By Hales, Thomas E.
Independent Banker , Vol. 48, No. 4
Why tamper with a system that has served us so well?
EDITOR'S NOTE: The Federal Deposit Insurance Corp. hosted a day-long conference on Jan. 29 to discuss the role of deposit insurance in the evolving financial system. Conference participants debated the merits of a number of recent reform proposals that would alter the current deposit insurance system by either privatizing it, reducing coverage or removing the full faith and credit of the federal government. Thomas E. Hales, chairman and CEO of Union State Bank in Orangeburg, NY., spoke in defense of the current system of deposit insurance that has served Americans for more than six decades. Hales is a member of IBAA's board of directors and the Federal Legislation Committee. His remarks are reprinted in Independent Banker for your consideration.
would like to thank the FDIC for inviting me to participate in this conference on deposit insurance. The issues for this panel are:
(1) Whether a private deposit insurance system can maintain financial stability and depositor confidence during periods of financial stress, and whether the public will accept less than a full federal guarantee of insured deposits;
(2) Whether elimination of a federal role in deposit insurance would significantly reduce regulatory burden;
(3) Whether "too-big-to-fail" can be eliminated; and (4) Whether additional major reforms to the current system should be initiated before the reforms of FIRREA and FDICIA have been tested.
Based on history, responsibility of government, fairness and plain old common sense, my answer to each of these questions is "No." Let's look at each issue in turn.
Privatizing Deposit Insurance The full faith and credit of the federal government is essential to an effective deposit insurance system, both for bringing long-term stability to the banking system and to ensuring depositor confidence in the system. Just look at the dismal history of private and state-sponsored deposit insurance funds. Remember the Rhode Island, Maryland and Ohio crises? When there were runs on banks in those states, the funds collapsed and depositors were left in the lurch.
To prevent a banking panic, depositors must have confidence in the insurance plan. As former FDIC chairman Ricki Helfer often pointed out, the public relies on the guarantee of the federal deposit insurance system. There is no evidence that depositors would accept anything less.
Contrary to the views of others on this panel, federal deposit insurance remains important to the American public. In a 1989 American Banker survey, 95 percent of respondents said federal deposit insurance was important. In 1989, banks were experiencing hard times. But even when conditions were vastly improved, the statistics stayed the same. In 1994, 94 percent of respondents to a Gallup survey reported federal deposit insurance is important to them.
The limited resources of private plans cannot compare to the unlimited resources and credibility of the federal government. Private plans may be able to handle isolated failures, but they cannot handle a crisis or a catastrophe. Remember: Bank failures come in waves. The system is only effective if it can stem panic in a crisis, thereby assuring stability. Private systems cannot do this.
All we need to do is to look at the thrift crisis to recognize how important the guarantee is to the American public. We re-learned the lesson during the thrift crisis, as Japan is learning the lesson today. Clearly, there is no FDIC fund without a government guarantee. The American consumer will not stand for it and should not be expected to give up federal protection for no reason.
The argument that eliminating the federal role in deposit insurance will reduce regulatory burden is a red herring. When Bill Taylor-a career regulator and an extremely straightforward, honest and intelligent man-was FDIC chairman, he spoke to the New York Bankers Association at the Waldorf Astoria in front of 150 bankers. …