Risk-Based Assessments Can Be Fair to Banks.(Brief Article)

Mr. Powell, chairman of the FDIC, advocated risk-based deposit insurance premiums in a recent speech made in North Carolina. This is an excerpt of his remarks.

First, there is the question of our fund structure. We have two deposit insurance funds, the Bank Insurance Fund and the Savings Association Insurance Fund. With industry consolidation over the past decade or so, the distinction between the two has become blurred. Further, there is the very real possibility that banks could face premiums while the thrift across the street does not - or vice versa. To solve these problems once and for all, the FDIC has recommended these funds be merged into one Deposit Insurance Fund.

Now I'm going to talk about some of the other important problems reform would solve. Today's system is largely a reaction against the high premiums we charged in the late 1980s and early 1990s to rescue the industry from the bank and thrift crisis. Once the crisis had passed, Congress prevented the FDIC from charging the vast majority of banks and thrifts for their deposit insurance during good times.

However, when the funds fall below certain levels - usually during tough economic times - the FDIC must charge steep premiums on the industry. I'm a former banker. Believe me, it doesn't make any sense to increase the financial burden on banks and thrifts when they are least able to bear it and limit credit availability when the economy most needs it. This is directly contrary to the purpose of deposit insurance.

These statutes also prevent the FDIC from charging appropriately for risk during good economic times. Right now, even though every bank poses some insurance risk, 92% of them pay nothing for deposit insurance. There are two things wrong with this. First, the premiums that most banks pay don't really depend on risk. This encourages some banks to pursue their riskier lines of business, something my new friends in Washington call moral hazard. It also means that safe banks unnecessarily subsidize risky banks. That's not fair.

A second problem is that new deposits enter the system without paying. Essentially, the banks that were around in the early 1990s endowed the funds, and newcomers are not asked to pay the ongoing costs of the deposit insurance system. More than 900 new banks and thrifts have never paid for deposit insurance. I know this firsthand because I chartered a bank in Texas in the late 1990s and we never paid a dime. Others have grown significantly without ...