Remarks by
Donna Tanoue
Chairman
Federal Deposit Insurance Corporation
Before the
Annual Convention
Of the
Independent Community Bankers of America
San Antonio
March 7, 2000
There is an old adage that makes a lot of sense: Fix your roof when the sun shines. The
sun is shining on our deposit insurance system. The funds are well capitalized, almost
all banks pay nothing for their insurance premiums, and losses to the fund for the
immediate future are projected to be small.
While reaching for the sunblock, however, we need to think about what we can do to
ensure that the funds can weather the next storm - because another storm will come
eventually.
Why is that important?
From the public's point of view, federal deposit insurance is a simple matter. Bank
customers in the United States know that their bank deposits are insured. They can rest
assured that their insured savings are safe.
Because depositors do not have to worry about the safety of their money, they do not
feel compelled to rush to the bank in response to the news - or rumor - that their bank is
troubled financially. And in preventing banking panics, deposit insurance helps to keep
the payments system operating.
In recent years, we have seen financial crises in Asia and Latin America - crises that, in
part, have led at least 31 countries to institute new explicit deposit insurance programs
during the 1990s. Today, 68 countries have such systems. The benefits of deposit
insurance are appreciated worldwide.
Deposit insurance is a simple idea - with profound results.
You in the industry -- and we at the FDIC - know, however, that deposit insurance raises
complicated issues -- and it requires a balancing of competing concerns. First and most
important, the deposit insurance system must help maintain public confidence while
shielding taxpayers from the costs that can arise from deposit insurance. Second,
deposit insurance should help the industry through bad times - that is what insurance
companies do. Next, deposit insurance must not alter the rational development of the
industry over time. Finally, the system must be fair. These concerns are fairly easy to
state, but difficult to address.
Donna Tanoue
Chairman
Federal Deposit Insurance Corporation
Before the
Annual Convention
Of the
Independent Community Bankers of America
San Antonio
March 7, 2000
There is an old adage that makes a lot of sense: Fix your roof when the sun shines. The
sun is shining on our deposit insurance system. The funds are well capitalized, almost
all banks pay nothing for their insurance premiums, and losses to the fund for the
immediate future are projected to be small.
While reaching for the sunblock, however, we need to think about what we can do to
ensure that the funds can weather the next storm - because another storm will come
eventually.
Why is that important?
From the public's point of view, federal deposit insurance is a simple matter. Bank
customers in the United States know that their bank deposits are insured. They can rest
assured that their insured savings are safe.
Because depositors do not have to worry about the safety of their money, they do not
feel compelled to rush to the bank in response to the news - or rumor - that their bank is
troubled financially. And in preventing banking panics, deposit insurance helps to keep
the payments system operating.
In recent years, we have seen financial crises in Asia and Latin America - crises that, in
part, have led at least 31 countries to institute new explicit deposit insurance programs
during the 1990s. Today, 68 countries have such systems. The benefits of deposit
insurance are appreciated worldwide.
Deposit insurance is a simple idea - with profound results.
You in the industry -- and we at the FDIC - know, however, that deposit insurance raises
complicated issues -- and it requires a balancing of competing concerns. First and most
important, the deposit insurance system must help maintain public confidence while
shielding taxpayers from the costs that can arise from deposit insurance. Second,
deposit insurance should help the industry through bad times - that is what insurance
companies do. Next, deposit insurance must not alter the rational development of the
industry over time. Finally, the system must be fair. These concerns are fairly easy to
state, but difficult to address.
We at the FDIC are undertaking a comprehensive review of our deposit insurance
system. I want to take a hard look at certain issues, including: (1) Does the deposit
insurance system create the right incentives? (2) Is the system fair? (3) What is the right
coverage level?
The country - the economy - the financial system - have changed significantly in the
almost 70 years since federal deposit insurance was created.
The security that deposit insurance provides the individual - and the stability that it
provides the financial system and the economy - have not changed.
But its effect -- and even its role - are arguably different in our world than they were a
lifetime ago.
Given the changes underway in our financial system, where hundreds of billions of
dollars can shift almost overnight, and where many Americans do their personal
business on-line, a reexamination of deposit insurance has never been more timely.
Let's look at some current issues in deposit insurance this morning - issues that will be a
part of our reexamination - beginning with the one that lies at the heart of running an
insurance operation, which is how we price deposit insurance.
On pricing, we need to look, in particular, at whether the current system unnecessarily
allows some banks to create more exposure for the insurance funds without cost to the
banks themselves. If the level of overall insured funds grows to the point that the
reserve ratio falls below 1.25 percent, all banks must pay premiums. And we need to
look at whether the relatively blunt one-size-fits-all approach to risk-based premiums is
appropriate.
At present, new institutions can enter the deposit insurance system without contributing
a penny to it. And most existing institutions can grow their deposits without incurring any
additional costs for deposit insurance.
The Bank Insurance Fund was fully capitalized in 1995. The Savings Association
Insurance Fund was fully capitalized in 1996. Since they were fully capitalized, 814 new
banks and thrifts have been chartered. Insured deposits held by this group of institutions
as of year end 1999 totaled almost $44 billion. Given this amount of growth in coverage,
the amount of money required to maintain the reserve ratio of the funds at 1.25 percent
would be about $550 million.
Moreover, some institutions have grown rapidly since the capitalization of the insurance
funds or may grow rapidly in the future. In many cases, rapid growth simply reflects an
institution's success in competing for new business. But, as recent experience suggests,
rapid growth may also indicate greater risk to the insurance funds.
system. I want to take a hard look at certain issues, including: (1) Does the deposit
insurance system create the right incentives? (2) Is the system fair? (3) What is the right
coverage level?
The country - the economy - the financial system - have changed significantly in the
almost 70 years since federal deposit insurance was created.
The security that deposit insurance provides the individual - and the stability that it
provides the financial system and the economy - have not changed.
But its effect -- and even its role - are arguably different in our world than they were a
lifetime ago.
Given the changes underway in our financial system, where hundreds of billions of
dollars can shift almost overnight, and where many Americans do their personal
business on-line, a reexamination of deposit insurance has never been more timely.
Let's look at some current issues in deposit insurance this morning - issues that will be a
part of our reexamination - beginning with the one that lies at the heart of running an
insurance operation, which is how we price deposit insurance.
On pricing, we need to look, in particular, at whether the current system unnecessarily
allows some banks to create more exposure for the insurance funds without cost to the
banks themselves. If the level of overall insured funds grows to the point that the
reserve ratio falls below 1.25 percent, all banks must pay premiums. And we need to
look at whether the relatively blunt one-size-fits-all approach to risk-based premiums is
appropriate.
At present, new institutions can enter the deposit insurance system without contributing
a penny to it. And most existing institutions can grow their deposits without incurring any
additional costs for deposit insurance.
The Bank Insurance Fund was fully capitalized in 1995. The Savings Association
Insurance Fund was fully capitalized in 1996. Since they were fully capitalized, 814 new
banks and thrifts have been chartered. Insured deposits held by this group of institutions
as of year end 1999 totaled almost $44 billion. Given this amount of growth in coverage,
the amount of money required to maintain the reserve ratio of the funds at 1.25 percent
would be about $550 million.
Moreover, some institutions have grown rapidly since the capitalization of the insurance
funds or may grow rapidly in the future. In many cases, rapid growth simply reflects an
institution's success in competing for new business. But, as recent experience suggests,
rapid growth may also indicate greater risk to the insurance funds.