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24–397 PDF 2005

H.R. 1185—THE FINANCIAL DEPOSIT

INSURANCE REFORM ACT OF 2005

HEARING

BEFORE THE

SUBCOMMITTEE ON 

FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MARCH 17, 2005

Printed for the use of the Committee on Financial Services

Serial No. 109–10

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SPENCER BACHUS, Alabama, Chairman

WALTER B. JONES, JR., North Carolina, 

Vice Chairman 

RICHARD H. BAKER, Louisiana 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SUE W. KELLY, New York 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

JUDY BIGGERT, Illinois 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

RICK RENZI, Arizona 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

MICHAEL G. OXLEY, Ohio 

BERNARD SANDERS, Vermont 

CAROLYN B. MALONEY, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

LUIS V. GUTIERREZ, Illinois 

DENNIS MOORE, Kansas 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

AL GREEN, Texas 

GWEN MOORE, Wisconsin 

WM. LACY CLAY, Missouri 

JIM MATHESON, Utah 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

March 17, 2005 ................................................................................................. 1

Appendix: 

March 17, 2005 ................................................................................................. 25

WITNESS 

THURSDAY, MARCH 17, 2005

Powell, Hon. Donald E., Chairman, Federal Deposit Insurance Corporation .... 6

APPENDIX 

Prepared statements: 

Oxley, Hon. Michael G. .................................................................................... 26

Bachus, Hon. Spencer ...................................................................................... 28

Gillmor, Hon. Paul E. ....................................................................................... 32

Hinojosa, Hon. Rube ́n ....................................................................................... 34

Royce, Hon. Edward R. .................................................................................... 36

Powell, Hon. Donald E. .................................................................................... 38

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Powell, Hon. Donald E.: 

Written response to questions from Hon. Gregory W. Meeks ....................... 48

(1)

H.R. 1185—THE FINANCIAL DEPOSIT 

INSURANCE REFORM ACT OF 2005

Thursday, March 17, 2005

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to call, at 9:34 a.m., in Room 

2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the subcommittee] presiding. 

Present: Representatives Bachus, Royce, Lucas, Kelly, Tiberi, 

Hensarling, Pearce, Neugebauer, Price, McHenry, Sanders, Meeks, 

Gutierrez, Moore of Kansas, Hooley, Hinojosa, Baca, Green, Moore 

of Wisconsin, and Clay. 

Mr. BACHUS. [Presiding.] Good morning. The subcommittee will 

come to order. 

Today’s hearing is on H.R. 1185, the Federal Deposit Insurance 

Reform Act of 2005. I want to first welcome FDIC Chairman Don 

Powell and express my appreciation for all the hard work that you 

have done on this issue and for your leadership at the FDIC. 

You have done an incredibly superb job there. You are a credit 

to the administration and just one more example of the good people 

that George W. Bush, our President, has placed in the administration. I always enjoy listening to your testimony and look forward 

to it today. 

I normally do not have a long opening statement, but since there 

are so few of us, I am going to put some things in the record. Deposit insurance reform has been thoroughly discussed and debated 

over several years. 

During both the 107th Congress and the 108th Congress, we 

have introduced comprehensive deposit insurance reform legislation. The legislation was a byproduct of recommendations made by 

the FDIC in early 2001, a series of hearings held in the subcommittee on proposed reform to the Federal deposit insurance system, and broad-based bipartisan cooperation. 

H.R. 3717 passed the House in the 107th Congress by a vote of 

408 to 18. H.R. 522 passed the House in the 108th Congress by a 

vote of 411 to 11. Congresswoman Hooley and I introduced this 

same legislation last week with Chairman Oxley and Ranking 

Member Frank. There are currently 32 sponsors. I look forward to 

working on this legislation in the same cooperative vein as last 

year with Ranking Member Sanders and Mr. Frank. 

2

Federal deposit insurance has been a hallmark of our nation’s 

banking system for 70 years. The reforms made by this legislation 

will ensure that the system that has served American savers and 

depositors so well will continue to do so for future generations. 

What does the legislation do? 

First, it merges the separate insurance funds that currently 

apply to deposits held by banks on the one hand and savings associations on the other, creating a stronger and more stable fund that 

will benefit banks and thrifts alike. 

Second, the bill makes a number of changes designed to address 

the pro-cyclical bias of the current system, which results in sharply 

higher premiums being assessed at down-points in the business 

cycle when banks can least afford to pay them and when funds are 

most needed for lending to spur economic growth. By giving the 

FDIC greater discretion to manage the insurance funds, based on 

industry conditions and economic trends, the legislation will ease 

volatility in the banking system and facilitate recovery from economic downturns. 

Third, the legislation includes modest increases in the amount of 

coverage available to depositors. Like other government programs 

that form part of the economic safety net for American families, deposit insurance should be periodically adjusted for inflation to ensure that its value does not erode over time. The system has gone 

25 years without any such adjustment, the longest period in its history. The modest increases that are provided in our bill are critical 

if deposit insurance is to remain relevant. The alternative is to 

simply let deposit insurance wither on the vine, which is an unacceptable outcome for millions of Americans who depend upon it to 

protect their savings. 

Much has been made of the fact that the Treasury Department 

and Federal Reserve oppose increasing deposit insurance coverage 

levels. What gets lost in the single-minded focus on coverage, however, is that the Treasury, the Fed and every other Federal banking agency broadly support all of the other key components of the 

reform package, including merging the funds, eliminating the current system’s bias, and addressing the so-called ‘‘free rider’’ problem by requiring that large brokerage firms that sweep customer 

funds from uninsured accounts into insured deposits will have to 

start paying their fair share of premiums. 

I remain hopeful that we can work with the Senate and the administration to resolve the coverage issue and get deposit insurance reform passed this year. All of us have heard from community 

bankers in our districts about the challenges they face daily in 

competing for deposits with large money-center banks that are perceived by the market rightly or wrongly as being too big to fail. 

By strengthening the deposit insurance system, H.R. 1185 will 

help small neighborhood-based financial institutions across the 

country, and particularly in rural America, continue to play an important role in financial economic development. 

The deposits that community banks are able to attract through 

the Federal deposit insurance guarantee are cycled back into those 

local communities in the form of consumer and small business 

loans, community development projects and home mortgages. If 

3

this source of funds dries up, it would have devastating effects for 

the economic vitality of our smaller cities and towns. 

Put simply, H.R. 1185 will promote the stability and soundness 

of the banking system. Moreover, it will provide assurance to working families, retirees and others who place their hard-earned savings in U.S. banks, thrifts and credit unions, that their FDIC-insured deposits are safe and secure. A pledge long made should not 

be reduced by inflation. 

In closing, I want to thank Chairman Oxley, Mr. Sanders and 

Mr. Frank for working with me to develop this legislation, and 

thank all 32 cosponsors for making deposit insurance reform one 

of the committee’s top legislative priorities this year. 

I look forward to working with Chairman Oxley, with Congresswoman Hooley, Ranking Members Frank and Sanders and other 

members of the committee on this important issue. 

The Chair now recognizes the Ranking Member of the subcommittee, Mr. Sanders, for his opening statement. 

Mr. SANDERS. Thank you very much, Mr. Chairman. 

Mr. Powell, thank you very much for being with us today. I am 

going to have to apologize early. I have not figured out how to be 

at two hearings at the same time, so I am going to have to leave 

earlier than I would have wanted. 

Mr. Chairman, since this is the first hearing in our subcommittee 

during the 109th Congress, let me begin by expressing the hope 

that we can work together in a nonpartisan way to address some 

of the important issues that fall within our subcommittee’s jurisdiction. 

For example, I am proud to be an original cosponsor of your legislation to protect credit unions. That is an important issue. America’s credit unions are one of the most vital, one of the most democratic institutions in America, and it is important that we do everything that we can to protect them. 

Mr. Chairman, I also look forward to working with you to provide 

financial incentives to expand employee ownership throughout the 

country. I hope Mr. Powell takes some note of that as well. 

I thought, in fact, that one of the more interesting hearings that 

we held last year dealt with the possibility of expanding employee 

ownership in this country. I look forward to working with you on 

the issue. 

The fact is, there are already in Vermont and around this country many small-and medium-size businesses that are owned by the 

workers themselves, and those companies are not about to move to 

China or to Mexico. They are going to stay in their communities 

and do their best to provide good-paying jobs to the people in those 

communities. I hope that we can provide financial incentives to 

those ESOP efforts that are under way. 

In addition, Mr. Chairman, I was pleased that we could work together in the last Congress to end what the banks refer to as ‘‘universal default’’ or what I refer to as the credit card bait-and-switch 

issue. I do not know how much familiarity Mr. Powell has with 

that issue, but it is to my mind a growing problem where. 

And I am sure you have, Mr. Powell, received offers from credit 

card companies guaranteeing you zero interest, but if you read the 

fine print you find out that you could end up paying 28 percent or 

4

30 percent interest. This is an alarming problem that is impacting 

millions of Americans. 

I hope, Mr. Chairman, that in a nonpartisan way that we can 

move forward together. I do not think you want to see the American people ripped off, and you know that people are paying the 

amount of their loan over many times just in outrageously high interest rates. I hope that we could work together on that. 

So there are a lot of important issues facing us, and I think the 

American people are looking forward to this committee standing up 

for consumers. It is no great secret that large banks and credit card 

companies exert an enormous amount of influence over this Congress. I hope that this committee will be representing consumers. 

I thank you very much, Mr. Chairman. 

Mr. BACHUS. I thank the Ranking Member. As you know, you 

and I worked as partners together to try to end the more egregious 

practice of bait and switch. I think it is something that unites Republicans and Democrats, poor, middle-class and affluent citizens. 

It is something that enrages us all and is, I believe, something that 

is a practice that is due more regulation. Thank you. 

Are there other members? 

I would like to recognize Ms. Hooley as the sponsor of the bill. 

Ms. HOOLEY. Thank you, Mr. Chair, for calling this hearing 

today. I am happy to be working with you, Chairman Oxley and 

Ranking Member Frank in introducing the Federal Deposit Insurance Reform Act of 2005. 

This is an effort that I truly believe continues the notable bipartisan working style of this committee and has allowed the attraction of a broad array of cosponsors. The legislation will give Americans an even more stable and secure insurance system for deposits 

in their banks, thrifts and credit unions. 

These needed reforms will bring the deposit insurance system 

into the 21st century by enhancing the value of our insured deposits, improving retirement security for all Americans, and ensuring 

that the value, cost and benefit of deposit insurance is shared 

equally. 

I look forward to hearing the views that the panel before us has 

on this legislation. I also look forward to hearing your views on 

other pressing issues facing our financial institutions. 

I thank the panel for being here, and I look forward to your testimony. 

Thank you. 

Mr. BACHUS. Thank you. 

And now I go to another cosponsor of the bill, Mr. Lucas, for any 

comments you have. 

Mr. LUCAS. I have no statement. 

Mr. BACHUS. Okay, if not, Mr. Hinojosa? I appreciate your participation. 

Mr. HINOJOSA. Chairman Bachus and Ranking Member Sanders, 

I want to express my sincere appreciation to both of you for holding 

this very important hearing today. 

I especially want to thank you, Chairman Bachus, for introducing H.R. 1185, the ‘‘Deposit Insurance Reform Act of 2005’’ that 

we are considering here today. I look forward to cosponsoring this 

5

legislation every Congress, but I hope that the winds are with us 

this time and the bill will finally become law this year. 

As most of us here are aware, the full faith and credit of the 

United States stands behind trillions of insured deposits at banks 

and savings associations. This insurance guards depositers’ accounts up to $100,000, providing stability to banks and to the economy since its inception in the 1930s. 

From the time I was appointed to this prestigious committee, we 

have been examining many proposals for changes to the Federal 

deposit insurance system for banks and savings associations and 

the share insurance program for credit unions. 

Under your guidance, Chairman Bachus, we have considered legislation with provisions to balance the financial condition of insured institutions to ensure the financial strength of the insurance 

funds, and provide competitive equality among participating institutions, including Federally insured credit unions. 

In the 108th Congress, this subcommittee reexamined all these 

issues. H.R. 522, the Federal Deposit Insurance Reform Act of 

2003, sought to restructure the Federal Deposit Insurance Corporation, change the FDIC’s pricing of insurance, and increase basic 

per-account coverage up to $130,000, indexed to inflation. 

It also provided increased insurance coverage of municipal deposits. H.R. 522 passed this committee with the Oxley-Frank manager’s amendment and passed the House on April 2, 2003, but the 

Senate failed to act on that bill, and it died in the 108th Congress. 

I was proud to have been a cosponsor of H.R. 522. 

While I am pleased to learn that the current Administration continues to support deposit insurance reform similar to that proposed 

in earlier Congresses, I am disheartened by its continued opposition to raising coverage of accounts to $130,000. Possibly Mr. Powell can shed light on all this. Our financial institutions need this 

increase in coverage, especially our community banks. 

During one of the many hearings on deposit insurance reform 

over the years, Chairman Alan Greenspan of the Federal Reserve 

contended that there will always be a niche for community banks, 

thus negating the need for increased deposit insurance coverage. I 

believe that he is mistaken and that our community banks are currently at a competitive disadvantage. 

Consequently, I believe that H.R. 1185 will help create parity 

across the financial institutions landscape, and as stated earlier, 

hope that this bill will finally become law this year. 

Having said that, Mr. Chairman, I yield back the remainder of 

my time. 

Mr. BACHUS. Thank you. 

I have been told that no members of the majority wish to speak. 

Is that correct? Is there anyone else that wishes to make an opening statement, Mr. Clay or Ms. Moore? No, okay. 

At this time, if there are no further opening statements, we will 

recognize Chairman Powell for his statement. 

6

STATEMENT OF HON. DONALD E. POWELL, CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. POWELL. Thank you, Chairman Bachus, Representative 

Sanders and members of the subcommittee. It is a pleasure to appear before you this morning to discuss deposit insurance reform. 

Deposit insurance reform is the top priority of the FDIC this 

year. We appreciate the committee making it an early priority as 

well. I would particularly like to thank Chairman Bachus and the 

other sponsors of H.R. 1185 for providing leadership on this issue 

and introducing deposit insurance reform legislation early in the 

109th Congress. 

An effective deposit insurance system contributes to America’s 

economic and financial stability by protecting depositors. For more 

than three generations, our deposit insurance system has played a 

key role in maintaining public confidence and provided a safe place 

for savings and retirement funds. 

While the current system is not in need of radical overhaul, flaws 

in the system could actually prolong an economic downturn, rather 

than promote the conditions necessary for recovery. These flaws 

can be corrected only by legislation and the need for that legislation increases with each passing year. 

Ensuring that Americans are able to save for retirement, education or medical care has always been important. It is crucial that 

people continue to feel secure in placing their savings in accounts 

at insured depository institutions. 

A strong deposit insurance system is crucial to maintaining the 

safety of these accounts and deposit insurance reform legislation as 

set forth in H.R. 1185 would enable the FDIC to keep the system 

strong and viable for generations to come. 

Deposit insurance reform is not about increasing assessment revenue from the industry or relieving the industry of its obligation 

to fund the deposit insurance system. Rather, the goal of reform is 

to distribute the assessment burden more evenly over time and 

more fairly across insured institutions. This is good for depositors, 

good for the industry and good for the overall economy. 

Today, I want to emphasize three critical elements of deposit insurance reform: one, merging the Bank Insurance Fund and Savings Association Insurance Fund; two, improving the FDIC’s ability 

to manage the merged fund; and three, effectively pricing premiums to reflect risk. 

First, merging the funds. As most of you know, the banking and 

thrift crisis of the last decade left the FDIC administering two deposit insurance funds, one for bank deposits and one for thrift deposits. But now 10 years later, industry trends have left no meaningful distinction between the two. We should merge the funds into 

a single deposit insurance fund that would be stronger and will 

treat all deposits the same. 

Second, improving the FDIC’s ability to manage the merged 

fund. The FDIC is prohibited from charging any premiums to most 

banks in good economic times. That means that during difficult 

economic times, the FDIC is forced by law to levy steep premiums 

on the industry. Doing so would further stress our country’s financial institutions at the very time that, as a matter of economic neVerDate 0ct 09 2002 10:20 Nov 18, 2005 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 G:\DOCS\24397.TXT FIN1 PsN: MICAH
7

cessity, we would be asking banks to strengthen their balance 

sheets and extend credit. 

Third, effectively pricing premiums to reflect risk. Under current 

law, safer banks are forced to subsidize riskier banks. This is unfair. Just as unfair is the fact that new deposits are able to enter 

the system in good times without paying for deposit insurance. Almost 1,100 banks have entered the system since 1996 without paying any premiums for Federal deposit insurance. 

We have an opportunity, and in my view a responsibility, to the 

American people to remedy these problems. The FDIC recommends 

the following: eliminating the hard targets and triggers in the current law; allowing the FDIC to manage the size of the insurance 

fund within a range; permitting the FDIC to charge steady riskbased premiums to allow the insurance fund to build up in good 

times and to be drawn down during bad times; permitting the 

FDIC to charge all insured institutions appropriately for risk at all 

times so that safer banks do not necessarily subsidize riskier 

banks. 

These methods for pricing and managing financial risk are best 

practices in the private sector and we would like to manage our 

system much the same way. 

Please note that an inability to implement such fundamental insurance principles is not merely a theoretical problem. The Pension 

Benefit Guaranty Corporation, for example, is unable to properly 

price its premiums for risk and this inability has contributed to its 

current deficit of over $23 billion. 

With some flexibility in fund management, we can alleviate potential problems, while strengthening our ability to deal with any 

future crisis. 

However, we are not asking for absolute discretion. We recognize 

the need for accountability and will work with you to ensure a system that provides it. The reforms I have just described are critical 

to improving the deposit insurance system. 

Another issue that has been the subject of much discussion is deposit insurance coverage. Some have said that coverage should be 

higher, some lower. Our position is simply to maintain its value 

through indexing. 

Again, we appreciate the committee’s leadership on deposit insurance reform and look forward to working with you to get this 

job done this year. I believe that H.R. 1185 is consistent with the 

spirit of the FDIC’s recommendations. Without a doubt, it would 

create a system that is significantly better than the existing system. 

I look forward to your comments and questions. 

Thank you. 

[The prepared statement of Hon. Donald E. Powell can be found 

on page 38 in the appendix.] 

Mr. BACHUS. Thank you, Chairman. 

I first want to say I am pleased to hear you reaffirm in your testimony the FDIC’s support for a provision in this legislation that 

provides for indexing coverage levels for inflation as a way of preserving the value of the coverage for depositors. 

8

When people argue against indexing, aren’t they really arguing 

for the elimination over time of deposit insurance, since over time 

inflation will completely erode the value of the coverage? 

Mr. POWELL. Yes, to some extent I think they are, Chairman 

Bachus. As you know, with inflation, the $100,000 has eroded over 

the past 25 years. 

So our position at the FDIC is simply to address that issue with 

indexing. That way, we can put that issue to the side and the coverage can keep up with inflation. 

Mr. BACHUS. I appreciate that. 

I will not ask you to comment on this, but I have found in talking to different bankers and members of the public that sometimes 

the larger banks, there is a perception that they are too big to fail 

and the government will step in and save them, but some of your 

community banks and smaller banks I think are disadvantaged, 

particularly by not raising coverage. But I am not going to ask you 

to jump into that fray. 

I will ask you to address something that Mr. Feeney and I and 

several other members of the majority, we wrote you, as you know, 

supporting the idea of including in any Social Security reform proposal a so-called ‘‘community bank option,’’ where workers can put 

a portion of their Social Security monies into a CD-type product at 

community banks in addition to stock or bond index funds. 

The community bank option becomes more important as workers 

approach or reach retirement age because it protects them against 

the effects of a significant market downturn. 

This community bank option is very low-risk, FDIC-insured, and 

protects the worker’s principal. 

Is this a concept that you could support? 

Mr. POWELL. I think obviously most Americans want a choice in 

how to invest their retirement funds. That is the reason that a 

great majority of Americans put their money in savings accounts 

and certificates of deposit in insured institutions, because they 

want the diversity that that offers. It is safe, as you indicated. It 

is insured by the full faith and credit of the United States. 

Plus in many economic cycles, the interest rate is not bad. So you 

have a fixed-income option through the offering of certificates of deposit. 

Mr. BACHUS. I, for one, have supported the President’s call for 

personal retirement accounts because the rate of return of Social 

Security has been less than the inflation rate, where if we gave 

Americans the option we give federal employees to invest in the 

thrift savings account, the worst we would have done with federal 

employees would have been 4.8 percent, which would have been a 

rate of return of three times what Social Security had. And the 

best we would have done is 11 percent. 

So all of us are somewhere between 4.8 percent and 11 percent, 

all federal employees. I just wish that my mother’s Social Security 

investment had had that rate of return. 

As the President said, Social Security is a key component of our 

retirement security system and something that he wants to preserve and make better. I believe that this community bank option, 

as well as something like all federal employees have. 

9

In your home state of Texas, many counties have turned to this 

system and none of them have failed. They have all yielded a lot 

of return. We do not hear any of the horror stories that are really 

associated with people misunderstanding the President’s proposal. 

We go in order that the members appeared. Ms. Hooley is next. 

Actually, Ms. Moore, you will be after Ms. Hooley on the Republican side, then Mr. Clay, Mr. Moore and Mr. Meeks and Mr. 

Gutierrez. 

On our side, Mr. Lucas is no longer here. It will be Mr. Pearce, 

Mr. Hinojosa, Mr. Neugebauer, Mr. McHenry and Mr. Royce. 

So at this time, I will recognize Ms. Hooley. 

Ms. HOOLEY. Thank you, Mr. Chair. 

Mr. Powell, thank you very much. 

I was meeting with some of the community bankers in my state 

in Oregon, and asked them what is it that you would like to see 

changed if you had the ability to do that. 

One of the more prevalent sentiments I heard, there seems to be 

an overabundance of regulators, agencies, rules, and red tape requirements for community banks, both at a State level and a Federal level. We know some of those regulations are important so 

that you have a system that works and people have confidence in 

that system. 

But they said, would you go back and explore ideas for simplifying the financial regulatory system. I think the Federal Deposit 

Insurance Reform Act takes a small step in doing that by merging 

the insurance funds. 

I was wondering, do you have any other suggestions for this committee about what we could do? Are there some things out there 

that make sense and still deal with the safety and soundness and 

making sure that people have confidence in a system that works? 

Mr. POWELL. There is an ongoing effort led by Vice Chairman 

John Reich of the FDIC, together with all of the other banking regulators, to address this specific issue that you just mentioned, reg 

relief, burden relief. It is a constant cry from the industry that the 

burdens which they are under in order to conduct their business 

is in fact perhaps is number one or number two on their agenda. 

That effort has been going on for about 6 months, where there 

has been lots of energy and lots of experience directed toward that 

effort. Vice Chairman Reich has reached out to all constituents, to 

the industry, to consumer groups and to Members of Congress. He 

is in the final stages of preparing a recommendation to Congress 

as it relates to specific regulatory relief. 

Without getting into any of those issues, I can assure you that 

the recommendations will be given to this committee and to a committee in the Senate shortly, and ask that Congress act upon those 

recommendations. 

Ms. HOOLEY. Thank you very much. I appreciate that you are 

doing that. 

Again, we all know there has to be a certain amount of regulation or we do not have a system that works. And yet, what are 

those things that sort of go over the edge that are not critical to 

having that confidence in safety and soundness in the system. 

Mr. POWELL. I appreciate that. That is the reason his outreach 

has been to all Americans. 

10

Ms. HOOLEY. All the regulators. 

Mr. POWELL. It has been to consumer groups. It has been to individuals and to the banking industry. 

Ms. HOOLEY. I will look forward to seeing that report and having 

it come before our committee. 

Thank you. 

Mr. BACHUS. Thank you. 

Mr. Pearce? 

Mr. PEARCE. Thank you, Mr. Chairman. 

I really appreciate your testimony. I appreciate what you are trying to do. It makes pretty good common sense. 

As I take a look at your testimony on page four, you make the 

comment that in 93 percent of the institutions that are about equal 

in their capitalization that there are identifiable differences in the 

risk. 

Can you kind of go through some of those things that would give 

us numerically an equivalency, but would create significant differences in risk? 

Mr. POWELL. Ninety-three percent of the institutions in America 

today do not pay any premiums. 

As with any insurance company, as we all know, risk is not all 

the same. An institution that may be rated a two or a one, they 

pose different types of risk. Maybe their concentration issue might 

be different. Their asset structure might be different. Their liability 

structure might be different. Their growth rate might be different. 

Management might be different. Capital might be different. 

There are lots of areas that we would look at when determining 

what the premiums should be. There would be some subjective, obviously, and there will be objective data in there, but we are committed to three areas. 

We are committed to making sure that it is fair, transparent, 

and we are committed also to making sure that the industry has 

the necessary feedback when we will be determining what the risks 

should be and how we would approach that risk as it relates to the 

premiums that they would pay. We would act not unlike an insurance company. 

Mr. PEARCE. Again, I am just not so familiar with the exact 

structure, but what opportunities do banks have if we give you this 

latitude? And it looks to me like we should. But what responses 

can banks make if your actions do not seem so transparent or if 

they do not seem so fair? 

Because I think you and your constituents right now in the department would do well, but it is the next group I am worried 

about. 

Mr. POWELL. I think, first of all, they need to be engaged in this 

process from the very beginning. We seek and covet their input. 

Second, if for some reason we are irresponsible in the way we assess these premiums, I think they can do two or three things. First 

of all, they can contact the FDIC, obviously, and we are going to 

listen. The folks at the FDIC will listen to that through their trade 

associations, through their elected officials. 

I would expect them to contact members of this committee and 

members of their local congressional district, trade associations. If 

we are doing that, I think there would be an outcry. 

11

Mr. PEARCE. I appreciate that. 

You recommend later in your presentation that a broader basepoint range would be desirable for you to have a little more flexibility. What range are you suggesting? 

Mr. POWELL. My preference would be 1 to 1.5, with again some 

accountability, some reporting requirements back to whomever we 

should be reporting to. 

The more flexibility we can have in managing that fund, I think 

we can better serve the industry during downtimes as well as good 

times. 

Mr. PEARCE. The scoring of the entire proposal is somewhat different this time that it was last time. I was not around for that 

one, but do you have an opinion on the scoring of this bill? They 

have attached quite a cost to it. 

Mr. POWELL. Our objective is for it to be revenue-neutral. I think 

that scoring obviously has some assumptions based upon some future predictability, but our desire is that it be revenue-neutral. 

Mr. PEARCE. On the pricing differential for large banks, again I 

do not know exactly where in here, but you make a comment that 

we cannot necessarily just price on size alone, but you argue in 

your presentation that we do need to consider that. 

Tell me a little bit more about that particular aspect. 

Mr. POWELL. The most important thing is, as I mentioned earlier, we want it to be fair with no discrimination against large institutions or small institutions. 

Having said that, the complexity of a large institution, depending 

upon what that institution may or may not be doing, poses certain 

risk. We would assess that risk based upon what we would find in 

their balance sheet, income statement, management and things of 

that nature. 

Mr. PEARCE. Thank you, Mr. Powell. 

Thank you, Mr. Chairman. 

Mr. BACHUS. Thank you. 

Ms. Moore? 

Ms. MOORE OF WISCONSIN. Thank you, Mr. Chairman. 

I am a brand new member of Congress and a brand new member 

of this committee. So I guess just by way of education for me, I 

would like some clarification about your belief that we need to do 

this merger in order to, I guess I am looking on page three, that 

it would eliminate the premium disparity between the BIF and the 

SAIF. 

I am remembering from ancient history the collapse of the savings and loan industry. I am wondering right now if there are premium disparities between those folks who have not paid any premiums; between the thrift institutions and the banks. 

In other words, is this merger going to cause one industry to subsidize another? 

Mr. POWELL. No, ma’am. 

Ms. MOORE OF WISCONSIN. And that is because? 

Mr. POWELL. That is because they would be treated equally. I 

think the testimony says the ‘‘possibility’’ of premium disparity. I 

do not think if the funds in fact are merged, that there will be any 

disparity between thrifts and the banks. 

12

Ms. MOORE OF WISCONSIN. Okay. What is the reserve ratio now, 

going into this merger? 

Mr. POWELL. It is about 1.34. 

Ms. MOORE OF WISCONSIN. So it is above par for what you expect? 

Mr. POWELL. Yes, ma’am. 

Ms. MOORE OF WISCONSIN. Can you just explain to me, it sort of 

follows the question that members on the other side asked about 

the numbers of institutions. You talked about the institutions that 

do not participate at all. Would they become a part of this new system? 

Could you just explain to me how their premiums are going to 

be priced in a way that is equitable and they are insured, but that 

it will not cause the other institutions to subsidize? 

I just do not understand that. If you could just roll me through 

it. 

Mr. POWELL. Because of the current law, we do not assess premiums to most institutions, only those institutions that are undercapitalized and management is not up to par. It is very few institutions. Ninety-three percent of insured institutions in America do 

not pay any premium. 

I was part of a bank that was chartered about 4 years ago, 5 

years ago. We got into the system. We were insured and we did not 

pay any premium. I do not know of an insurance product that is 

free. These institutions are all insured and they are not paying any 

premiums. 

Now, if they were here today, they would say, well, we have been 

paying premiums for a long time when we funded the program 

many years ago. However, there are a lot of institutions that have 

been organized after 1996 and they have not paid any premiums 

at all. So we are attempting to address that. 

All institutions will pay based upon their risk profile. Everybody 

will pay. 

Ms. MOORE OF WISCONSIN. So that would be going forward, so 

those folks who have paid the premium will not have any sort of 

a refund or credit? 

Mr. POWELL. Yes. The proposal as the bill was passed and introduced last year, is that there would be some credit assessments 

based upon what they had paid into it as of December 31, 1996. 

So if you are an institution and you have been paying the premiums, and I am an institution and have not been paying the premiums, I am going to write the check and you are going to get a 

credit. 

Ms. MOORE OF WISCONSIN. Got you. That is what I needed to 

know. Thank you so much. 

Thank you, Mr. Chairman. 

Mr. BACHUS. Thank you. Let me commend you for your questioning. You certainly did not question like a new member. You did 

very well. Thank you. 

Mr. Hensarling? 

Mr. HENSARLING. Thank you, Mr. Chairman. 

First thing, with all of the television cameras in the hallway, I 

am tempted to ask the Chairman about possible steroid abuse at 

the FDIC. 

13

[Laughter.] 

I will refrain from that. 

Mr. BACHUS. Are you on steroids? 

[Laughter.] 

Mr. HENSARLING. Although not a major league ballplayer, I know 

that our Chairman is a major league financial player and his leadership and his stewardship of the FDIC have been excellent, and 

I certainly commend him for that. 

Chairman Powell, this is very old ground that has been tilled by 

this committee on a couple of occasions, so I do not care to keep 

you long. 

I guess a question I had in the 108th Congress I would like to 

ask again, that is really to understand the implications for the 

American taxpayer of this proposal. 

Particularly as I understand it, the flexibility that the FDIC 

seeks on the risk-based premium, that it is not your purpose to increase assessment revenue, merely to redistribute it. 

If you do not increase the assessment, yet your deposit coverage 

limit goes up, aren’t you inherently taking on more risk? If you 

have the same revenue, how can the taxpayer not be exposed to 

more risk? 

Could you help me sleep a little better at night and illuminate 

this issue for me please? 

Mr. POWELL. As you know, the ultimate backstop is the good 

faith and credit of the United States of America. Having said that, 

the current law, that duty of paying the premiums and funding any 

balance of the fund, if the fund gets down to zero, all banks must 

pay until the fund is adequate. 

So we would have to go through a lot of capital, a lot of capital 

in the banking industry now in excess of $1 trillion. They, in my 

view, could pay the necessary premiums without going to the taxpayer to supplement the fund if in fact it went down because of 

some crisis. 

So again, the backstop is the taxpayer, but it first has to go 

through all of the insured institutions. 

Mr. HENSARLING. Thank you very much. 

Mr. Chairman, I yield back the balance of my time. 

Mr. BACHUS. Thank you. 

Mr. Meeks? 

Mr. MEEKS. Mr. Chairman, I will be brief. 

Let me just ask real quick, in regards to municipal deposits, does 

the FDIC have any safety concerns about whether or not funds 

which are deposited into commercial banks as opposed to savings 

banks or credit unions, do you see any risk, any concerns? 

Mr. POWELL. No, sir. Most of those funds, the municipal deposits 

in insured institutions, most states require that there be United 

States government obligations placed against those funds. We do 

not have any undue concern about that. 

Mr. MEEKS. Has their been an analysis done to your knowledge 

as to what the DRR would rise to if the individuals who are not 

paying, the freeloaders were actually paying? 

Mr. POWELL. I am sure we have done an analysis and I would 

be happy to get back to you on that and give you a copy of that 

14

analysis. You are saying those, the free riders, if in fact they were 

paying, where would the fund be? 

Mr. MEEKS. That is correct. 

Mr. POWELL. Yes. It would be better, but I do not know how 

much better, but I would be happy to get that back to you. 

[The following information can be found on page 48 in the appendix.] 

Mr. MEEKS. Okay. Do you think that credits would kick in? 

Could it be that good, so much that there would be credits that 

would immediately kick in? 

Mr. POWELL. I doubt that. I doubt that. Depending on what 

benchmark, would it be 1.5 or 1.3 or 1-whatever that benchmark 

might be. Most of these that have come on-stream are the smaller 

institutions, however nobody has paid since 1996, large, small, in 

between. 

Mr. MEEKS. In regards to management of banks, now that the 

cost of insurance has increased from $40,000 to $100,000, have you 

seen any detriment or any substantial findings, or anything with 

regard to management of banks because of the increase? 

Mr. POWELL. No, sir. 

Mr. MEEKS. None at all? 

Mr. POWELL. I think what you were referring to is because the 

coverage was raised, has that caused management to take additional risk or abnormal risk? 

Mr. MEEKS. Absolutely. 

Mr. POWELL. No. 

Mr. MEEKS. Great. 

Last question, then. In regards to changing the DRR from the 

hard 1.25 to a floating 1.15 or to 1.40, what circumstances would 

have to happen for you to change it or to move it from one direction 

to the other? 

Mr. POWELL. With flexibility in there, and obviously if it started 

on the downward trend, it would be because of some failures to the 

system and charges to that particular fund, and that would be during down economic times. 

Obviously, if in fact we start increasing the premiums because of 

that, that would cause some funds that would be normally going 

to credit and help the economy, it would be paying premiums to the 

FDIC. 

So we would attempt to manage that process. The same thing 

would be true if the fund was rising, that during good times it may 

be necessary that we would rebate in the form of credits or in the 

form of cash rebates. 

That would all have to be assessed depending on a global review 

of the industry and what affect we thought the current economic 

times and future economic times may cause on the fund. 

Mr. MEEKS. Thank you. 

I yield back. 

And I would love to see that analysis. 

Mr. POWELL. Thank you. 

Mr. BACHUS. Thank you. 

Mr. Neugebauer? I note that you are a cosponsor of the legislation. 

Mr. NEUGEBAUER. Yes. Thank you, Mr. Chairman. 

15

Thank you, Chairman Powell, for being here today. I just want 

to comment and talk about a little, kind of a couple of different 

issues. 

When you say 93 percent of the banks are not paying into the 

system today, and yet we know if you had an event like we had 

in Texas in the 1980s, you would have to go to an assessment situation if your reserve dropped below the statutory level. Would that 

mean that only 7 percent of the banks then would be paying into 

that? How would be the mechanics of that? 

Mr. POWELL. We would start assessing premiums from all banks. 

In fact, the premiums can go as high as 23 percent to the fund if 

it’s about the necessary benchmark. So all would pay. 

Mr. NEUGEBAUER. And then when I think about the 1980s and 

then I think about today. 

Mr. POWELL. I would not like to go back there. 

Mr. NEUGEBAUER. I know. I don’t either. Thank goodness we survived that. 

I think the question that I have is in the marketplace today, 

Wall Street has devised all of these vehicles where people are putting in and they are saying they are insured accounts, and because 

there is not a crisis today, is there demand in the marketplace for 

people coming into financial institutions, is there a worry that, you 

know, are my funds insured? 

Because I know some of my friends, I am kind of paranoid about 

that because I was in an area where that, but they do not give any 

thought to whether their funds are insured. What is your perception of the demand in the marketplace for higher insurance levels? 

Mr. POWELL. That is a tough issue. I talk to a lot of bankers at 

large institutions, small institutions, metropolitan institutions, 

country banks and so forth. 

I think it depends upon your market. It depends upon your market. Some folks believe that they would receive more deposits if in 

fact the coverage was raised. Others do not believe it is important 

because of the current economic times we are in, that their customer base is not concerned about increasing the coverage. They 

believe that $100,000 is adequate. 

We at the FDIC have tried to listen to all of those parties. We 

do know that it has not been changed in the last 25-plus years, and 

that it has deteriorated over time. Attempting to put that question 

behind us, that is the reason our recommendation is that it be indexed. 

Mr. NEUGEBAUER. The third question I have, you mentioned the 

pension fund. It is in deficit. Do you think the current reserve level 

is based on the risk to FDIC at this particular point in time? Or 

are we at adequate levels? Or should we think about increasing 

that? 

Mr. POWELL. Congressman, I think we are at adequate levels, 

based upon current economic data and the current condition of the 

industry. I think we are at a good level. 

I do not know what tomorrow is going to bring, and that is the 

reason we are asking for more flexibility to manage that fund during good times and during bad times. 

Mr. NEUGEBAUER. Mr. Chairman, I yield back the balance of my 

time. 

16

Mr. BACHUS. Thank you, Mr. Neugebauer. 

Mr. Moore? 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. 

Mr. Chairman, I want to thank you for being here today and for 

your testimony and for your good work in this area. I am a cosponsor of H.R. 1185 and I appreciate your work there, and I certainly 

appreciate Chairman Bachus’s work as well. 

I have no further questions, but thank you, sir. 

Mr. POWELL. Thank you. 

Mr. BACHUS. Thank you, Mr. Moore. 

Mr. McHenry? 

Mr. MCHENRY. Low man on the totem pole. I always get forgotten. 

Mr. BACHUS. You are an important new member of this committee. With a name like Patrick McHenry, I mean, how could you 

be anything but a patriot? 

[Laughter.] 

Mr. MCHENRY. Thank you, Mr. Chairman. 

Unfortunately, the gentleman from Texas, Mr. Hensarling, took 

my joke. That is a mistake a freshman would make is telling a 

more senior member the good line he was going to use, and then 

he uses it about 20 minutes before he can. 

But thank you for being here today. I certainly applaud the 

Chairman for taking on this task. 

I am a new member of the committee. I am also a member of the 

Budget Committee. As such, I thought I would ask in terms of the 

budget impact. Certainly, I know the history here. In the past, it 

was scored as a net savings to the budget, and now it seems it is 

being scored as an additional cost to the American people. 

I would hope that you could address that. 

Mr. POWELL. Yes. We have reviewed that. 

First of all, our intent is that it be revenue-neutral. I think it is 

revenue-neutral. Their analysis is based on some assumptions and 

some projections of the future that none of us have control over. 

Again, our hope is and our desire is and our intent is that it be 

revenue-neutral. 

Mr. MCHENRY. Excellent. 

In terms of how this will impact the average American, if you 

could speak in those terms. How will it affect the average American who goes to their community bank and makes their deposit? 

How is that going to affect the average community bank and how 

is that going to affect some of your average working men and 

women? 

Mr. POWELL. I think the average customer of the ‘‘average’’ bank 

in America will not see any effect other than from the savings side. 

They are conscious of making sure that their funds are safe and 

secure in an insured institution. They understand what the FDIC 

is and what that means to financial stability, not only of their institution, but the financial stability of the banking system in America. So I think there is a keen awareness of that. 

On the other side, I think what it really speaks to is that most 

Americans when we have an economic downturn, credit is restricted. You cannot borrow money in bad times. You can always 

17

borrow money in good times, so credit is restricted. And that is the 

time that really we need banks extending credit. 

With the current system, banks will be paying premiums, or they 

may be paying premiums, more premiums for their FDIC insurance 

than under this proposal. So that is the reason we have asked for 

flexibility as it relates to assessment to institutions to make sure 

that this pro-cyclical event does not occur again. 

Mr. MCHENRY. Certainly. I certainly appreciate your testimony 

and answering the questions today. I certainly have a number of 

other questions for you, but not pertaining specifically to deposit 

insurance reform. I hope that we can discuss those at some point. 

Mr. POWELL. I would be happy to come see you. 

Mr. MCHENRY. Thanks so much. 

Thank you, Mr. Chairman. I yield back my time. 

Mr. BACHUS. Mr. Royce? 

Mr. ROYCE. Thank you, Mr. Chairman. 

I welcome you, Chairman Powell. I want to indicate I am a 

strong supporter and advocate of merging the BIF and the SAIF. 

I am very much in favor of the flexible DRR provision that is in 

this bill. But what gives me pause is the increase in the deposit 

insurance limit. I cannot support the bill with that in it. I have 

heard Chairman Greenspan lay out an argument, a case that I 

would just like to repeat briefly here. 

He says that extending the liability of the fund beyond the 

$100,000 limit would do the following. I would like to get your 

thoughts on that. He says it would increase the government subsidy to depository institutions. It would expand moral hazard and 

it would reduce the incentive for market discipline without providing any clear public benefit. I thought I would ask you for your 

response to Chairman Greenspan. 

Mr. POWELL. I agree with his first point. 

On number two, I would have a different view. I understand his 

view on number two and number three, moral hazard. I was in the 

banking business almost 40 years and was in Texas during the 

worst downturn we have ever had in the banking business. I can 

assure you, Congressman, that deposit insurance coverage did not 

dictate my management style or my management decisions. I do 

not think it dictated any banker in Texas. 

What that really implies is that because of the subsidy, I am 

going to take additional risk. When I take additional risk, I may 

lose my job. I may lose my investment in the bank and the bank 

may fail. So that has to be measured depending upon lots of things 

in the marketplace. It is a factor. It is a factor and I do not deny 

that at all. But I do not think it is an overwhelming factor. Obviously, if we did not have deposit insurance, I would not have the 

funding to make loans and any loan poses some risk. 

The third one is, I can again understand that view. It really relates to the second one. 

Mr. ROYCE. Yes. I understand you. 

Mr. POWELL. I think deposit insurance clearly provides stability 

in the marketplace. We do not have runs on it, and I think the 

FDIC still stands for the symbol of confidence. That is powerful. 

That is powerful in the economic free markets that we have in 

America. I think we are the envy of the world, and for lots of reaVerDate 0ct 09 2002 10:20 Nov 18, 2005 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 G:\DOCS\24397.TXT FIN1 PsN: MICAH
18

sons. I think deposit insurance contributes to that stability and 

that confidence that Americans have when they deposit their 

money in a bank. 

Mr. ROYCE. I understand that argument. The moral hazard argument, though, is one that has been persuasive not just with the 

Federal Reserve that is opposed, but also the Office of Thrift Supervision and with the Office of the Comptroller of the Currency, 

and also with the Treasury Department. All of these agencies oppose increasing the deposit coverage limits because of their concerns about safety and soundness. 

The second question, or last question, I wanted to ask you is this. 

I think an argument has been made that as the insurance limit increases, individual depositors are less likely to become another 

check out there on the bank’s management. In other words, a bank 

will not have to be as well managed during troubling times to attract more deposits because the money is guaranteed by the FDIC. 

Chairman Greenspan calls this phenomenon reputation risk. He 

says under this kind of scenario, there is no reputation risk. As 

members of this committee, shouldn’t we be concerned about this 

argument? 

Mr. POWELL. Let me go back to your first question, because I 

want to respond to that. 

Mr. ROYCE. Sure, absolutely. 

Mr. POWELL. We at the FDIC are not recommending increasing 

coverage. I want to be sure you understand. We are recommending 

that coverage not be diluted in any way. The $100,000 we believe 

has served America okay. We just want it to keep its value so 

therefore we are indexing. So we are not recommending coverage. 

Your second question, again, it is a fair view. There is a balance 

there. I do not think the average American depositor could understand the condition of a bank anyway. I do not think they could 

read a financial statement, a balance sheet and an income statement and come away with making some judgment of whether they 

should put their money in that institution. 

I think Congress made that decision many years ago when they 

established the FDIC, that it was in the best interest of America 

that we provide some stability, the taxpayers provide some stability 

of where I could put my money in and not be sophisticated and 

know that it is safe. 

Whether it should be $100,000, that is a debate for another 

issue, but clearly deposit insurance was a policy issue that the 

American people I think wanted because of them being not sufficient to determine in fact if that is a safe investment. 

That is the reason we have other choices. That is the reason a 

consumer can put it in a non-insured institution. That is the reason 

they can put it in the stock market. That is the reason they can 

put it in some other thing, but in an insured institution, it provides 

safety that one can have. 

I think obviously because of that subsidy, banks are regulated. 

Banks have to do certain things that others do not, that is not 

there. I think also banks have provided a tremendous economic engine. I am not sure they could have done that without ‘‘the subsidy’’ and the regulation because of that subsidy, the regulation 

19

that that imposes upon them and puts discipline into the system 

that perhaps you would not have. 

Because of that economic engine, I think we are all better off in 

America from an economic standpoint. 

Mr. ROYCE. Thank you, Chairman Powell. 

Thank you, Chairman Bachus. 

Mr. BACHUS. Thank you, Mr. Royce. 

I will recognize Mr. Baca, and then I would like to ask another 

follow-up question to Mr. Royce, and might actually yield to him 

when I do that. 

Mr. Baca? 

Mr. BACA. Thank you very much, Mr. Chairman. 

Mr. Powell, as you know, H.R. 1185 increased the amount of coverage for retirement accounts to $260,000 and requires the retirement coverage level to be indexed every 5 years in order to protect 

the value of the safety net. 

Given the sensitivity of the retirement savings issue after the 

Enron and WorldCom downfalls, do you think the increased coverage level for retirement accounts and municipal deposits is sufficient? And if so, why? 

Mr. POWELL. I think it is sufficient, but I am not sure I can tell 

you why. That number just doubles the $130,000, and that number 

could have been $200,000. There have been a lot of studies. I think 

there is $225 billion in the banking industry in the form of retirement funds, but that is not very much compared to the global retirement deposits in all types of institutions. 

As Americans become older and savings are increasingly important to all of us, that could be revisited from time to time. But I 

think where it is today, we at the FDIC have been neutral on that 

particular dollar amount. 

Mr. BACA. Because apparently there seems to be a lack of trust 

by the American people, especially with what happened with Enron 

and WorldCom recently. So it appears that we really have to go 

back and revisit this because people are very much concerned with 

their future in terms of what happens. 

Even right now with Social Security, when you look at the year 

2042, when we are really going to have a crisis. We do not have 

a crisis right now, but could have a crisis if we do not begin to 

move in the right direction. 

Mr. POWELL. I agree. 

Mr. BACA. Okay. 

Thank you very much, Mr. Chairman. No further questions. I 

yield back the balance of my time. 

Mr. BACHUS. Thank you, Chairman Powell. 

Mr. Royce had to leave for another hearing, but I was kind of curious to see if you had any thoughts on, he mentioned Chairman 

Greenspan and the Treasury Department under Secretary Rubin. 

They took a position against insuring Americans who deposited 

their money for over $100,000 in American institutions. They said 

it created a moral hazard and that the government should not be 

in the job of insuring deposits. In fact, Chairman Greenspan has 

said he would just as soon let it wither on the vine. He does not 

think the government ought to be guaranteeing things. 

20

My question for Mr. Royce, I guess, and for you is, why has the 

Federal Reserve and the Treasury bailed out some 77 different institutions, including Mexico, for several billion dollars, and Long 

Term Capital Management which did not pay a dime into any insurance fund? 

It just mystifies me how Chairman Greenspan would say that the American people who invest $120,000 in a savings account, 

why we should let them lose their money, but we ought to bail out 

Long Term Capital Management, a massive hedge fund, which only 

had multimillionaire investors, that we ought to bail that out? 

Because when these institutions go belly up, then it affects the 

whole economy. 

I would think that when a little bank in Texas or a little bank 

in Georgia or a little bank in California goes under, that the Federal Government, that the people who paid into the insurance fund 

and who are willing to pay for more coverage, that they are entitled, basically, to be covered, as opposed to Long Term Capital 

Management, with several billion dollars in 1998, the same folks 

that you are now quoting rushed to their defense. They had not 

paid a dime into the government or to the taxpayers, and the taxpayers picked up billions of dollars. Mexico, several other large institutions, and they stepped in and insured it to the limit. 

Mr. ROYCE. If the gentleman would yield just for a minute. 

Just for the record, Mr. Chairman, I wanted to make it clear that 

I argued at the time and voted against the bailout for Mexico and 

other bailouts as well. 

So for me, the moral hazard argument is a philosophical argument. When I hear others put that argument forward, and I am 

mindful of past experience with moral hazard, that is why I 

brought it up today with Chairman Powell. 

Mr. BACHUS. I guess I am just asking you and Chairman Powell, 

don’t you agree that it is more egregious? I do not think it is egregious if people want to pay into insurance $120,000. But you know 

that is a question of policy. I am just saying that you quoted Chairman Greenspan, and the Treasury Department, Bob Rubin, they 

bailed out Mexico. What was the reason for that? 

Mr. ROYCE. I debated that argument. I talked to Secretary Rubin 

at the time about that and raised my concerns that the bailout of 

Mexico, the moral hazard there, might lead to other risky behavior. 

I feel that subsequently it led to a little more risk taken in the 

markets in Asia. 

Mr. BACHUS. I agree. 

Mr. ROYCE. As a consequence of the moral hazard of bailing out 

Mexico, we set up the institutions in the United States and our investors to over-invest in a hot market in Asia, and as a consequence of that mal-investment, we then went through a second 

phase. And so, as a matter of fact I had breakfast with Chairman 

Greenspan at the time in order to lay out that argument about the 

bailout in Mexico. So I just for the record wanted to clarify. 

Mr. BACHUS. I did not know if he at the time gave you some explanation, at the same time he was saying to my constituents back 

in Greenville, Alabama, or a little town that wanted $120,000 

worth of coverage for their retirement income, why he did not want 

to cover that, but he was willing to go to Mexico or bail out a bunch 

21

of millionaire hedge fund owners that had not paid a dime into any 

fund. I just did not know what the explanation was, if he offered 

you an explanation for why they were for that. Was it just the 

Washington view? 

Mr. ROYCE. I think that the views expressed by all of the agencies that we have discussed I would hope indicate that they have 

learned something from the bailout of Mexico. My real hope would 

be that the more we move toward free market solutions and the 

more we move away from subsidies, the less likely we will be to 

see something like the Asian meltdown or the situation in Mexico 

in the future. 

I think the answer to this is to get back to market-based economic principles and to move away from implied subsidies and 

moral hazard. 

Mr. BACHUS. You would actually be for abolishing the guarantee 

altogether? 

Mr. ROYCE. Well, I was not aware that I was going to be a witness here today. 

[Laughter.] 

But let me make this point, if I could, Mr. Chairman. 

I am for not compounding a problem that I have witnessed in the 

past with regard to what happened in the S&L industry, with regard to what happened in the bailout of Mexico. 

I mean, as I look at this economic conundrum that results whenever we create an incentive for money to move where there is an 

implied government guarantee of a bailout, I think we inevitably 

run into some moral risk questions and problems. 

That is why I raised it today. I did raise it because many of the 

regulatory institutions that have oversight have raised that argument, but they are not witnesses here today. They have not been 

invited here today. 

I just thought that at this hearing with Chairman Powell, at 

least the economic arguments should be put forward. That is why 

I raised it. 

Mr. BACHUS. I do not think there is an implied guarantee. I 

think people pay into the insurance fund and it is a guarantee. I 

do not think there is anything implied about the guarantee to depositors. 

Mr. ROYCE. No, in this case it is a direct guarantee. 

Mr. BACHUS. I think Mexico is a good example. 

Mr. ROYCE. In many other cases, we are advancing implied guarantees, and that is also a concern to me and that is why I raised 

that issue as well. 

Mr. BACHUS. I just think it is healthy, and I think that it is consistent with wanting to raise coverage to keep up with inflation, to 

do what Chairman Greenspan, to say that he does not believe in 

deposit insurance. He would just as soon it wither on the vine. 

I just think it is more important that we guarantee deposits in 

our institutions. I think the savings and loan crisis would have 

been lots worse if there had been no guarantee. Boy, I cannot imagine what the recovery would have been like. 

Mr. ROYCE. Arguably, if the gentleman would yield, I think the 

argument can be made that without the types of guarantees and 

22

encouragement that existed there, and without Congress expanding 

and increasing that guarantee, which this institution did. 

It took the amount, it doubled the amount at one point, and then 

it allowed all types of additional investment, and as a consequence 

of that it created an environment where at least economists believe 

it incentivized this risk-taking, and as a consequence of that we 

had the comeuppance of the failures——

Mr. BACHUS. The other thing is, and even Chairman Greenspan 

has said part of the savings and loan problem was the problem that 

Congress came with new legislation and authorized the savings 

and loans to do a lot of things they had not been doing, and it was 

that that caused the system to fail, not the deposit insurance guarantee which had existed since the Depression. 

So it was not deposit insurance that caused the system to fail. 

If it had been that, it would have failed before, and the banks did 

not fail. That had to be something to do with the savings and 

loans. The banks did not fail. 

Mr. ROYCE. The Chairman of this committee at the time, and 

this certainly predates our election to the Congress, but the Chairman of the Banking Committee at the time, as memory serves, 

sponsored a bill to double the deposit insurance in that industry, 

for the S&L industry. 

Anyway, I just wanted to raise these economic points, and I appreciate your forbearance in allowing me to do so. 

Thank you, Mr. Chairman. 

Mr. BACHUS. I appreciate that, Mr. Royce, because I think when 

we have these discussions—did you have any comments you wish 

to make? 

Mr. POWELL. No, sir. 

[Laughter.] 

Mr. BACHUS. I was pretty sure of that. 

I just hope that the money that is paid into FDIC will be used 

to insure deposits and not be used to, that or the Federal Reserve 

or any other government money will be used to bail out hedge 

funds or Mexico or other countries, which has been the case in 77 

different instances. 

If there are no other questions. Oh, Mr. Price? 

Mr. PRICE. I just enjoyed the colloquy. 

[Laughter.] 

Mr. BACHUS. You can see that we are working toward a bipartisan solution to this problem. 

I will say this, one thing you said this morning is increasing the 

range. I will tell you that my thought on this was that we ought 

to at least bring it down to 1 or 1.1. I do not know why 1.5, if anything, if it is going to go from 1.25, it ought to go in the same direction, the same distance. 

I will say that I believe anything above 1.4 could create a drain 

and could make banks noncompetitive, and that is the last thing 

we want to do. If I had my druthers, I would say 1 to 1.35. I do 

think that moving it down, that there would probably be very little 

resistance from this committee if someone offered an amendment 

to that effect. 

I thank you for your attendance. 

Mr. POWELL. Thank you, sir. 

23

Mr. BACHUS. I have always admired your leadership, and I feel 

like you have brought is you have brought representation from 

mainstream America and from financial institutions, and from constituents outside the beltway. I think that is very refreshing. 

Mr. POWELL. Thank you. 

[Whereupon, at 10:50 a.m., the subcommittee was adjourned.] 

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A P P E N D I X

March 17, 2005

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