Association for

Financial Professionals

April 24, 2000

Arthur J. Murton

Director, Division of Insurance

Federal Deposit Insurance Corporation

550 17” Street, N.W.

Washington, DC 20429

Dear Mr. Mutton:

The Association for Financial Professionals (AFP) welcomes the opportunity to participate in the

April 25 Roundtable on deposit insurance issues.

The AFP represents over 14,000 finance and treasury professionals who on behalf of over 5,000

corporations and other organizations are significant users of the nation’s financial system. Our

members have responsibilities for banking relationships, investments, pension management,

credit, payments and cash management. In these roles, our members negotiate, monitor, and

approve for payment the fees which are passed-through by banks to corporate customers for

deposit insurance assessments paid to the Bank Insurance Fund (BIF). Therefore, AFP members

have an active interest and a sizable stake in any changes to the deposit insurance system.

Corporations are the major funders of the BIF because banks pass-through their deposit

insurance costs to corporate customers on the basis of balance size. Our members pay these

assessments based on total balances which customarily are well in excess of the insured

$100,000 limit. Therefore our members subsidize the BIF through premium costs for deposits

which are not insured by the Fund.

Our comments today focus primarily on deposit insurance premium assessment methodology,

and certain structural inequities in the system. We recommend a relatively simple set of

adjustments which can be quickly implemented:

l Assess only insured balances. Eliminate the current inequitable system of assessing total

domestic deposits while insuring some lesser amount -- currently $100,000.

l Discontinue the 16 2/3% float adjustment factor. AFP members report that almost all banks

with which they have relationships have the capability to calculate collected balances.

Collected balances should be the assessment base.

l Use average daily balances as the assessment base for the reporting quarter, rather than

quarter-end “as-of’ balances.

We believe the above outlined formula presents a simple, fair, direct, and understandable

assessment structure.

7315 Wisconsin Avenue l Suite 600 West 9 Bethesda l Maryland 20814

Phone: 301.907.2862 l Fax: 301.907.2864 l www.AFPon1ine.org
Federal Deposit Insurance Corporation

April 24, 2000

Page 2 of 2

Other Considerations:

We believe that the float adjustment factor for time deposits of one percent for Money Market

Deposit Accounts (MMDA) should be re-examined. The MMDA account is used frequently as a

transaction account, and in the event of passage of the “Business Checking Modernization Act”

(H.R. 4067), permissible monthly transfers will be raised from 6 to 24. In effect, the MMDA

should be redefined as a transaction account.

We wish to highlight a basic structural flaw in the development of the risk-based system

implemented by the Federal Deposit Insurance Corporation (FDIC) in order to comply with the

Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICA). FDIC insurance

charges are levied currently at a uniform rate and applied to ledger balances as of the last day of

each quarter. The methodology fails to capture differences in loss potential among banks with

similar ledger balances but varied deposit bases. For example, a retail bank with average

account balances below the coverage ceiling has a far greater loss potential for the BIF than a

wholesale bank with a similar aggregate ledger balance. A more appropriate basis for levying

BIF charges would entail some determination of account types held by the institution to assess

actual loss potential from accounts under $100,000. This information is currently provided to the

FDIC by each institution.

We also believe that excess premiums should be rebated to banks and thrifts, which in turn

should reimburse their customers for the pass-through charges assessed to fund the premiums.

Finally, the” AFP does not support raising the coverage ceiling to $200,000 from $100,000, nor

extending a full insurance coverage guarantee to all municipal deposits.

We appreciate this opportunity to participate in this Roundtable and express the opinions of our

Association, which we believe resonate those of the general business community.

Sincerely,

Nolan L. North, CCM Patrick M. Montgomery

Vice President and Assistant Treasurer Assistant Vice President, Finance

T. Rowe Price Associates, Inc. ULLICO

Chairman Chair

AFP Board of Directors AFP Government Relations Committee

Frank P. Cut-ran

Vice President

Government Relations and

Technical Services

Association for Financial Professionals