The Bank Insurance Fund (BIF) has substantially rebuilt its reserves over the last 3 years from a deficit position at the end of calendar year 1991. The Savings Association Insurance Fund (SAIF), while also building its reserves, is doing so at a significantly slower rate. The Congress, administration, savings association trade groups, regulators, and other interested parties have expressed concern that a significant disparity in premium rates between BIF and SAIF could develop when BIF is fully recapitalized if the Federal Deposit Insurance Corporation (FDIC) lowers BIF’s premium rates. They are concerned that a significant insurance premium rate differential could put SAIF-insured institutions at a competitive disadvantage with their BIF-insured counterparts. They believe that this, in turn, could have serious implications for the long-term viability of the industry and its insurance fund. Pursuant to the June 10, 1994, request of the now Chairman of the Senate Committee on Banking, Housing, and Urban Affairs and the now Ranking Minority Member of the House Committee on Small Business, we undertook a review of the issues related to the likelihood that an insurance premium rate differential would develop between bank and thrift institutions and the potential impact of such a differential on the banking and thrift industries and their respective insurance funds. During the 1980s, the savings and loan industry experienced severe financial difficulties, and the deterioration of the industry’s financial condition overwhelmed the resources of its deposit insurance fund, the Federal Savings and Loan Insurance Corporation (FSLIC). By 1988, the condition of the industry and its insurance fund had reached crisis proportions. At December 31, 1988, FSLIC reported a deficit of $75 billion. The Financing Corporation (FICO) was established in 1987 to recapitalize FSLIC. FICO was funded mainly through the issuance of public debt offerings, which were limited to $10.8 billion. The net proceeds of FICO’s debt offerings were used to purchase capital stock and capital certificates issued by FSLIC—in effect, providing capital to FSLIC. FICO was authorized to assess FSLIC-insured institutions for the annual interest expense on the obligations issued, as well as for bond issuance and custodial costs. The industry’s problems, however, required far more funding than that provided through FICO. In response to the thrift crisis, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was enacted. FIRREA abolished FSLIC and created the Resolution Trust Corporation (RTC) to manage and resolve all troubled savings institutions that were previously insured by FSLIC and for which a conservator or receiver was appointed during the period January 1, 1989, through August 8, 1992. FIRREA also provided RTC with an initial $50 billion for the cost of resolving these institutions. FIRREA created a new insurance fund for thrifts—the Savings Association Insurance Fund, retitled the insurance fund for banks—the Bank Insurance Fund, and designated FDIC as sole insurer of all banks and savings associations and administrator of the insurance funds. FIRREA authorized FICO, with the approval of the FDIC Board of Directors, to assess SAIF-member savings associations to cover its interest payments, issuance costs, and custodial fees. Subsequently, the RTC Refinancing, Restructuring, and Improvement Act terminated FICO’s authority to issue bonds, but it did not modify FICO’s authority to assess SAIF members to cover its annual interest expense, which will continue until the 30-year recapitalization bonds mature in the years 2017 through 2019. FIRREA provided that the amount of FICO’s assessment was not to exceed the amount authorized to be assessed SAIF members by FDIC for insurance premiums, and that FICO’s assessment was to be deducted from the amount FDIC was authorized to assess SAIF members. FIRREA and subsequent legislation also amended the Federal Deposit Insurance Act (FDI Act), particularly with respect to insurance assessments. Under the FDI Act, as amended, the FDIC Board of Directors is to set semiannual insurance premium rates for SAIF and BIF independently. Further, the Board is to set such rates for SAIF to increase SAIF’s reserve ratio to the designated reserve ratio and, once SAIF attains the designated reserve ratio, to maintain SAIF’s reserve ratio at the designated reserve ratio. In setting insurance premium rates, the Board of Directors is required to consider the Fund’s expected operating expenses, case resolution expenditures and income, the effect of assessments on members’ earnings and capital, and any other factors that the Board of Directors may deem appropriate. The FDI Act, as amended, establishes a designated reserve ratio of 1.25 percent for both BIF and SAIF so that both funds build reserves sufficient to withstand the pressures of any substantial financial institution failures in the future. FDIC’s Board of Directors must set insurance premium rates at a level that will enable each fund to build its reserves to reach this ratio. The fund capitalization provisions added to the FDI Act by the FDIC Improvement Act of 1991 (FDICIA) required FDIC to establish a recapitalization schedule for BIF to achieve the designated reserve ratio not later than 15 years after implementation and to set insurance assessments in accordance with this schedule. Until January 1, 1998, FDIC must set SAIF’s insurance premium rates at a level that will enable SAIF to achieve the designated reserve ratio within a reasonable period of time. FDIC’s Board of Directors has the authority to lower SAIF premiums to an average annual rate of 18 basis points until January 1, 1998. After January 1, 1998, FDIC must set premium rates for SAIF to meet the designated reserve ratio according to a 15-year schedule. FDIC may extend the date specified in the schedule to a later date that it determines will, over time, maximize the amount of insurance premiums received by SAIF, net of insurance losses incurred. FDIC currently projects that BIF will reach the 1.25 percent designated reserve ratio during 1995, and SAIF is projected to attain its ratio in 2002. As of December 31, 1994, BIF had unaudited reserves of $21.8 billion, representing approximately 1.16 percent of insured deposits. As of the same date, SAIF had unaudited reserves of $1.9 billion, representing approximately 0.27 percent of insured deposits. Currently, BIF-insured institutions are assessed insurance premiums at a rate averaging 23 cents for every $100 in deposits subject to assessments (23 basis points), while SAIF-insured institutions are assessed at premium rates averaging 24 cents for every $100 of assessable deposits (24 basis points). SAIF was created without any initial capital, and from SAIF’s inception through December 31, 1992, FICO, the Resolution Funding Corporation (REFCORP), and the FSLIC Resolution Fund (FRF) had prior claim on a substantial portion of SAIF members’ insurance premiums. During the period 1989 through 1993, approximately $6.4 billion, or 84 percent of SAIF’s insurance premiums, were used to fund the priority claims of FICO, REFCORP, and FRF. Beginning in 1993, only FICO continued to have prior claim on SAIF members’ insurance premiums, with SAIF receiving the remaining amount. In 1993, FICO received $779 million, which represented approximately 46 percent of SAIF’s total insurance premiums for that year. To address the problem of SAIF’s capitalization in light of the other claims on its insurance premiums, the FDI Act, as amended by FIRREA, provided for two types of supplemental funding from the Treasury—backup funding for SAIF insurance premiums and payments to maintain a minimum fund balance. As subsequently amended by the RTC Refinancing, Restructuring, and Improvement Act of 1991, these provisions required the Treasury to provide funding to SAIF each fiscal year from 1993 to 2000 to the extent that the SAIF-member insurance premiums deposited in the Fund did not total $2 billion a year. This would have assured SAIF of at least $16 billion in either premium income or Treasury payments. In addition, Treasury was authorized to make annual payments necessary to ensure that SAIF had a specific net worth, ranging from zero during fiscal year 1992 to $8.8 billion during fiscal year 2000. The cumulative amounts of these payments were also not to exceed $16 billion. The FDI Act, as amended, also authorized funds to be appropriated to the Secretary of the Treasury for purposes of these payments. However, none of the funds authorized were actually appropriated. The funding provisions contained in the FDI Act were again amended in December 1993 by the RTC Completion Act. The amendments authorize Treasury payments of up to $8 billion to SAIF for insurance losses incurred in fiscal years 1994 through 1998. Additionally, before any funds can be made available to SAIF for this purpose, FDIC must certify to the Congress, among other things, that (1) SAIF-insured institutions are unable to pay premiums sufficient to cover insurance losses and to meet a repayment schedule for any amount borrowed from the Treasury for insurance purposes under the FDI Act, as amended, without adversely affecting their ability to raise and maintain capital or to maintain the assessment base and (2) an increase in premiums could reasonably be expected to result in greater losses to the government. The RTC Completion Act also makes available to SAIF any of the RTC’s unused loss funding to cover insurance losses during the 2-year period beginning on the date of RTC’s termination. However, SAIF’s use of this funding is subject to restrictions similar to those of the Treasury funding authorized under the act. Additionally, FDICIA provided SAIF a mechanism for funding insurance losses.