Statement to the Congress - Federal Reserve's position on Savings Association Insurance Fund, deposit insurance - Transcript

Federal Reserve Bulletin, Oct, 1995

Let me conclude by clarifying why the Federal Reserve is concerned about the SAIF problem and believes it is necessary to resolve it. The Federal Reserve's primary concerns are sustainable economic growth and financial stability. A healthy and competitive financial system is critical for maintaining and promoting economic growth. One key component of a healthy financial system is a sound depository institution system, and an important component of a sound depository institution system is that depository institutions are not given artificial incentives to switch between insurance funds or to abandon an insurance fund to gain competitive advantages. Such "regulatory arbitrage" wastes scarce and valuable resources that could be much more productively employed.

Furthermore, as we know from our experience in the last recession, uncertainties about the resolution of insurance fund failures, and the regulatory policies needed to protect the taxpayer while these uncertainties are resolved, can only inhibit the willingness of depository institutions to lend. While there were many reasons monetary policy encountered strong headwinds during that period, surely the legislative and regulatory reactions to the taxpayer funding of the thrift deposit insurance fund and to the depleted nature of BIF compounded our problems.

Whatever solution is finally adopted, we should not lose sight of first principles. A deposit insurance system that focuses the attention of banks and thrift institutions on the relative status of their funds, and a system that rewards those who can jump ship first, is, to say the least, counterproductive. What is needed is a deposit insurance system whose status is unquestioned, so that the depositories can appropriately focus their attention on the extension and management of credit in our economy. I might also add that a congressional decision to provide a more banklike thrift charter and banklike taxation would be consistent with market trends and stronger depositories, and would not be likely to reduce mortgage credit flows.