsophisticated and
lower-income savers need this protection. As indicated above, relatively few such individuals appear to
have retirement accounts at or in excess of current FDIC insurance levels. According to the testimony of
industry representatives, some bankers believe that there are substantial amounts of retirement accounts
in excess of $250,000 that will be attracted into depository institutions if insurance coverage increases.
Most likely, however, these funds are from wealthy and more sophisticated individuals. Providing
additional FDIC insurance coverage to such individuals does not advance the interests of low- and
middle-income savers, although it might improve the competitive posture of certain depository
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