To suspend temporarily the duty on certain textile machinery.

Mr. Chairman, I thank the gentleman for yielding me this time and for his leadership, and I rise in support of the Ose- Maloney amendment, a compromise approach to deposit insurance coverage that holds standard account coverage at $100,000 while offering increased protection for retirees.

Mr. Chairman, as a whole, this is an outstanding bill. As an original cosponsor of H.R. 522, I am supportive of the overwhelming majority of provisions in the legislation. It is long past time to merge the BIF and SAIF insurance funds. Additionally, eliminating the 23 basis point cliff and providing a new premium system that takes into account the past contributions of institutions are major steps forward.

The bill includes a mechanism for determining credit for past contributions to the insurance funds that is based on an amendment I cosponsored along with the gentleman from Nebraska (Mr. Bereuter) last session. This is a critically important provision as a matter of fairness to institutions that recapitalized the funds, and I thank the gentleman from Alabama (Mr. Bachus) for including this balanced amendment in the legislation.

Despite these many positives, I believe the immediate 30 percent increase in insurance coverage in the bill is a serious mistake. This coverage increase to $130,000 is opposed by all the Federal financial service regulators, including Alan Greenspan, Treasury Secretary Peter Fischer, OCC Comptroller John Hawke and OTS Director James Gilleran.

Proponents of increased coverage argue that it poses no new risk to the insurance system, but the regulators who oppose this increase are the very officials whose job it is to protect the safety and soundness of the financial system. The unanimity of regulator opposition to increased coverage is an extremely powerful message.

Another argument put forth by proponents of coverage increases is that inflation has eroded deposit insurance. I do not believe this argument matches the actual situation of the banking industry. The fact is that only 2 percent

of insured accounts have more than $100,000 according to a study by the Federal Reserve. The same Fed study put the average account balance at merely $6,000. Any way you look at it the increase in coverage will benefit very, very few depositors.

Proponents of increasing coverage also contend that because insurance premiums are paid by banks, increasing coverage does not cost taxpayers. While I concede this point, I think we have to remember that behind the deposit insurance funds is the full faith and credit of the United States Government.

Since I joined the Committee on Financial Services at the close of the savings and loan crisis, I have been committed to protecting the safety and soundness of the financial service system. While the causes of the S&L failures were many, as my friend from Alabama pointed out, the fact is that standing behind the insurance system are our constituent taxpayer dollars. No matter what the reasons are for a future bank failure or string of failures, by raising insurance coverage we increase the potential liability of the government. Additionally, raising coverage may encourage the concept of moral hazard. Institutions will be encouraged to engage in riskier behavior to boost earnings if they know that failure is insured by the Federal Government.

Finally, I urge support for this amendment because it strikes a compromise. It holds the line on coverage for standard accounts while offering retirees additional insurance. I believe that there are many valid policy arguments for offering additional coverage and additional insurance for this special class of banking account. At its core this amendment represents a compromise. It allows Members the opportunity to support the concerns of the regulatory community on standard accounts while offering increased insurance on retirement accounts.

This is a good bill and I will support its passage. I simply think it would be much improved with the adoption of this amendment, and I thank the gentleman from California (Mr. Ose) for his leadership and I thank also the gentleman from Alabama (Mr. Bachus) for crafting a fine underlying bill, along with the chairman, the gentleman from Ohio (Mr. Oxley), and the Democratic leader, the gentleman from Massachusetts (Mr. Frank).

Mr. Chairman, I include for the Record the following testimony from our committee hearing:

Prepared Testimony of the Honorable Peter R. Fischer, Undersecretary for Domestic Finance, Department of the Treasury, 9:30 a.m., Wednesday,

February 26, 2003--Dirksen 538

Mr. Chairman, Senator Sarbanes, and Members of the

Committee, I appreciate the opportunity to provide the

Administration's views on deposit insurance reform. I also

want to commend Chairman Powell and the FDIC staff for their

valuable contributions to the discussion of this important

issue.

The Administration strongly supports reforms to our deposit

insurance system that would, first, merge the bank and thrift

insurance funds, second, allow more flexibility in the

management of fund reserves while maintaining adequate

reserve levels and, third, ensure that all participating

institutions fairly share in the maintenance of FDIC

resources in accordance with the insurance fund's loss

exposure from each institution. The Administration strongly

opposes any increases in deposit insurance coverage limits.

Our current deposit insurance system managed by the Federal

Deposit Insurance Corporation (FDIC) serves to protect

insured depositors from exposure to bank losses and, as a

result, helps to promote public confidence in the U.S.

banking system. I am concerned today that our deposit

insurance system has structural weaknesses that, in the

absence of reform, could deepen over time. I want to

emphasize that there is no crisis in the FDIC; both of its

funds are strong, well managed, with adequate reserves. This

is the right time to act--when we do not face a crisis--and

the Administration supports legislation focused on the repair

of these structural weaknesses.

Increases in FDIC benefits, however, including any increase

in the level of insurance coverage, are not part of the

solution to these problems and should be avoided. When I

testified before this Committee last April, I argued that an

increase in deposit insurance coverage limits would serve no

sound public policy purpose. Nothing has occurred since then

to change that view. The Administration continues to oppose

higher coverage limit in any form. Indeed, we feel that the

entire issue of coverage limits regrettably diverts attention

from the important reforms that are needed.

merging the bank and thrift insurance funds

We support a merger of the Bank Insurance Fund (BIF) and

Savings Association Insurance Fund (SAIF) as soon as

practicable. A larger, combined insurance fund would be

better able to diversify risks, and thus withstand losses,

than would either fund separately. Merging the funds while

the industry is strong and both funds are adequately

capitalized would not burden either BIF or SAIF members. A

merged fund would also end the possibility that similar

institutions could pay significantly different premiums for

the same product, as was the case in the recent past and

could occur again in the near future without this change. A

merger would also recognize changes in the industry. As a

result of mergers and consolidations, each fund now insures

deposits of both commercial banks and thrifts. Indeed,

commercial banks now account for 45 percent of all SAIF-

insured deposits.

Flexibility in the Management of FDIC Reserves

Current law generally requires each insurance fund to

maintain reserves equal to 1.25 percent of estimated insured

deposits, the ``designated reserve ratio.'' When the reserve

ratio falls below this threshold, the FDIC must charge either

a premium sufficient to restore the reserve ratio to 1.25

percent within one year, or a minimum of 23 basis points if

the reserve ratio would remain below 1.25 percent for a

longer period. Since the latter would be expected when the

banking system, and probably the economy as well, were under

stress, such a sharp increase in industry assessments could

have an undesirable pro-cyclical effect, further reducing

liquidity precisely when liquidity is needed. Were FDIC fund

contributions to come from resources that otherwise might be

part of capital, every dollar paid would mean a potential

reduction of 10 or 12 dollars in lending, or as much as $12

billion in reduced lending for a $1 billion FDIC

replenishment.

Reserves should be allowed to grow when conditions are

good. This would enable the fund to better absorb losses

under adverse conditions without sharp increases in premiums.

In order to achieve this objective and also to account for

changing risks to the insurance fund over time, we support

greater latitude for the FDIC to alter the designated reserve

ratio within statutorily prescribed upper and lower bounds.

Within these bounds, the FDIC should provide for public

notice and comment concerning any proposed change to the

designated reserve ratio. The FDIC should also have

discretion in determining how quickly the fund meets the

designated reserve ratio as long as the actual reserve ratio

is within these bounds. If the reserve ratio were to fall

below the lower bound, the FDIC should restore it to within

the statutory range promptly, over a reasonable but limited

timeframe. We would also support some reduction in the

prescribed minimum premium rate--currently 23 basis points--

that would be in effect if more than one year were required

to restore the fund's reserves.

Nevertheless, as we learned from the deposit insurance

experience of the 1980s, flexibility must be tempered by a

clear requirement for prudent and timely fund replenishment.

The statutory range for the designated reserve ratio should

strike an appropriate balance between the burden of pre-

funding future loses and the pro-cyclical costs of

replenishing the insurance fund in a downturn. A key benefit

to giving the FDIC greater flexibility in managing the

reserve ratio within statutorily prescribed bounds is the

ability to achieve low, stable premiums over time, adequate

to meet FDIC needs in bad times, with the least burden on

financial institutions and on the economy. We also believe

that with this reform, the possibility of recourse to

taxpayer resources is even further removed.

Full Risk-Based Shared Funding

Every day that they operate, banks and thrifts benefit from

their access to federal deposit insurance. For several years,

however, the FDIC has been allowed to obtain premiums for

deposit insurance from only a few insured institutions.

Currently, over 90 percent of banks and thrifts pay nothing

to the FDIC. This is an untenable formula for the long-term

stability of the FDIC.

Moreover, current law frustrates one of the most important

reforms enacted in the wake of the collapse of the Federal

Savings and Loan Insurance Corporation (FSLIC) and the

depletion of FDIC reserves: the requirement for risk-based

premiums. When 90 percent of the industry pays no premiums,

there is little opportunity to do what any prudent insurer

would do: adjust premiums for risk. Nearly all banks are

treated the same, and lately they have been treated to free

service.

For example, today a bank can rapidly increase its insured

deposits without paying anything into the insurance fund. As

is now well known, some large financial companies have

greatly augmented their insured deposits in the past few

years by sweeping uninsured funds into their affiliated

depository institutions--without compensating the FDIC at

all. Other major financial companies might be expected to do

the same in the future. In addition, most of the over 1,100

banks and thrifts chartered after 1996 have never paid a

penny in deposit insurance premiums. Yet if insured deposit

growth by a relatively few institutions were to cause the

reserve ratio to decline below the designated reserve ratio,

all banks would be required to pay premiums to raise

reserves.

To rectify this ``free rider'' problem and ensure that

institutions appropriately compensate the FDIC commensurate

with their risk, Congress should remove the current

restrictions on FDIC premium-setting. In order to recognize

past payments to build up current reserves, we support the

proposal to apply temporary transition credits against future

premiums that would be distributed based on a measure of each

institution's contribution to the build-up of insurance fund

reserves in the early-to-mid 1990s. In addition to transition

credits, allowing the FDIC to provide assessment credits on

an on-going basis would permit the FDIC to collect payments

from institutions more closely in relation to their deposit

growth.

We strongly oppose rebates, which would drain the insurance

fund of cash. Over much of its history, the FDIC insurance

fund reserve ratio remained well above the current target,

only to drop into deficit conditions by the beginning of the

1990s. Therefore, it is vital that funds collected in good

times, and the earnings on those collections, be available

for times when they will be needed.

There are other important structural issues that need to be

addressed sooner than later. It would be appropriate to

evaluate whether there are changes to the National Credit

Union Share Insurance Fund (NCUSIF) that would be suitable in

light of the proposed reforms made of FDIC insurance so as to

avoid unintended disparities between the two programs.

Perhaps even more important is the need to address the long-

term funding of supervision by the National Credit Union

Administration, particularly in view of recent trends toward

conversions from federal to state charters and growing

consolidation of credit unions. Similarly, there are

structural problems in the funding of the Office of the

Comptroller of the Currency and the Office of Thrift

Supervision, the resolution of which should not be delayed.

Deposit Insurance Coverage Limits

The improvements to the deposit insurance system that I

have just outlined are vital to the system's long-term

health. Other proposals, however, would not contribute to the

strength of the taxpayer-backed deposit insurance system and

may actually weaken it.

Increasing the general coverage limit up front or through

indexation, or raising coverage limits for particular

categories of deposits, is unnecessary. Savers do not need an

increase in coverage limits and would receive no real

financial benefit. Unlike other government benefit programs,

there is no need for indexation of deposit insurance coverage

because savers can now obtain all the coverage that they

desire by using multiple banks and through other means.

Higher coverage limits would not predictably advantage any

particular size of banks, would increase all banks' insurance

premium costs, and would mean greater taxpayer exposure by

adding to the contingent liabilities of the government and

weakening market discipline. An increase in coverage limits

would reduce--not enhance--competition among banks in general

as the efficient and inefficient offer the same investment

risk to depositors; in fact, perversely, investors would be

drawn at no risk to the worst banks, which usually offer the

highest interest rates.

Higher Coverage Limits Not Sought by Savers

First of all, the clamor for raising coverage limits does

not come from savers. The evidence that current coverage

limits constitute a burden to savers is scant; there has been

little demand from depositors for higher maximum levels. The

recent consumer finance survey data released by the Federal

Reserve confirm what we found in the previous survey, namely

that raising the coverage limit would do little, if anything,

for most savers. Median family deposit balances are only

$4,000 for transaction account deposits and $15,000 for

certificates of deposit, far below the current $100,000

ceiling. The same holds true even when considering only older

Americans, a segment of the population with higher bank

account usage: median transaction account balances and

certificates of deposit total $8,000 and $20,000,

respectively, for those households headed by individuals

between the ages of 65 and 74.

Examining the Federal Reserve data for retirement accounts

shows present maximum deposit insurance coverage to be more

than adequate. The median balance across age groups held in

IRA/Keogh accounts at insured depository institutions is only

$15,000. For the 65 to 69 age group, median household IRA/

Keogh deposits total $30,000.

A small group of relatively affluent savers might find

greater convenience from increased maximum coverage levels.

But it is a tiny group. Only 3.4 percent of households with

bank accounts held any uninsured deposits, and the median

income of these households was more than double the median

income of all depositors in the survey.

Under current rules, these savers have plenty of options,

with the market place presenting new options for unlimited

deposit insurance coverage without changing federal coverage

limits. At little inconvenience, savers with substantial bank

deposits--including retirees and those with large bank

savings for retirement--may place deposits at any number of

banks to obtain as much FDIC coverage as desired. They may

also establish accounts within the same bank under different

legal capacities, qualifying for several multiples of current

maximum coverage limits. Firms are now developing programs

for exchanging depositor accounts that could offer seamless

means of providing unlimited coverage for depositors without

any change in current limits.

One of the fundamental rules of prudent retirement planning

is to diversify investment vehicles. Many individuals,

including those who are retired or planning for retirement,

feel comfortable putting substantial amounts into uninsured

mutual funds, money market accounts, and a variety of other

investment instruments. Just 21 percent of all IRA/Keogh

funds are in insured depository institutions. There is simply

no widespread consumer concern about existing coverage limits

that would justify extending taxpayer exposure by creating a

new government-insured retirement program under the FDIC.

Coverage Limits and Bank Competition

Banks, regardless of size, continue to have little trouble

attracting deposits under the existing coverage limits.

Federal Reserve data have shown that smaller banks have grown

more rapidly and experienced higher rates of growth in both

insured and uninsured deposits than have larger banks over

the past several years. After adjusting for the effects of

mergers, domestic assets of the largest 1,000 commercial

banks grew 5.5 percent per year on average from 1994 to 2002;

all other banks grew 13.8 percent per year on average. Nor

are smaller banks losing the competition for uninsured

deposits. Uninsured deposits of the top 1,000 banks grew 9.9

percent annually on average over this period, while such

deposits at smaller banks grew on average by 21.4 percent

annually.

Higher Coverage Limits for Municipal Funds Erode Discipline

Proposals for substantially higher levels of protection of

municipal deposits than of other classes of deposits would

exacerbate the inherent moral hazard problems of deposit

insurance. Rather than keep funds in local institutions,

state and municipal treasurers would have powerful incentives

to seek out not the safest institutions in which to place

taxpayer funds but rather those offering the highest interest

rates. Since these are usually riskier institutions, state

and municipal treasurers would be drawn into funding the more

trouble banks. Local, well run, healthy banks might have to

pay a premium in increased deposit rates to retain municipal

business. Today there are incentives for state and local

government treasurers to monitor risks taken with large

volumes of public sector deposits. Should the FDIC largely

protect these funds, an important source of credit judgment

on the lending and investment decisions of local banks would

be lost.

conclusion

In conclusion, I reaffirm the Administration's support for

the three-part general framework that I have outlined to

correct the structural flaws in the deposit insurance system.

I encourage Congress to pursue these improvements with a

steady focus on the important work that needs to be done. The

Administration does not support legislation that raises

deposit insurance coverage limits in any form, and we urge

that Congress avoid such an unneeded and counterproductive

diversion from real and necessary reform.

Mr. Chairman, I yield myself 7 minutes.

Mr. Chairman, I rise in support of H.R. 522, the Federal Deposit Insurance Reform Act of 2003. I want to begin by thanking the gentleman from Ohio (Mr. Oxley), the chairman of the committee, for his tremendous leadership in steering what is a complex bill through the legislative process. I also want to thank the ranking member of the committee, the gentleman from Massachusetts (Mr. Frank), for his support of this important piece of legislation. The committee and the Congress in its votes on this legislation in the past, legislation very similar, has shown that it can work together in a very bipartisan manner.

Deposit insurance reform has been thoroughly discussed and debated over the past several years. During the 107th Congress, I introduced comprehensive deposit insurance reform, H.R. 3717. The legislation was a by-product of recommendations by the FDIC in early 2001, industry representatives coming together urging that we take action. The American Banking Association, The Credit Union National Association, Independent Bankers and Financial Services Roundtable, all urging the Federal Reserve, the administration, urging us to take action to reform Federal deposit insurance. We did take action, and the 107th Congress passed H.R. 3717 by a vote of 408 to 18.

Unfortunately, that bill died in the other body.

Earlier this year, I introduced the same legislation. This time it is H.R. 522, the Deposit Insurance Reform Act of 2003. The gentleman from Ohio (Mr. Oxley) and the gentleman from Massachusetts (Mr. Frank) joined me in introducing this legislation, along with 57 other cosponsors on both sides of the aisle. It was approved by the Committee on Financial Services by a unanimous voice vote. I am pleased that the Senate now plans to act on similar legislation in the very near future, and that the President's budget for fiscal year 2004 outlines a proposal similar to our legislation.

The legislation is supported not only by American bankers, the Financial Services Roundtable made up of the 100 largest financial corporations in America, but also by the credit unions, the thrift associations, the community bankers, the securities industry, and also by groups that we sometimes do not find on the same side; the American Association of Retired Persons has recently endorsed this legislation.

Federal deposit insurance has been the hallmark of our Nation's banking system for almost 70 years. The reforms made by this legislation will ensure that the system that serves savers and depositors so well for so long will continue for future generations.

What does the legislation do? First, it merges separate insurance funds that currently apply to deposits held by banks on the one hand and savings associations on the other, creating a stronger, more stable fund that benefits banks and thrifts alike.

Second, it changes the ``pro-cyclical'' bias of the current system. In other words, it spreads out over time the assessments to the institutions which results in, by doing this, a more uniform assessment. Presently we have sharply higher premiums served during recessionary times and much lower premiums during good times. Banks can least afford to pay a higher premium during recessions, and we found that out, and this corrects that.

Third, the legislation includes modest increases in the amount of coverage available. The system has gone from 1980 without an increase in coverage. If we took 1980 as our basis and we increased coverage based on inflation, we would go to $200,000. If we went back to 1980, the $100,000, and we increased it based on per capita income, it would actually go to $300,000. So we are proposing $130,000, a very modest increase.

If we went back to 1974, because some have said they should not have raised it in 1980, they should have kept it at the 1974 level, and we increased it for inflation, it would go to $140,000.

Mr. Chairman, there are some who will offer amendments who have actually publicly stated that they do not believe in Federal deposit insurance, one of the gentlemen offering an amendment later on. So there are Members of the body who do not believe that our deposits in banks should be federally insured.

I understand that; but I, for one, disagree with that. I think Americans have come to rely and have a sense of security in knowing that when they put their retirement funds in a bank or thrift that it is federally insured. Particularly in light of the recent volatility on Wall Street, people have, I think, come to rely more and value more the fact that they can put their money in a federally insured financial institution and not lose that money.

All of us have heard from community bankers in our districts about the challenges that they face in competing for deposits with large- money center banks that are perceived by the market, rightly or wrongly, as being too big to fail. By strengthening the deposit insurance system, our legislation will help small neighborhood-based financial institutions across the country, especially in rural areas, continue to play an important role in financing economic development.

The independent bankers have actually said that this legislation is key to maintaining local home-owned banking institutions. The deposits that community banks are able to attract through Federal deposit insurance guarantees are cycled back into local communities in the form of consumer and small business loans. One reason for this legislation is we value the right of every American to go down to his corner financial institution.

My thanks go to the chairman of the committee.

Mr. Chairman, I reserve the balance of my time.

Mr. Chairman, I yield 2 minutes to the gentleman from Ohio (Mr. Tiberi).

Mr. Chairman, I yield 2 minutes to the gentleman from Kansas (Mr. Moran).

Mr. Chairman, I yield 2 minutes to the gentleman from Texas (Mr. Hensarling).

Mr. Chairman, I yield 2 minutes to the gentlewoman from Florida (Ms. Ginny Brown-Waite).

Mr. Chairman, I yield 2 minutes to the gentleman from Colorado (Mr. Beauprez).

Mr. Chairman, I yield 4 minutes to the gentleman from Ohio (Mr. Oxley), the chairman of the Committee on Financial Services.

(Mr. OXLEY asked and was given permission to revise and extend his remarks.)

Mr. Chairman, I yield 3 minutes to the gentleman from Texas (Mr. Burgess).

(Mr. BURGESS asked and was given permission to revise and extend his remarks.)

Mr. Chairman, I yield 3 minutes to the gentleman from Alabama (Mr. Aderholt).

Mr. Chairman, I yield myself such time as remains.

Mr. Chairman, there are opponents to this legislation. Those opponents give several reasons, and we may hear those during the amendments; but I think the most honest opponent of this legislation is the gentleman from California (Mr. Rohrabacher), who will offer an amendment or who may not offer an amendment but who has filed an amendment to strike the increases in coverage.

The gentleman from California (Mr. Rohrabacher) said in the American Banker, and I quote him, in today's edition, ``I don't believe in Federal deposit insurance.'' I think that pretty much sums up the opposition because if a person does not believe in it, then a person does not want it to increase to allow for inflation or for increase in per capita income. If a person does believe in it, then they want it to remain current. They want it to remain current with per capita income and inflation.

As I said, we last increased the levels in 1980. If we adjusted them for per capita income, they would actually go to $300,000. If we increased them for inflation, they would go to $200,000. We, to build a consensus, only increased them to $130,000; but we did increase retirement funds to $260,000, but we felt that there were people other than retirees who deserve the protection to keep up with per capita income and inflation.

So we increased everyone's coverage to 130, including small businesses and depositors, many of whom we found in testimony sell their house, deposit the entire proceeds in a financial institution and assume, sometimes tragically, that there is sufficient coverage.

There are additional reasons why people are opposing this legislation. There is a question of cost. The CBO scored the same bill last year as a savings of $750 million. This year they say it has a cost of $1 billion.

Chairman Powell of the FDIC responded to the CBO estimate and said this, because it conclusively rebuts any CBO estimate that this will cost the taxpayers and any argument that may be made on the floor today about the budgetary impact of the legislation, and he says, ``H.R. 522 provides the FDIC with the tools to achieve revenue neutrality in the management of the deposit insurance system. Because any analysis that determines 522 will result in an increase in net government spending must necessarily rely on assumptions regarding how the FDIC Board will exercise the discretion provided in the legislation.'' And here is the most pertinent part: ``I can assure Congress that the leadership of the FDIC has no intention of managing the deposit insurance system in a way that increases the cost to the government or increases the burden on insured institutions. The costs of the deposit insurance system will continue to be borne by the banking industry, but in a manner that establishes a strong risk-based premium system and avoids the procyclical risks inherent in current law.'' I do stress there are risks in the current law if we do not amend it.

He also in a letter to this body on March 31 says, ``No analysis of the `costs' of legislation is complete without a full consideration of the benefits provided by the bill,'' and he goes on to list many benefits to the economy, to savers and to strengthening our banking institution.

Another rabbit that has been turned loose by opponents of this bill is that the increase in coverage, the last increase was what precipitated the savings and loan crisis. That is simply not a fact. There were many causes. In fact, let me read from a report from this own body as to the reason for the savings and loan crisis. The causes of the thrift crisis can be traced to a number of factors: poorly timed deregulation, the dismal performance of some thrift management, inadequate oversight supervision and regulation.

Mr. Chairman, I was standing to claim the time in opposition.

Mr. Chairman, I yield myself such time as I may consume.

I speak in opposition to this amendment. One of the statements by the proponent of this amendment has been that the former increase in coverage was the primary reason for the savings and loan crisis, and let me say in that regard that the cause of the savings and loan collapse, crisis in this country, has been well examined and well documented. The FDIC, in fact, issued a report called ``History of the Eighties, Lessons for the Future and Examination of the Banking Crisis of the 1980s.''

Here is their reasoning. The rise in the number of bank failures in the 1980s had no single cause or short list of causes. Rather, it resulted from a concurrence of various forces working together to produce a decade of banking crises.

First, broad national forces, economic, financial, legislative and regulatory established the preconditions for the increased number of bank failures. Second, a series of severe regional and sectional recessions hit banks in a number of banking markets and led to the majority of the failures. Third, some of the banks in these markets assumed excessive risk and were insufficiently restrained by supervisory authorities with the result that they failed in disproportionate numbers.

As a result of that, Mr. Chairman, we have made several changes in the law in this body in an attempt, and I think a successful attempt thus far, to make these institutions subject to more oversight and to stronger capital requirements.

One Member of our body's father served as the FBI director during the savings and loan crisis. He was asked in a congressional hearing for his comment on the savings and loan crisis, and he said that criminal activity, fraud and looting were the primary causes of the crisis. In fact, the committee staff has made a fairly exhaustive study of the various articles written concerning the collapse of the savings and loans, and these were the reasons given at the time.

My colleagues can see we have a basic laundry list of reasons, but there is actually evidence that the increase in coverage at the time gave savers some degree of security and actually prevented a panic at many institutions, and some of that body of evidence supports that it actually helped in a contagion of that crisis.

Mr. Chairman, the final argument is a moral-hazard argument. The offerer of this amendment has argued that increasing coverage will create a greater moral hazard in the system; but then, surprisingly, his amendment does not raise the level from $100,000 to $130,000. It does away with that, but then he raises retirement accounts to $260,000, and he raises municipal deposits; and by doing that, they have managed in the subcommittee to basically arouse everyone's opposition to the amendment because if we raise the coverage for retirements in municipal deposits, then one is, in fact, arguing against the reason for offering his own amendment.

I will close simply by saying that this moral-hazard argument has been looked at by the FDIC. They asked two respected economists to make a report, and they were Federal Reserve Governor Alan Blinder, and this is what he said. The point is made that if the FDIC is given the authority to charge risk-based premiums, and that is what H.R. 522 does, then ``most objections based on moral hazard should evaporate.'' He goes on to state, ``In a world of properly priced deposit insurance, it seems more appropriate to ask the opposite question: Why have any coverage limits at all?''

In fact, I think that ought to be the question we are debating: Why have any coverage limits at all? Even the CBO says that this bill will result in an increase of insured deposits in our institutions. Is that not something that we have all argued for? Do we not want an increase in the deposits in our financial institutions? Does that not strengthen our economy? Is that not good for America? They say that some institutions will fail and some people in that institution will lose 200 or $220,000 worth of retirement funds. Do we not want them to have federally insured coverage? Do we want them to lose this money? I do not think so.

Finally, do we believe in insurance? I think that is the essence of this whole argument. I mean, do we believe in insurance? Do we believe in insuring for losses? If we do, and I for one think that insurance is a good thing, I believe that insurance is a prudent thing, and I believe that in order for our Federal deposit insurance system to survive and have any relevance then that insurance protection, which I believe in, I believe in insuring against risk, I believe it is a prudent thing to do, then why would we want the Federal deposit insurance system to wither on the vine?

Why would we not want it to stay current with inflationary rates and per capita income? And the only way to do that is to vote ``yes'' on this bill. A vote against this bill basically would be like going back to 1980 and reducing the coverage from $100,000 to $30,000 if you went on per capita income, or $47,000 if you went on inflation.

How many in our body would do that? How many in our body would vote today to take those levels back to the 1980 level? I do not think any of us would. A few of us would because, as the gentleman from California (Mr. Rohrabacher) says, I do not believe in Federal deposit insurance. I do not believe in the Federal Government supplying insurance. Well, it is the depositors, for one thing. The Federal Government does not. If he would look, he would see it is the banks through their premiums.

I yield to the gentleman from Massachusetts.

Mr. Chairman, I yield myself such time as I may consume and simply close by doing two things. One is responding to the gentleman from California when he uses the analogy that if someone wants to deposit or wants over $100,000 in their account they can simply take part of that money out of one account and place it in another account or they can drive down the street.

Now, Americans today are a highly mobile society, and we know that Americans sell their homes and we know that in almost every case, when they do that, they deposit that money in their bank. They do not take that check and split it. They do not ask for two checks. We know that the average cost of a house is well in excess of $100,000 and we know that they deposit that money in a bank. And if that bank fails, they lose all but $100,000. We do not think that is right.

The authors of this amendment also do a strange thing. They say we are increasing the coverage and that is a bad thing; but then they increase the coverage for retirement accounts to $260,000 and municipal accounts to $2 million. So they basically argue against their own amendment.

Mr. Chairman, may I inquire into the amount of time remaining?

Mr. Chairman, I yield 30 seconds to the gentleman from Alabama (Mr. Davis).

Mr. Speaker, on that I demand the yeas and nays.

Mr. Chairman, I rise today in strong support of H.R. 522, the Federal Deposit Insurance Reform Act of 2003. Our country has the largest, most complex, most stable banking system in the world. Deposit insurance is one of the major reasons for this stability. And today we will strengthen this system so that it continues to serve as a model for the rest of the world.

Depositors, taxpayers, and depository institutions would be well- served by this legislation which will modernize the Federal deposit insurance system. Federal deposit insurance was created by the Congress in 1934 and it has successfully served the American people for almost 70 years. Public confidence has been maintained, and the stability of the Nation's banking system has been preserved during periods of financial uncertainty.

The deposit insurance system has been significantly modified only twice since 1934, both times in response to the savings and loan crisis of the late 1980s and 1990s. During this crisis the

Federal Government resolved 2,363 failures of insured institutions involving more than $700 billion in assets. As FDIC Chairman Powell has stated, ``There were no bank runs, no panics, no disruptions to financial markets, and no debilitating impact on overall economic activity.''

The existence of the Federal deposit insurance was a critical factor in maintaining public confidence in the banking system during these troubled times. H.R. 522, though technical in nature, seeks to apply the experience of the last decade to today's banking marketplace. It is the 21st century legislation for a 21st century banking industry, and this is it. And while the purpose of deposit insurance remains the same, industry growth, bank expansion from new powers, and the integration of banking and securities activities require that the scope and coverage of deposit insurance evolve so as to reflect the realities of a modern financial services industry. Moreover, the presence of Federal deposit insurance continues to be a key consideration for consumers in their decisions about where they do their banking and what level of deposit risk they are willing to assume.

Mr. Chairman, there is broad consensus in this body, the Bush administration, the Federal banking and thrift regulators, and business and consumer groups in favor of improving and strengthening the deposit insurance system and making it more responsive to the cyclical nature of banking activities and the post-Gramm-Leach-Bliley financial and economic environment. This legislation fulfills our commitment to the American public. Indeed, H.R. 522 was reported out of committee on a voice vote, a testimony to its responsiveness and timeliness. Substantially similar legislation passed this body just last year with over 400 votes.

This legislation is based on the recognition that depositors, savers, and investors have integrated financial needs and that the deposit insurance system must be stronger, more flexible, and adaptable to changing depositor behaviors in real times. The bill provides the FDIC with the necessary supervisory tools to manage the deposit insurance fund in a way that balances all affected interests and allocates the benefits and costs of the system evenly and fairly.

I want to thank the chairman of the Subcommittee on Financial Institutions and Consumer Credit, the gentleman from Alabama (Mr. Bachus) for taking on this challenging, highly technical legislative process and for engaging all the major stakeholders in developing a bipartisan piece of well-balanced, highly effective legislation.

I also want to thank all of the bipartisan co-sponsors of this important legislation, particularly our distinguished ranking member, the gentleman from Massachusetts (Mr. Frank), for their good work in this effort. I strongly urge all of my colleagues to support this legislation, and by doing so we ensure the public continues to maintain its confidence in the U.S. financial services industry, by far the most stable in the world.

Mr. Chairman, in scoring last year's deposit insurance reform legislation, the CBO concluded that the bill would decrease net Federal spending by $700 million. This year, presented with a substantially similar piece of legislation reforming the deposit insurance system, the CBO applied a different set of assumptions in performing its analysis of H.R. 522, and concluded that this year's bill would increase net Federal spending by some $1.9 billion.

This large swing between last year's estimate and this year's is attributable in large measure to a change in CBO's calculation of how much premiums the FDIC will be able to collect from insured depository institutions under the two bills. In making this calculation, CBO acknowledged the speculative nature of its analysis, stating that ``it is possible that the FDIC could use its broad discretion [under the legislation] differently than we have assumed and that could result in either fewer or greater premium collections than CBO has estimated.''

The CBO's analysis is grounded in an arbitrary assumption that the FDIC Board will choose not to exercise its authority in a revenue neutral way. This assumption is directly contrary to the consistent congressional testimony of the FDIC that a central goal of deposit insurance reform is revenue neutrality.

In fact, in a letter that the Committee received on March 31, 2003, from the Chairman of the FDIC, the Honorable Don Powell, Chairman Powell stated the FDIC's position that H.R. 522 gives the agency ``appropriate tools and incentives to manage the deposit insurance system such that it will not result in increased net government spending.''

Chairman Powell's letter, which conclusively rebuts the notion that H.R. 522 will have an adverse affect on Federal spending, goes on to state:

H.R. 522 provides the FDIC with the tools to achieve

revenue neutrality in the management of the deposit insurance

system. Because any analysis that determines H.R. 522 will

result in an increase in net government spending must

necessarily rely on assumptions regarding how the FDIC Board

will exercise the discretion provided in the legislation, I

can assure Congress that the leadership of the FDIC has no

intention of managing the deposit insurance system in a way

that increases the costs to the government or increases the

burden on insured institutions. The costs of the deposit

insurance system will continue to be borne by the banking

industry, but in a manner that establishes a strong risk-

based premium system and avoids the procyclical risks

inherent in current law.

The Committee shares the view of the FDIC, the agency that has had responsibility for administering the deposit insurance program since its inception more than 70 years ago, and believes that the CBO analysis of the potential budgetary impact of H.R. 522 is fundamentally flawed.

For the Record, I am including a copy of the CBO estimate and the FDIC's response.

U.S. Congress,

Congressional Budget Office,

Washington, DC, March 28, 2003.

Hon. Michael G. Oxley,

Chairman Committee on Financial Services, House of

Representatives, Washington, DC.

Dear Mr. Chairman: The Congressional Budget Office has

prepared the enclosed cost estimate for H.R. 522, the Federal

Deposit Insurance Reform Act of 2003.

If you wish further details on this estimate, we will be

pleased to provide them. The CBO staff contacts are Mark

Hadley and Ken Johnson (for federal costs), and Judith Ruud

(for the private-sector impact).

Sincerely,

Barry B. Anderson

for Douglas Holtz-Eakin, Director.

Enclosure.

H.R. 522--Federal Deposit Insurance Reform Act of 2003

Summary: H.R. 522 would amend provisions of banking and

credit union law to reform the deposit insurance system.

Specifically, the bill would increase insurance coverage for

insured accounts from $100,000 per account to $130,000 for

most accounts (with higher levels of coverage for retirement

accounts and municipal deposits). Over time, the coverage

limit for insured deposits would increase to account for

inflation. Those provisions of the bill would affect deposits

held by banks and thrifts, which are insured by the Federal

Deposit Insurance Corporation (FDIC), as well as those held

by credit unions, which are insured by the National Credit

Union Administration (NCUA). In addition, the bill would

merge the Bank Insurance Fund (BIF) and the Savings

Association Insurance Fund (SAIF) to create a new Deposit

Insurance Fund (DIF) to pay the claims of depositors of

failed banks and thrifts. Finally, H.R. 522 would amend the

conditions under which banks and thrifts would pay insurance

premiums to the FDIC, which administers the funds.

CBO estimates that H.R. 522 would increase the net cost of

resolving failed financial institutions by $2.1 billion over

the next 10 years. Under the bill, the FDIC and NCUA would

offset some of that cost through increased insurance premiums

paid by financial institutions. Because H.R. 522 would allow

institutions to pay FDIC premiums with credits in lieu of

cash, the additional cost of resolving failed financial

institutions under the bill would exceed the cash receipts

from additional premiums. Consequently, we estimate that the

FDIC would bear nearly all of the increased costs of

resolving failed institutions during the next five years,

when most of the credits would be used. As a result, CBO

estimates that a would increase net direct spending by $1.9

billion over the 2004-2013 period.

H.R. 522 contains an intergovernmental mandate as defined

in the Unfunded Mandates Reform Act (UMRA). CBO estimates

that the mandate would impose no costs on state, local, or

tribal governments and, therefore, that it costs would not

exceed the threshold established in UMRA ($59 million 2003,

adjusted annually for inflation).

The bill contains private-sector mandates as defined by

UMRA, primarily because it would necessitate the payment of

increased deposit insurance premiums. CBO estimates that the

direct cost of those mandates would be below the annual

threshold specified in UMRA ($117 million in 2003, adjusted

annually for inflation) during the first five years after

enactment because the bill would provide credits to certain

institutions that would largely offset their insurance

premium assessments over the 2004-2008 period. We do not have

sufficient information to provide a precise estimate of the

aggregate cost of all the mandates in the bill.

Estimated cost to the Federal Government: The estimated

budgetary impact of H.R. 522 is shown in the following table.

The costs of this legislation fall within budget function 370

(commerce and housing credit).

--------------------------------------------------------------------------------------------------------------------------------------------------------

By fiscal year, in billions of dollars--

Mr Chairman, banks that primarily serve agricultural customer remain concerned with the possibility of having to rely more and more on nontraditional funding sources to support their asset growth and continued ability to provide the necessary financing for their customers--farmers, ranchers, consumers and rural businesses.

Today, more than 1,820 of our nation's banks hold more than 25 percent of their loans. According to the Federal Deposit Insurance Corporation, FDIC, office in Kansas City, in Nebraska, there are 210 farm banks that are FDIC insured institutions with at least 25 percent of total loans comprised of agriculture loans. A majority of these banks are located in rural areas and are the economic engines that help support the local community.

The legislation we are considering today, H.R. 522, the Federal Deposit Insurance Reform Act of 2003, includes modest reforms to the deposit insurance system that will substantially benefit local banks in my community and

our nation's agricultural economy. During the 1990s many farm banks experienced a decline in core deposits and would likely see that trend reversed with increased deposit insurance coverage levels. A key component of this legislation includes a provision that provides for a modest increase of general coverage levels to $130,000 and then indexes it for inflation. Deposit insurance coverage levels have not been increased in twenty-three years, the longest period in FDIC history without an increase. Deposit protection has eroded by one-half due to inflation since 1980.

Higher coverage levels would provide rural residents such as farmers and ranchers with the additional security to deposit their funds in the local bank. These funds would be reinvested in the local communities to support projects such as the building of new ethanol plants and other value-added processing activities that will benefit local agricultural producers and provide employment for rural residents. Additional economic development in rural areas would create new opportunities for recent college and high school graduates and would help stop the rural depopulation that has been occurring over the past 20 years in many of our agriculturally dependent areas.

I urge my colleagues to support our nation's local banks and rural communities by voting ``yea'' on H.R. 522.

Mr. Chairman, H.R. 522, the Federal Deposit Insurance Reform Act, expands the federal government's unconstitutional control over the financial services industry and raises taxes on all financial institutions. Furthermore, this legislation could increase the possibility of future bank failures. Therefore, I must oppose this bill.

I primarily object to the provisions in H.R. 522 which may increase the premiums assessed on participating financial institutions. These ``premiums,'' which are actually taxes, are the premier sources of funds for the Deposit Insurance Fund. This fund is used to bail out banks that experience difficulties meeting their commitments to their depositors. Thus, the deposit insurance system transfers liability for poor management decisions form those who made the decisions, to their competitors. This system punishes those financial institutions which follow sound practices, as they are forced to absorb the losses of their competitors. This also compounds the moral hazard problem created whenever government socializes business losses.

In the event of a severe banking crisis, Congress will likely transfer funds from the general revenue into the Deposit Insurance Fund, which could make all taxpayers liable for the mistakes of a few. Of course, such a bailout would require separate authorization from Congress, but can anyone imagine Congress saying ``No'' to banking lobbyists pleading for relief from the costs of bailing out their weaker competitors?

Government subsidies lead to government control, as regulations are imposed on the recipients of the subsidies in order to address the moral hazard problem. This is certainly the case in banking, which is one of the most heavily regulated industries in America. However, as George Kaufman, the John Smith Professor of Banking and Finance at Loyola University in Chicago, and co-chair of the Shadow Financial Regulatory Committee, pointed out in a study for the CATO Institute, the FDIC's history of poor management exacerbated the banking crisis of the eighties and nineties. Professor Kaufman properly identifies a key reason for the FDIC's poor track record in protection individual depositors: regulators have incentives to downplay or even cover-up problems in the financial system such as banking failures. Banking failures are black marks on the regulators' records. In addition, regulators may be subject to political pressure to delay imposing sanctions on failing institutions, thus increasing the magnitude of the loss.

Immediately after a problem in the banking industry comes to light, the media and Congress will inevitably blame it on regulators who were ``asleep at the switch.'' Yet, most politicians continue to believe that giving the very regulators whose incompetence (or worse) either caused or contributed to the problem will somehow prevent future crises!

The presence of deposit insurance and government regulations removes incentives for individuals to act on their own to protect their deposits or even inquire as to the health of their financial institutions. After all, why should individuals be concerned with the health of their financial institutions when the federal government is insuring banks following sound practices and has insured their deposits?

Finally, I would remind my colleague that the federal deposit insurance programs lacks constitutional authority. Congress' only mandate in the area of money, and banking is to maintain the value of the money. Unfortunately, Congress abdicated its responsibility over monetary policy with the passage of the Federal Reserve Act of 1913, which allows the federal government to erode the value of the currency at the will of the central bank. Congress' embrace of fiat money is directly responsible for the instability in the banking system that created the justification for deposit insurance.

In conclusion, Mr. Chairman, H.R. 522 imposes new taxes on financial institutions, forces sound institutions to pay for the mistakes of their reckless competitors, increases the chances of taxpayers being forced to bail out unsound financial institutions, reduces individual depositors' incentives to take action to protect their deposits, and exceeds Congress's constitutional authority. I therefore urge my colleagues to reject this bill. Instead of extending the Federal program, Congress should work to prevent the crises which justify government programs like deposit insurance, by fulfilling our constitutional responsibility to pursue sound monetary policies.

Mr. Chairman, I offer an amendment.

The CHAIRMAN: The Clerk will designate the amendment.

Mr. Chairman, I yield myself 5 minutes.

Mr. Chairman, I fully support many of the reforms in H.R. 522 but must, once again, raise some concern with one particular section that would not only cause harm but could ensure that the other reforms are once again delayed by the other body or by the administration. That issue is the increase in coverage amounts.

I am pleased to see my friend, the gentlewoman from New York (Mrs. Maloney), a fellow member of Committee on Financial Services, here on the floor today who is joining me in offering this amendment.

This simple amendment returns the base coverage level for insurance on deposits to the current $100,000 level. It removes provisions increasing coverage to $130,000, as well as provisions to automatically increase coverage through inflation adjustments. This is the only change it makes.

Mr. Chairman, I reserve the balance of my time.

Mr. Chairman, could you tell me how much time remains on each side?

Mr. Chairman, I want to make sure we are talking about the right amendment. It is amendment No. 1, which only deals with the level of insurance and the question of indexing. It does not deal with retirement accounts or municipal deposits. Am I correct in that, Mr. Chairman?

Mr. Chairman, I yield 5 minutes to the gentlewoman from New York (Mrs. Maloney).

Mr. Chairman, I yield myself such time as I may consume, and I want to echo the comments of the gentlewoman from New York (Mrs. Maloney).

Mr. Chairman, one of the things I have is an experience of having had to survive the savings and loan crisis of the 1980s when I was in the real estate business. This was not a pretty time for those of us who were confronted with that situation, and I would advise those who did not have that pleasure that they do not want to have the opportunity to enjoy that in their future business careers.

I will say that in the context of whether or not to raise from $100,000 to $130,000, or some other level, the plain fact of the matter is that 98 percent of all accounts have balances less than $100,000, and the law allows each of those who might otherwise exceed $100,000, if they wish, to open another insured account up to another $100,000; to drive down the street and open an account in another bank; to diversify their deposits in their community. It is not necessarily a fact that there is only one place at which an individual can receive insurance on their accounts. If you have more than $100,000 in an account, you can reduce the balance in that account and take that money to another bank and receive another layer of protection for that balance.

Mr. Chairman, that is the beauty of this system. That is the strength of the system. And, in fact, it is the strongest argument that we do not need to increase limits. This proposal to increase to $130,000 is a solution in search of a problem.

I urge this body to make an ``aye'' vote on my amendment. And, Mr. Chairman, I want to submit for the

Record the statements of Under Secretary of the Treasury Peter Fischer, Federal Reserve Board Chairman Alan Greenspan, Comptroller of the Currency John D. Hawke, Jr., and Director of the Office of Thrift Supervision James Gilleran.

H.R. 3717--Federal Deposit Insurance Reform Act of 2002, Rep. Bachus

(R) Alabama and 63 Cosponsors

The Administration supports those provisions of H.R. 3717

that would improve the deposit insurance system's operation

and fairness. Specifically, the Administration supports

provisions that would: (1) allow the insurance fund reserve

ratio to vary within a range and eliminate triggers that

could cause sharp changes in premiums; (2) merge the bank and

thrift insurance fund; and (3) ensure that institutions

appropriately compensate the FDIC for insured deposit growth

while also taking into account the past contributions of many

institutions to build fund reserves.

The Administration, however, strongly opposes those

provisions of H.R. 3717 that would raise deposit insurance

coverage limits. The interests of depositors will not be

served by an increase in deposit insurance coverage limits.

The average saver would derive no financial benefit from

increased coverage limits. The small fraction of savers with

substantial deposits may obtain as much coverage as desired

at minimal inconvenience by placing deposits at multiple

institutions. An increase in coverage limits would neither

enhance competition among depository institutions in general

nor make the nation's community banks more competitive in

raising funds.

Increased coverage limits would also expose taxpayers to

additional risk while providing no benefit to the

overwhelming majority of Americans. Higher coverage limits

would mean greater off-balance sheet contingent liabilities

of the Government and weaker market discipline, exposing the

insurance fund and taxpayers to increased risk of loss.

To avoid dilution of FDIC and NCUA reserves resulting from

the higher coverage limits provided in H.R. 3717, banks,

thrifts, and credit unions will need to pay at least $3.5

billion in higher insurance assessments according to CBO and

OMB estimates. A substantial amount of the higher industry

costs will occur in the first year.

The Administration notes the submission to Congress by the

FDIC of recommendations for legislative or administration

action is subject to the President's authority under the

Recommendations Clause of the Constitution.

Pay-As-You-Go-Scoring

Any law that would reduce receipts or increase direct

spending is subject to the PAYGO requirements of the Balanced

Budget and Emergency Deficit Control Act (BEA) and could

cause a sequester of mandatory programs in any fiscal year

through 2006. The requirement to score PAYGO costs expires on

September 30, 2002, and there are no discretionary caps

beyond 2002. The Administration will work with Congress to

ensure fiscal discipline consistent with the President's

budget and a quick return to a balanced budget. The

Administration will also work with Congress to ensure that

any unintended sequester of spending does not occur.