Deposit Insurance Reform Proposal
Seidman, L. William, American Banker
I AM PLEASED to have an opportunity to appear before this committee to discuss deposit insurance reform. You have held a number of hearings where a great many views on this subject have been expressed. We have considered these and our own experience, especially our recent experience. We at the Federal Deposit Insurance Corp. have concluded that, while the basic deposit insurance system is performing well, there is an urgent need for selective change.
In my testimony, I will indicate where I believe changes are necessary. These changes will include those requiring federal legislation, those requiring state legislation, and those that can be implemented by the FDIC under existing law.
Last year, there were 120 bank failures and FDIC-assisted mergers, and very likely we will see at least that many this year. In 1984 there were 79 bank failures; in 1983, 48; and in 1982, 42. During the entire decade of the 1970s there were only 76 bank failures. As of March 3, there were 1,196 banks on the FDIC's problem list. This number has increased steadily since the spring of 1981, when there were 200 banks on the problem list. This dramatic change has provoked many questions about the condition of the banking system, the handling of bank failures, the role that deposit insurance has played, and the role that it should play in the future.
Banking System Problems
Bank failures have increased primarily because of weaknesses in the economy. While the overall economy has performed well during the past three years, performance has been uneven, leaving some parts of the country and some industries especially depressed. Weaknesses are likely to persist during the next year or more in energy and agriculture and in several foreign countries that are significant bank borrowers, and parts of the banking system will continue to be hurt by these strains.
During this same period, the banking environment had undergone considerable change. Deposit rate ceilings were deregulated. Competition among domestic banks and between banks and other institutions (including foreign banks competing in the U.S.) has increased. The effect of increased competition has been uneven; in some cases, banks previously insulated from competition have encountered significantly reduced margins in the marketplace; some banks have seen investments in branches and other facilities become redundant in the face of technological change and greater price competition.
Economic and competitive forces have made it more difficult for some banks to operate profitability. In some instnaces, reduced spreads on safe activities induced banks to take more risk, and this led to increased loan losses. Years of operating in a very comfortable economic and competitive environment may have led some banks to become complacent in assessing risk and controlling expenses. An exact distribution of the causes of current problems is not possible. In our system, such problems are exacerbated by branching and other geographic restrictions which limit diversification possibilities for banks and lead to excessive exposure to a single industry.
Banks and regulators are adjusting to what has been happening. There is considerable evidence that banks are placing more stress on loan quality. And regulators have sought to get on top of problems earlier, especially in the case of large banks. However, many of the current problems will be around for some time, and they may get worse. They reflect weaknesses in existing loans on the books of banks and weakened financial conditions of those borrowers.
What has been the role of deposit insurance in this process? The existence of high deposit insurance coverage (including what is perceived to be 100% de facto coverage for large banks) has probably contributed to expansion and precarious funding by some banks. While some maintain that high insurance coverage has contributed to risk taking. …