Merging the BIF and the SAIF:
Would a Merger Improve the Funds’Viability?
Robert Oshinsky
Financial Economist
Division of Research and Statistics
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
Phone: 202-898-3813
Fax: 202-898-7149
E-mail: roshinsky@fdic.gov
The author gratefully acknowledges the comments and suggestions of
William R. Watson, Barry Kolatch, Steven Seelig, James Marino, Lynn Shibut, and
Kevin Sheehan. The views expressed are those of the author and not necessarily those of
the Federal Deposit Insurance Corporation.
Would a Merger Improve the Funds’Viability?
Robert Oshinsky
Financial Economist
Division of Research and Statistics
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
Phone: 202-898-3813
Fax: 202-898-7149
E-mail: roshinsky@fdic.gov
The author gratefully acknowledges the comments and suggestions of
William R. Watson, Barry Kolatch, Steven Seelig, James Marino, Lynn Shibut, and
Kevin Sheehan. The views expressed are those of the author and not necessarily those of
the Federal Deposit Insurance Corporation.
1. Introduction
As part of the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (FIRREA), the Savings Association Insurance Fund (SAIF) was created. Ever since
its creation, however, it has been considered vulnerable, partly because of its small size
and partly because of its geographic concentration. SAIF-member institutions constitute
a much smaller portion of U.S. banking organizations than Bank Insurance Fund (BIF)
member institutions do. As of year-end 1998, the SAIF had 1,430 members, roughly
16 percent the number of BIF members, and the SAIF insured an estimated $709 billion
in deposits, roughly 33 percent of the estimated deposits insured by the BIF.1 In addition,
SAIF-member institutions are geographically concentrated, unlike BIF-member
institutions.
This paper examines the SAIF’s ability to remain solvent using a Monte Carlo
model that was developed by Oshinsky (1999) to study the effects of banking
consolidation and megamergers on the BIF. It shows that, in contrast to the BIF, industry
consolidation has served to reduce the vulnerability of the SAIF, as several large
BIF-member institutions have increased their SAIF-insured holdings. Nonetheless, the
SAIF continues to be somewhat more vulnerable to insolvency risk than the BIF.
The paper also examines a merger of the BIF and the SAIF. It finds that a larger,
combined insurance fund would be less at risk than either the BIF or the SAIF separately.
In other words, both the BIF and the SAIF would benefit from a merger of the funds. A
fund merger would also eliminate the possibility that one fund might become insolvent
while the other fund remains solvent. For the SAIF, however, the benefits of a fund
1 FDIC (1999), 17.
2
As part of the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (FIRREA), the Savings Association Insurance Fund (SAIF) was created. Ever since
its creation, however, it has been considered vulnerable, partly because of its small size
and partly because of its geographic concentration. SAIF-member institutions constitute
a much smaller portion of U.S. banking organizations than Bank Insurance Fund (BIF)
member institutions do. As of year-end 1998, the SAIF had 1,430 members, roughly
16 percent the number of BIF members, and the SAIF insured an estimated $709 billion
in deposits, roughly 33 percent of the estimated deposits insured by the BIF.1 In addition,
SAIF-member institutions are geographically concentrated, unlike BIF-member
institutions.
This paper examines the SAIF’s ability to remain solvent using a Monte Carlo
model that was developed by Oshinsky (1999) to study the effects of banking
consolidation and megamergers on the BIF. It shows that, in contrast to the BIF, industry
consolidation has served to reduce the vulnerability of the SAIF, as several large
BIF-member institutions have increased their SAIF-insured holdings. Nonetheless, the
SAIF continues to be somewhat more vulnerable to insolvency risk than the BIF.
The paper also examines a merger of the BIF and the SAIF. It finds that a larger,
combined insurance fund would be less at risk than either the BIF or the SAIF separately.
In other words, both the BIF and the SAIF would benefit from a merger of the funds. A
fund merger would also eliminate the possibility that one fund might become insolvent
while the other fund remains solvent. For the SAIF, however, the benefits of a fund
1 FDIC (1999), 17.
2