Oral Statement

Of

John D. Hawke, Jr.

Comptroller of the Currency

Before the

**Senate Committee on Banking, Housing and Urban Affairs**

**April 23, 2002**

Chairman Sarbanes and Members of the Committee, our position on the
major issues in deposit insurance reform is essentially the same as
those expressed by Chairman Greenspan and Secretary Fisher, and I will
not burden the Committee with repetition on those points. My written
statement elaborates on these issues.

I would like to use this time to focus on an issue that is of major
consequence to the OCC \-- the need to reform the way bank supervision
is funded. This issue is of direct relevance to deposit insurance reform
for a number of reasons:

First, it relates to the way the deposit insurance funds are used to
absorb the costs of supervising insured banks that are not members of
the Federal Reserve System. The question of deposit insurance reform
necessarily involves consideration of how large the funds should be, and
that question compels consideration of how the funds are and might be
used in the future.

Second, some of the proposals for deposit insurance reform have held out
the prospect that there might be rebates made from the fund when it
exceeds a certain size, or credits against future premium liabilities
given under some circumstances for banks that have paid into the funds
in times past. We believe that any consideration of rebates or credits
must take into account the long-standing inequity that national banks
have suffered by reason of the present use of the funds to finance the
costs of state bank supervision by the FDIC.

While all insured banks, both state and national, have in years past
paid premiums into the funds, and are obligated to pay premiums in the
future sufficient to maintain the insurance funds at the designated
reserve ratio, state banks receive a special benefit from the funds that
is not afforded national banks. Each year the funds \-- which are about
\$42 billion in size \-- are tapped to pay the FDIC's costs of
supervising state banks that are not members of the Federal Reserve
System. I should add that State banks that [are]{.underline} Fed members
receive supervision from the Federal Reserve, and the Fed's costs of
providing such supervision are charged against the System's earnings \--
which last year were about \$32 billion.

In 2001, the FDIC and the Fed together spent over \$900 million on state
bank supervision, yet none of these costs were passed on to the banks
they supervise. To be sure, state banks do pay modest direct assessments
to their state supervisors, but the supervision provided by the states
is a relatively small component of the overall cost of supervision of
state banks. Thus, in 2001, we estimate that state banks in the
aggregate paid only \$237 million in state assessments, or about 22% of
their total cost of supervision.

In stark contrast, national banks pay 100% of the costs of their
supervision \-- in direct assessments that must be levied by the OCC. In
2001, those payments totaled more than over \$400 million.

As a result of the decisions by the Fed and the FDIC to absorb their
costs of supervising state banks, there is a continuing incentive for
national banks to convert to state charters to realize the lower costs
that are thus made available. Indeed, state supervisors aggressively
proselytize for such conversions, heavily exploiting fee disparity as a
major part of their sales pitch to national banks.

The unfairness of this disparity is underscored by two facts: First, the
supervisory functions performed by the Fed and the FDIC for state banks
are exactly the same as those performed by the OCC for national banks.
There is virtually no function we perform for national banks that is not
replicated for state banks at our sister agencies. Second, because
national banks account for about 55% of the amount presently in the bank
insurance fund, they are in practical effect picking up more than half
of the FDIC's costs of supervising state banks

Ending this anomaly is not just a matter of fairness to national banks.
It is a necessary component of allocating the costs and benefits of
deposit insurance in an equitable and efficient manner among insured
banks \-- and we respectfully submit that this issue should be
considered in the context of any legislation that would bear on the
determination of how large the fund should be and how rebates and
credits are calculated.

One approach to the resolution of this problem that we have formulated
is to use the [earnings]{.underline} on the FDIC's insurance funds to
cover the costs of both state and national bank supervision. Today, with
combined reserves of BIF and SAIF at about \$42 billion, the interest
income earned by the funds of \$2.5 billion per year exceeds by a large
margin the combined supervisory costs of the FDIC, OCC, OTS, and all
fifty state supervisory agencies \-- and, of course, the \$525 million
that the FDIC spends on state bank supervision is already a charge
against the funds.

Under our proposal, which is spelled out in more detail in an OCC white
paper, a nondiscretionary formula would be devised that would operate
automatically to provide the various supervisory agencies (both federal
and state) with a baseline amount reflecting their current levels of
expenditures on supervision. The allocations would be adjusted each year
under the formula to reflect changes in the composition and risk profile
of the banks. In the event the earning on the funds were insufficient to
cover the allocations called for by the formula, the various agencies
would have to resort to their assessment authority to make up any
shortfall \-- but we calculate that it would take a very significant
reduction in the size of the funds to reach this point.

An arrangement such as this would not only remedy the inequity to
national banks that exists today, but would add new vitality to the dual
banking system by creating a regulatory environment in which banks
choose their charters on the basis of the quality of supervision and the
suitability of the charter for their business objectives, rather than on
the basis of a disparity in supervisory assessment attributable solely
to the fact that the preponderance of the costs of supervising state
banks are absorbed by the federal agencies responsible for the major
portion of that supervision.

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