Speeches and Congressional testimony

US Office of the Comptroller of the Currency: Quarterly Journal, Sep 2002

Nonetheless, the efforts so far undertaken to address the weaknesses in the system uncovered during the banking and thrift crises of the late 1980s and early 1990s have not been entirely adequate to the task. Indeed, the legislation adopted in response to those crises has actually constrained the FDIC from taking sensible and necessary actions. This is particularly the case with respect to the FDIC's ability to price deposit insurance in a way that reflects the risks posed by different depository institutions, and to the funds' ability to absorb material losses over the business cycle without causing sharp increases in premiums. Failure to address these issues in the current financial environment poses the danger that the next major domestic financial crisis will be exacerbated rather than ameliorated by the federal deposit insurance system.

Current legislative proposals in the House and Senate to reform deposit insurance address most, albeit not all, of the issues raised by the FDIC staff in its excellent and wideranging Options Paper released in August 2000. Among these issues are (1) how much discretion the FDIC should have to set premiums reflecting the risks posed by individual institutions to the insurance funds; (2) whether strict limits on the size of the insurance funds result in excessive volatility of deposit insurance premiums; (3) whether the deposit insurance coverage limit should be increased and/or indexed to changes in the price level; and (4) whether the Bank Insurance Fund (BIF) should be merged with the Savings Association Insurance Fund (SAIF).

In summary, the OCC recommends that (1) the FDIC be provided with the authority to implement a risk-based premium system for all banks; (2) the current fixed designated reserve ratio (DRR) be replaced with a range to allow the FDIC more flexibility in administering the deposit insurance premium structure; (3) coverage limits on deposits should not be increased; and (4) the BIF and SAIF should be merged.

We believe that deposit insurance reform also provides an opportunity to strengthen our supervisory structure by eliminating a distortion and unfairness in the current system of funding bank supervision. Currently, a portion of the earnings on the insurance funds, which state and national banks paid into, is diverted to fund the federal supervision of only one class of institutions, state banks supervised by the FDIC. The FDIC has elected not to pass those costs on to the banks they supervise. As a consequence, state nonmember banks pay only a small percentage of the costs of their supervision. In contrast, national banks pay over $400 million each year to cover the full costs of their supervision by the OCC. Ending this anomaly is not just a matter of fairness to national banks. It is a necessary component of allocating the costs and benefits of deposit insurance in an equitable and efficient manner among insured banks. For that reason, in addition to our views on the issues addressed by the legislative proposals to reform deposit insurance, my testimony today will include our suggestion for remedying the inequity that exists in the funding of supervision.