Merge funds, tweak premiums among best reform ideas

Northwestern Financial Review, Mar 1, 2002 by Bengtson, Tom

[interview: Andrew "Skip" Hove]

Q

What ideas for deposit insurance reform do you think have the most merit?

The merger of the funds is probably most important right now. The product is the same whether banks or thrifts are buying it. The public doesn't distinguish between a bank and a thrift. The second part of that is many banks have SAIF deposits. And some thrifts have BIF deposits. You have a mixing in there of deposits. It makes it very confusing for banks that are trying to calculate their assessments. The time has come to merge the funds.

Anything else?

The second is this issue of deposits coming into the fund without bringing any dowry There are all kinds of those funds coming in. Probably the most visible are those that come in from a brokerage firm such as Merrill Lynch or Smith Barney. They both have bank charters. They have had those bank charters for some time but they are bringing those deposits in without really having paid any premiums. Plus, look at newly chartered banks. There are about 800 banks that have been chartered since the deposit insurance premium went to zero. None of those brought any dowry with them. You have to address that issue.

Perhaps everyone should be paying a premium. I think what the FDIC has proposed is that you've got some sort of a premium that everyone pays. Then you give some assessment credits back. You say, "okay, over a period of time if you were a payer, then you get an assessment credit back." That seems to make sense to me because it takes care of this issue of new deposits coming in without any dowry.

And a lot of bankers are saying we need more coverage. A hundred thousand dollars isn't what it used to be. And I think people probably agree with that. Politically, however, I doubt the coverage is going to double. The proposal that FDIC has brought forward says let's go out to some point in the future and see what some index says. We will then raise that coverage by that index in increments, perhaps $5,000 increments. That makes some sense.

And do something about retirement accounts. Very clearly a lot of retirement accounts are a lot larger than $100,000 and lack of coverage on those kinds of accounts is what really makes people nervous as they get older.

The FDIC was not the primary regulator on several of the recent bank failures. Do you think the FDIC needs greater authority to examine banks in cases where it is not the primary regulator?

The FDIC Board recently approved a resolution on backup supervision. What it says is that FDIC essentially can go into any bank it sees as potentially troubled. It is going to notify the primary regulator. It will go in with the primary regulator, or by itself I think that is important because if you look at some of these bank failures we've had, Keystone in West Virginia; Superior Bank; now you've got this one down in Florida, they are all situations where the FDIC has not been the primary regulator. The FDIC now has some new authority. Actually, they always had the authority but I think because of the make-up of the boards we've had in the last few years it wasn't as clear that the FDIC could go in. Very frankly, sometimes the other regulators resisted. So they have resolved that and it's a good thing.

Does the FDIC and other regulatory agencies have all the tools they need to identify problems in banks?

I think so, but you can't be in a bank every day, all the time. The speed of transactions today is such that things can happen very rapidly. And if you are not there every day, things can go wrong. People can be mischievous. Once things go sour, it's very easy for people to get into mischief. They'll start doing things that they might not otherwise do. And if you are only in there once a year, in between times a lot of things can happen. So outside of having an examiner on site all the time in every bank, I think the regulators do a remarkably good job of preventing a lot of these.

You've seen a lot of banks over the years. Summarize what you consider to be the most important factor that separates a good bank from an average bank.

It's the managers. It's the people in the bank.

Andrew "Skip" Hove served on the board of the Federal Deposit Insurance Corp., for 10 years. He was chairman of the FDIC on three separate occasions.