T. Johnson: Legislation Safeguards Deposits
The economic landscape has undergone significant changes since the beginning of the economic crisis, and the Wall Street reform legislation currently being considered in the Senate will make further changes. While many issues have been touted as benefits of Wall Street reform, one that has been overlooked is how this legislation will enhance the safety and soundness of
depository institutions. As we have witnessed over the past 18 months with more than 200 bank failures, it is critical that we have a strong and stable deposit insurance fund and that our regulators have the tools they need to wind down failed depository institutions to guarantee that Americans’ savings and retirement remain safe.
As we know, the economic crisis has presented an enormous strain to the deposit insurance fund and to the banks that contribute to keeping it stable and strong. Despite this enormous strain, both the Federal Deposit Insurance Corp.’s deposit insurance fund and the National Credit Union Administration’s share insurance fund have made good on their promise to pay for the insured deposits when an institution fails. This protection is the bedrock of our financial system, but it has not come for free — the DIF ratio has fallen, substantially lower than the 1.15 percent required ratio, and the share insurance fund has struggled. These extraordinary times have warranted emergency, temporary actions to ensure continued stability and protection, including a decision by the FDIC for banks to prepay their assessments.
I am sensitive to concerns that onerous assessments could force financial institutions to raise consumer fees and curtail lending. This outcome is concerning as borrowers across our nation struggle and frozen credit markets limit lending. I am also concerned that these increased assessments disproportionately affect small banks. On the other hand, assessments that are too low could prevent the future buildup of the fund.
While the FDIC has borrowed money from the Treasury, any money must be repaid with interest, and any line of credit should be temporary with an eye to the long-term restoration of the insurance funds. In addition, while deposit insurance coverage is currently at $250,000, Congress must consider the appropriate level of deposit insurance coverage and whether the emergency increases should be extended or even made permanent when the current coverage expires in 2013.
Deposit insurance is a benefit to institutions, but it should not come at the expense of taxpayers. As the financial system recovers, Congress must do all it can to make sure that banks and credit unions do not resist efforts to build back up the DIF and the share insurance fund. As we have witnessed over the past year and a half, banks have had to absorb severe insurance premiums when they can least afford them.
Wall Street reform will help maintain a stable insurance fund for our nation’s depositors in several ways. First, ending “too big to fail” will mean that large financial firms can never get so large that the risky actions of any company threaten the safety of the deposits within that bank or the insurance system as a whole. The bill also establishes the Financial Oversight Council with the responsibilities to eye nationwide trends and risk, and it will allow us to better anticipate possible threats to the deposit fund and take pre-emptive actions.
Provisions in this legislation will also improve prudential regulation of depository institutions in a variety of ways. First, it will streamline many of the responsibilities of the prudential regulator. This will eliminate many gaps and loopholes in regulation. Second, if a bank is taking risks and putting the deposit fund in jeopardy with those actions, the prudential regulators will be able to require additional capital and leverage. In addition, the Consumer Financial Protection Bureau will be able to spot trends like poor underwriting that in addition to threatening consumers could also threaten the fund.
In addition to the changes to strengthen prudential regulation, we should also be thinking about how we rebuild the insurance funds as our economy recovers. Congress should consider other tools, which will help rebuild the fund and make the fund less pro-cyclical. For example, should the reserve ratio of the fund be higher? Should the FDIC still pay back dividends if the fund is of a certain size? Does the FDIC have enough access to information for deposit insurance assessment purposes? Are there other programs, such as the Transaction Account Guarantee Program, that could be temporarily extended to create more certainty in our banking system?
Americans need to know that their deposits are safe and that a lifetime of hard work in contributing to savings and retirements will not fall victim to the next fiscal crisis. I know that the issue of deposit insurance reform doesn’t grab a lot of headlines, but it is vital to the stability of America’s financial system, and I believe the changes in the Wall Street reform bill help ensure the system’s stability.
Sen. Tim Johnson (D-S.D.) is chairman of the Banking, Housing and Urban Affairs Subcommittee on Financial Institutions.