Remarks
By
Donna Tanoue
Chairman
Federal Deposit Insurance Corporation
Before
America's Community Bankers
Seattle, Washington
October 30, 2000
There is an old saying: "If it isn't broken, don't fix it," but we learned in the 1980s that
when it comes to federal deposit insurance, it would have been far better to address the
problems of the FSLIC (Federal Savings and Loan Insurance Corporation) before it was
broke. That lesson was an expensive one for the taxpayers and for you.
Many of you paid for the mistakes of your defunct counterparts throughout the 1980s
and long into the 1990s: billions and billions of dollars through assessments to the
FSLIC and through assessments to build up the Savings Association Insurance Fund
(SAIF). And in paying off Financing Corporation (FICO) bonds, you're still paying for
those mistakes today.
The 1980s were a tough time. During the thrift crisis, a third of the savings institutions in
the country were wiped out, so the thrift industry represented here today is - for the
most part - an industry of survivors, survivors who had to struggle to contribute
significant premium income throughout the crisis years and were then required to
capitalize a new insurance fund, paying more than half of industry income in 1996.
Those experiences give you a unique perspective. No one knows the value of federal
deposit insurance more than you do. When the 1980s began, 590 thrifts were insured
by state-sponsored programs in Maryland, North Carolina, Ohio, and Pennsylvania. By
the close of the decade, all those programs had either collapsed or were abandoned. As
one after the other fell, the absolute certainty of federal insurance limited the damage.
At the same time, no one knows better than you do the consequences of neglecting the
latent flaws in a deposit insurance system. No thrift executive who lived through the
demise of the FSLIC would ever want to have that kind of experience again.
Since last spring, the FDIC has engaged in a comprehensive review of the deposit
insurance system, with an eye to reform, that is to say, to addressing its latent flaws.
I've talked with your counterparts in the commercial banking industry about this effort,
but, because you have a unique perspective - forged and tempered in the heat of crisis -
- I welcome the opportunity to discuss it with you today and to talk about why reform is
needed from a public policy perspective.
One reason reform is needed is so that we can merge the bank and thrift insurance
funds. We continue to endorse this as a fundamental safety and soundness goal. I think
By
Donna Tanoue
Chairman
Federal Deposit Insurance Corporation
Before
America's Community Bankers
Seattle, Washington
October 30, 2000
There is an old saying: "If it isn't broken, don't fix it," but we learned in the 1980s that
when it comes to federal deposit insurance, it would have been far better to address the
problems of the FSLIC (Federal Savings and Loan Insurance Corporation) before it was
broke. That lesson was an expensive one for the taxpayers and for you.
Many of you paid for the mistakes of your defunct counterparts throughout the 1980s
and long into the 1990s: billions and billions of dollars through assessments to the
FSLIC and through assessments to build up the Savings Association Insurance Fund
(SAIF). And in paying off Financing Corporation (FICO) bonds, you're still paying for
those mistakes today.
The 1980s were a tough time. During the thrift crisis, a third of the savings institutions in
the country were wiped out, so the thrift industry represented here today is - for the
most part - an industry of survivors, survivors who had to struggle to contribute
significant premium income throughout the crisis years and were then required to
capitalize a new insurance fund, paying more than half of industry income in 1996.
Those experiences give you a unique perspective. No one knows the value of federal
deposit insurance more than you do. When the 1980s began, 590 thrifts were insured
by state-sponsored programs in Maryland, North Carolina, Ohio, and Pennsylvania. By
the close of the decade, all those programs had either collapsed or were abandoned. As
one after the other fell, the absolute certainty of federal insurance limited the damage.
At the same time, no one knows better than you do the consequences of neglecting the
latent flaws in a deposit insurance system. No thrift executive who lived through the
demise of the FSLIC would ever want to have that kind of experience again.
Since last spring, the FDIC has engaged in a comprehensive review of the deposit
insurance system, with an eye to reform, that is to say, to addressing its latent flaws.
I've talked with your counterparts in the commercial banking industry about this effort,
but, because you have a unique perspective - forged and tempered in the heat of crisis -
- I welcome the opportunity to discuss it with you today and to talk about why reform is
needed from a public policy perspective.
One reason reform is needed is so that we can merge the bank and thrift insurance
funds. We continue to endorse this as a fundamental safety and soundness goal. I think
we all agree about that. Today, I want to talk to you about additional reasons for reform:
why it is needed in terms of fairness, why it is needed in terms of benefiting the
economy, and why it is needed in terms of benefiting the depositor.
First, fairness.
The current system allows fast-growing institutions to increase their insured deposits
without paying assessments into the insurance fund. That is patently unfair to the vast
majority of institutions that paid into the fund to capitalize it. Without fairness, any
system eventually would come under pressure, break down, or require major redesign
in the long run. What do I mean when I say fast growing? Consider the example of one
particular federal savings bank insured by SAIF. At mid-year 1996, it had insured
deposits of about $250 million. As of last June 30, it reported insured deposits of over
$3.1 billion. It increased insured deposits by 10 fold and didn't pay a penny for the
additional exposure. That's not fair, but that's not all.
Most newly chartered institutions pay nothing at all into the insurance funds. Nothing.
And if one of these newly chartered institutions fails, there is the possibility that FDIC
money will be spent resolving the failure, without the institutions ever paying one thin
dime into the fund.
That's patently unfair to the rest of you.
What degree of unfairness are we talking about here?
Consider a thrift that 15 years ago held about $500 million in assets and has grown into
a $1 billion institution today. Assuming a typical thrift balance sheet, in those 15 years, it
has paid somewhere in the neighborhood of $20 million to meet its deposit insurance
obligations, including payments to the Financing Corporation. On the other hand, the
fast-growing savings bank I mentioned earlier is only four years old, but it has $3 billion
in insured deposits and paid a total of $2 million to date for its deposit insurance
obligations, including payments to the Financing Corporation.
Fairness - to the vast majority of institutions - also means that we should price deposit
insurance so that premiums better reflect risk. Just like private sector insurers do. Those
of you who lived through the 1980s - survived the 1980s - know what it is like to pay for
the mistakes of high flying institutions. I want to emphasize this point.
When banks pay little in good times and a lot in bad times - after the failures have
occurred - more and more of the cost burden is shifted to the survivors. Does this make
sense? Or does it make more sense for institutions to pay steady premiums over time?
In addition, while the survivors paid for the thrift failures of the 1980s, the U.S. taxpayer
paid more. You have an interest - and I have an interest - in seeing that that doesn't
happen again. And, as you know, Congress shares our interest. That is why it passed
legislation nearly 10 years ago that made sure that the bank and thrift industries would
why it is needed in terms of fairness, why it is needed in terms of benefiting the
economy, and why it is needed in terms of benefiting the depositor.
First, fairness.
The current system allows fast-growing institutions to increase their insured deposits
without paying assessments into the insurance fund. That is patently unfair to the vast
majority of institutions that paid into the fund to capitalize it. Without fairness, any
system eventually would come under pressure, break down, or require major redesign
in the long run. What do I mean when I say fast growing? Consider the example of one
particular federal savings bank insured by SAIF. At mid-year 1996, it had insured
deposits of about $250 million. As of last June 30, it reported insured deposits of over
$3.1 billion. It increased insured deposits by 10 fold and didn't pay a penny for the
additional exposure. That's not fair, but that's not all.
Most newly chartered institutions pay nothing at all into the insurance funds. Nothing.
And if one of these newly chartered institutions fails, there is the possibility that FDIC
money will be spent resolving the failure, without the institutions ever paying one thin
dime into the fund.
That's patently unfair to the rest of you.
What degree of unfairness are we talking about here?
Consider a thrift that 15 years ago held about $500 million in assets and has grown into
a $1 billion institution today. Assuming a typical thrift balance sheet, in those 15 years, it
has paid somewhere in the neighborhood of $20 million to meet its deposit insurance
obligations, including payments to the Financing Corporation. On the other hand, the
fast-growing savings bank I mentioned earlier is only four years old, but it has $3 billion
in insured deposits and paid a total of $2 million to date for its deposit insurance
obligations, including payments to the Financing Corporation.
Fairness - to the vast majority of institutions - also means that we should price deposit
insurance so that premiums better reflect risk. Just like private sector insurers do. Those
of you who lived through the 1980s - survived the 1980s - know what it is like to pay for
the mistakes of high flying institutions. I want to emphasize this point.
When banks pay little in good times and a lot in bad times - after the failures have
occurred - more and more of the cost burden is shifted to the survivors. Does this make
sense? Or does it make more sense for institutions to pay steady premiums over time?
In addition, while the survivors paid for the thrift failures of the 1980s, the U.S. taxpayer
paid more. You have an interest - and I have an interest - in seeing that that doesn't
happen again. And, as you know, Congress shares our interest. That is why it passed
legislation nearly 10 years ago that made sure that the bank and thrift industries would