"My Rookie Year"

Having just completed my rookie season here inside the beltway, I thought this would be a good time to reflect on some of the things that I have learned.

One thing that I have learned is that folks here in Washington would almost always rather disagree than agree. It seems to me that there are a surprising number of people here who would prefer to have a really good food fight over the last five percent than confess that they actually agree on 95 percent.

What really surprised me, though, is that in order to keep a good disagreement going, sometimes people actually make things up. Really. Call me naïve, but I honestly did not expect to spend so much of my time listening to works of fiction on financial policy matters.

The discussions about deposit insurance reform over the past year come to mind as an example.

You know, the Treasury and community bankers agree on almost every aspect of reform. But you would never know that from what some of their advocates say.

We have twice testified since last year expressing our support for compensating small banks for the "free rider" problem. We support the idea of authorizing transition assessment credits against future premiums in order to recognize the contributions of many community banks to FDIC reserves in the early-to-mid-1990s. We favor other premium-setting reforms to prevent future "free riders."

We have also voiced our support for merging the bank and thrift insurance funds in order to better diversify risks – to help reduce the size of any possible future premiums.

We have expressed our support for giving the FDIC greater flexibility to reduce the pro-cyclical burden of premium costs. We support eliminating the "triggers" in the current system that have the potential to force banks to pay much higher premiums at a time when the economy may be under serious stress.

We have supported giving the FDIC greater discretion to vary premiums according to the risk that an institution poses. This too should benefit well-run banks over time.

All of these ideas – that we have been supporting – would be good for community banks, good for our banking system, and good for the well-being of our economy. Most importantly, giving Don Powell these authorities would help him run a better deposit insurance system for our country.

But somehow or other, all that we hear is the tired refrain of the hired guns complaining that the Treasury is not supporting deposit insurance reform and therefore not supporting community banks. Anyone who is telling you that is making it up. If you are under any doubt, let me make but one suggestion: read my . . . testimony (at www.treas.gov/press/releases/po3029.htm).

Now, we have expressed an opinion about higher coverage limits that differs in a material way from the opinion of some folks in this town.

What amazes me is not that we disagree about this issue. What amazes me is how much creativity and imagination have gone into constructing the arguments in favor of raising coverage limits and how much effort has gone into ignoring the facts.

We know that the reserve ratio of the FDIC’s Bank Insurance Fund (BIF) has fluctuated around the minimum target of 1.25 percent of insured deposits in recent quarters. The FDIC has acknowledged the increased likelihood of new, albeit small, premiums for BIF-member banks next year even under the existing limits.

What goes unsaid – or, worse, what’s being swept under the carpet – is the fact that banks and thrifts will have to pay even greater premium increases if the higher coverage provisions in the current bills become law.

The FDIC estimated that the coverage provisions in the current bills would reduce the combined bank-thrift insurance fund reserve ratio immediately by about 9 basis points as existing uninsured deposits convert to insured status, and by an additional 4 or 5 basis points over the next few years as higher limits attract new insured deposits into the banking system.

So raising coverage levels will raise the premium costs to banks (above what they would otherwise have to be). But some folks in this town seem to want to do this in the name of holding down costs. Truth is stranger than fiction – in this town, anyway. But there’s more.

The claim has been made that community banks have been having difficulty raising deposits. But contrary to the premature reports of their demise, community banks’ deposit-taking franchise is alive and well and will likely remain so in a world in which inflation expectations are both low and stable.

As data from the Federal Reserve have shown, community banks have demonstrated their ability to compete successfully for insured and uninsured deposits in order to fund asset growth. After adjusting for the effects of mergers, banks below the top 1,000 on average increased in asset size almost twice as fast as the top 1,000 since the mid-1990s.

The claim has also been made that increasing coverage limits would help improve the competitive position of small banks vis-à-vis large banks. This idea is completely unencumbered by any basis in fact.

For every additional $30,000 in insured deposits a small bank may be able to offer a customer, some of their large bank competitors will be able to offer multiples of that amount in insurance coverage through the control of several affiliated depository institutions. I am at a loss to understand how this could possibly reduce the perceived "too big to fail" funding advantage of large banks, relative to small banks, about which community bankers have so long complained.

Indeed, the whole argument for raising coverage limits is also unencumbered by the interests of depositors. Simply put, the average saver would derive no financial benefit from increased coverage limits. Any depositor who wishes can open multiple accounts at a single depository in different capacities or, if desired, at multiple depositories.

Looking back over my rookie year, I can’t say that I’ve learned very much about finance or banking. But I have learned about how some people enjoy an argument in this town.

Regrettably, I have also seen that progress on the real issues of deposit insurance reform has been blocked by those who claim to be its best friends. We all know that a bill might well have been enacted months ago if only those relentlessly pursuing coverage increases had just relented.

But it doesn’t seem to be about reform, nor about the facts, nor even about the interests of depositors or community bankers. It seems to be about the sport of having an argument.

Since I arrived in this town I have said that I would like to see real deposit insurance reform that produced real benefits for depositors, for bankers and for our banking system. Maybe someday we’ll get to that. Maybe next year. I am always an optimist. After all, I have to be an optimist: I’m a Red Sox fan.