Ricki Tigert Helfer
Federal Deposit Insurance Corporation
New York State Bankers Association
New York, New York
February 2, 1995
Thank you and good afternoon.
I want to start with a fact that is sometimes overlooked in
public discussion: The money in the Bank Insurance Fund (BIF)
belongs to the banking industry. The FDIC manages the Fund in
trust. The Fund is the product of premium assessments on banks
and investment income from those assessments. We at the FDIC can
say with pride that no bank depositor has lost a penny of insured
money and that no U.S. taxpayer has paid a single cent for this
depositor protection. You -- the banking industry -- have paid
In the last several years, you have paid -- by any standard
-- a high price. From 1991 through 1994, you paid from $5 to $6
billion a year in assessments. Given this extraordinary inflow
of assessment income -- and record earnings in banking, rather
than continued record losses as some people predicted -- the BIF
will reach $1.25 in reserves for every $100 in deposits sometime
around mid-year. At recapitalization, the FDIC will have a $25
billion reserve to deal with unforeseen losses. Not too many
years ago, we thought that the fund would not hit the
Congressionally-mandated 1.25 ratio until the year 2002.
As a result of the very fast recapitalization of the Bank
Insurance Fund, relief from the burden of historically high
premiums is in sight for almost all banks -- and for nine-out-of-
ten banks, that relief is substantial. As you know, on Tuesday,
the FDIC Board agreed to propose for comment a new premium rate
schedule. Under that schedule, the best capitalized banks in the
system -- 9,780 banks out of 10,778 BIF-insured institutions, or
91 percent of the total -- would see their assessment rates
reduced from the current 23 basis points to 4 basis points. That
is an 83 percent reduction.
The next largest group -- those institutions that are well-
capitalized but reflect somewhat greater supervisory risk --
would see their premiums drop from 23 basis points to 7 basis
points. These BIF-insured institutions number 639 -- about 6
percent of the total.
In fact, eight of our nine assessment groups -- a range that
runs from best-capitalized, best managed to worst-capitalized,
worst-managed -- would experience some premium reduction. Only
the worst-capitalized, worst-managed institutions -- those in the
lowest group -- would see their assessments stay the same.
Today, they number 33 out of 10,778 institutions. Every other
bank would see a reduction in rates.
We estimate that -- as a result of lower assessment costs --
industry expenses will drop by more than $4.5 billion per year
and industry profits -- after taxes -- will rise more than $3
billion a year.
Let me be clear, this is no "windfall" for the industry --
quite the contrary! In the last four years, the need to
recapitalize the Bank Insurance Fund has made extraordinary
demands on your operating income. When the recapitalization of
BIF is accomplished, there will be no need to impose such
Insurance losses are projected to be $130 million during the
second half of 1995, and operating expenses are projected to be
approximately $260 million. Investment income is expected to
approach $500 million for the second half of the year, and it
alone should suffice to cover these obligations in that period.
That being the case, why did we propose a 4 basis point
premium for the best banks? What is the magic in 4 basis points?
There is no magic, but there is some reason, to set the rate
somewhere near 4 basis points for the best banks.
For about half of our existence, the effective assessment
rate for FDIC insurance was less than 4 basis points. Experience
showed that this was not enough. In the period 1981-93, the Bank
Insurance Fund's losses averaged 16 basis points.
Add to this experience several prudential concerns going
forward: one, banks face increasing competition; two, rapid
financial innovation increases risk-taking; and, three, interest
rates and other prices are increasingly variable, in part due to
the globalization of markets. Given these concerns, it is
unlikely that the loss experience in the banking industry will
revert to that which we knew before 1980. Indeed, the average
yearly loss as a percentage of deposits may be greater than the
60-year average, with large changes from year to year.
We believe that we need an average assessment rate of 4 to 5 basis points to maintain the BIF reserve ratio at 1.25. When you
take into account the higher premiums for riskier institutions,
we would experience an average assessment rate of 4.5 basis
points -- which would produce approximately $1.1 billion of
annual revenue in the short run.
Prudence also requires us to be able to change assessment
rates as conditions change. The FDIC Board now has the
discretion to set deposit insurance assessment rates semi-
annually. We are proposing to increase or decrease the
assessment schedule -- across the board -- by up to 5 basis
points without going through an additional notice and comment
Prudential concerns -- and the law -- require us to take
into account potential risks to the Bank Insurance Fund from
those institutions that are less well-managed and less well-
capitalized than the best. As you know, Congress instructed the
FDIC to set our insurance premiums to reflect the risk that
individual banks pose to the insurance fund. Strong banks should
not subsidize weak ones. Risk-based premiums are a way to
maintain a strong insurance fund that is prepared to handle
losses. It is also a way to influence behavior by rewarding
well-run institutions and encouraging weak ones to improve. As
the Fund nears recapitalization, we must decide just how great
the spread in premiums should be to reflect the risks of less
well-capitalized and less well-managed institutions and to
motivate the managements of those institutions to improve their
Today, there is an 8-basis-point spread between the premiums
the best banks pay and the premiums the worst banks pay. As you
know, there are 9 gradations in that range.
Bankers and banking scholars have criticized the 8 point
spread for being too narrow. In fact, when the FDIC Board
proposed the current risk-based premium system for comment in
1992, it asked whether the 8-basis-point system should be
widened. Three-out-of-four commenters on this issue favored a
wider spread. At that time, the health of the banking industry
did not permit a wider spread.
We are now proposing to widen the range to 27 basis points
-- a range from 4 basis points for the best banks to 31 basis
points for the worst banks. Note that 31 basis points is no
greater than the premium that the least well-capitalized and
least-well managed banks pay now.
Today, well-capitalized banks pay 23, 26, or 29 basis points
in premiums, depending upon the supervisory risks they present;
adequately capitalized banks pay 26, 29, or 30 basis points; and
under-capitalized banks pay 29, 30, or 31 basis points.
Under our proposal, well-capitalized banks would pay 4 basis
points, 7 basis points, or 21 basis points, depending upon the
risks they present; adequately-capitalized banks would pay 7
basis points, 14 basis points, or 28 basis points; and
undercapitalized banks would pay 14 basis points, 28 basis points
or 31 basis points. These premiums are large enough to be a real
incentive for banks to improve their condition. We crafted the
proposal carefully so that the risk-based premiums would not
cause more problems than they would resolve. All in all, this
range would allow the FDIC to function more like an insurance
company. You probably noted that the further away from the best-
capitalized, best-managed institutions you go, the larger the
differences between the rates become, with a compression of rates
in the two lowest categories. That approach makes sense: the
empirical evidence shows that the less capital and managerial
direction an institution has, the more likely it is to fail and
to cost the BIF money. It is a matter of actuarial fairness.
I want to discuss one other area of Bank Insurance Fund
financing with you: investment income. In the last several
years, with the emphasis on assessment income, the important
contribution of investment income to the growth of the Fund has
been forgotten. In fact, in the years 1934 to 1993, income from
investments and other sources totalled about 40 percent, while
income from assessments totalled about 60 percent. In the period
1981 through 1989, investment income totalled $14.5 billion,
while assessment income totalled just $13 billion. The Fund
enjoyed almost $2 billion in investment income in 1985 alone. In
light of the events of the late 1980s and early 1990s, the Fund's
investment income insulated the U.S. taxpayer from the costs of
bank failures. As interest rates rise and the Fund becomes more
liquid, our investment income is likely to grow.
Before I close, I want to discuss one other issue with you
briefly: replenishing the Savings Association Insurance Fund
(SAIF). As you know, the FDIC Board on Tuesday also proposed
retaining the existing assessment rate schedule for SAIF.
A substantial premium differential between BIF-insured and
SAIF-insured institutions is likely to have an impact -- and FDIC
Board members know that. The law, however, requires the FDIC to
set BIF and SAIF premium rates independently -- and that is what
we are doing. Media reports yesterday accurately described
reaction in the thrift industry.
I want to stress that the problem will not just go away.
The SAIF now has under $2 billion in reserves. It needs
approximately $7 billion to be fully capitalized. While the
thrift industry is now relatively healthy, keep in mind that the
law requires future thrift resolutions to be borne by the SAIF.
Also keep in mind that almost half of the revenue flowing
into SAIF is dedicated to paying off obligations left over from
an attempt to clean-up the thrift industry before the creation of
the Resolution Trust Corporation (RTC). That draw on the SAIF --
to service bonds issued by the Financing Corporation, known as
"FICO" bonds -- is about $780 million a year. If you have ever
tried to fill a bucket with a big hole in the side, you see the
problem here. This draw on SAIF is the major reason the SAIF is
not likely to be recapitalized until 2002.
The insurance system for the savings and loan industry may
no longer be broken, but it still needs fixing.
In medieval Europe, merchants sometimes adopted a style of
living considerably below the style they could afford. The
reason was not the habit of thrift -- the reason was to avoid
drawing the attention of the count, the duke, and the king to the
merchant's wealth -- that is, to avoid being taxed. Governments
in all places and at all time have needs that must be funded.
Banking has repeatedly reported record earnings. Banking
has an insurance fund projected to reach $25 billion in a matter
of months. Banking is looking at a proposed 83 percent reduction
in insurance premiums, which, as I noted before, can translate
into more than $3 billion in after tax profit.
Other people -- especially your counterparts in the thrift
industry -- are not unaware of your good fortune.
If I were a banker, I would not close my eyes to the SAIF
problems and hope they magically disappear. I would involve
myself in working with all the interested parties to make sure
that the inevitable solution is both effective and fair.
In closing, every new Chairman of the Federal Deposit
Insurance Corporation looks forward to addressing the New York
State Bankers for the first time. The insurance of bank
obligations began here with the first state-sponsored insurance
plan in 1829. The creation of the New York plan was a
recognition by bankers here that they may have been in different
boats, but they were all afloat on the same lake, and that
whatever affected one affected all. It took more than a century
-- and a banking catastrophe -- for bankers throughout the rest
of the country to come to the same conclusion -- but New Yorkers
then, like New Yorkers now, took pride in being first.
For the last four years, FDIC insurance premiums have been
major operating expenses for the industry. For the best banks,
that will soon no longer be true. These banks will be able to
compete more effectively in the domestic and global financial
marketplaces -- and that will benefit U.S. businesses, the U.S.
economy and all of us.
I am sure that New York banks will be among the first to
take advantage of the new competitive opportunities that will
arise. As you take advantage of these opportunities, I urge you
to make use of controls that will allow you to monitor and limit,
where necessary, your risks. The FDIC wants to work with you to
assure the health of your institutions, the continued soundness
of the Bank Insurance Fund, and the strength of the financial
New Yorkers always seem to take advantage of business
opportunities. There was a little story in the newspaper not too
long ago about a teacher in a grammar school upstate who told the
class that "Anybody in this room could grow up and become
President of the United States. You all have a chance."
Half the students in the class tried to sell the teacher an
option on theirs.