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…
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.