Thank you, Mr. Chairman. Last April, the Federal Deposit Insurance Corporation issued recommendations for deposit insurance reform. These recommendations included merging the two deposit insurance funds, the elimination of sharp premium swings, and indexing coverage levels to account for inflation. These recommendations initiated a national dialogue on how the Federal Deposit Insurance Corporation can operate more efficiently, provide greater economic stabilization, and protect savings. I thank Senator Johnson, Chairman of the Subcommittee on Financial Institutions, and his Subcommittee staff for all of their work in continuing the national dialogue.
One area worthy of discussion is the merger of the two insurance funds. The current administration of two deposit insurance funds, the Bank Insurance Fund and the Savings Association Insurance Fund, has created a system where identical coverage is provided but assessments are determined separately. Banks and thrifts with similar risk levels could potentially be paying different amounts for coverage. This occurred in 1995 and 1996, when the highest rated Savings Association Insurance Fund institutions were paying premiums while the highest rated institutions of the other fund were not. In addition, many financial institutions have both types of insured deposits. Merging the fund would simplify reporting and accounting requirements for financial institutions and the FDIC.
Another area to examine is the elimination of sharp premium swings. Significant increases in deposit insurance premiums can occur when the designated reserve ratio falls below 1.25 percent of insured deposits. I am concerned because this would most likely happen during difficult financial times when banks would have difficulty paying sudden increases in their premiums. Access to credit could be restricted and an economic downturn could be prolonged. There is a need to provide the FDIC with greater flexibility in determining the appropriate reserve ratio in an attempt to level out the economic cycles.
Finally, the issue of indexing or increasing coverage limits needs to be thoroughly evaluated to determine the possible impact such action would have on the nation's banking system.
I thank you for appearing today, and I look forward to your recommendations as we explore the issue of federal deposit insurance reform.
Again, Mr. Chairman, thank you for conducting this hearing.