Summer summary

Northwestern Financial Review, Jul 15-Jul 31, 2002 by Bengtson, Tom

[straight talk]

Summer is convention season when many bankers gather with colleagues to get a mid-year update on industry issues. This column is written for the benefit of bankers who may not get a chance to attend one of those annual meetings. Half way through 2002, let's take a look at some of the major issues facing the banking industry.

Deposit insurance reform has the potential to affect every bank in the country. The House has passed reform that would raise the coverage level to $130,000 per account, and give the FDIC greater flexibility in determining premiums. The Senate is sitting on a similar bill, although backroom politicking may prevent it from ever considering it. The big question for bankers is: what's reform going to cost? Now that the BIF reserve ratio has fallen below the 1.25 percent floor, many bankers are anticipating paying premiums next year. The FDIC board will meet in November to set premium pricing. Impacting their decision most will be the amount of money it decides to set aside for projected future losses. On the other hand, reform could change the picture completely, and many banks could be spared premiums if a new law gives them assessment credits for payments made into the fund years ago.

Credit union competition is very important to bankers, although most lawmakers remain clueless on this one. ABA President Jim Smith predicts more credit unions will lobby for the right to make loans guaranteed by the Small Business Administration. It is particularly galling that tax-- exempt financial institutions would be permitted to use government sponsored enterprises to compete against tax-paying corporations. First credit unions get access to cheap money from the Federal Home Loan Banks, and now they may seek to further leverage the SBA. While lawmakers may never agree to tax credit unions, they may agree that credit unions shouldn't be allowed to grow by using government agencies created by tax-paying entities.

A number of tax issues are key. The House just passed legislation that will give people the opportunity to contribute more money to individual retirement accounts and 401 (k) plans. The effort to eliminate the inheritance tax is gaining momentum, having passed the House. And, a number of bankers are evaluating hardware needs and other expenditures in light of accelerated depreciation opportunities created by tax legislation passed in response to last fall's terrorist attacks.

And, thankfully, the economy is proving resilient. Given the accounting scandals, the terrorist attacks, a sluggish stock market, and a nervous labor force, it would be easy to imagine a suffering economy. But, in fact, the economy is growing and bank profits are good.

By Tom Bengtson, Publisher