VOL 2000-8
Reflections on Deposit Insurance Reform: What It May Mean,
and Why
The "comprehensive review" of federal deposit insurance announced last March by
Donna Tonoue, Chairman of the Federal Deposit Insurance Corporation, has begun
to take shape. On August 9 the Corporation released its "Deposit Insurance
Options Paper" (OP) and announced that it was seeking public comment. In a press
conference coincident with release of the OP, Chairman Tanoue stated that with
the exception of its endorsement of merging the bank and thrift insurance funds,
"the FDIC does not endorse anything; we're looking at everything." She hopes to
be able to present recommendations to the FDIC Board in time for early
consideration by the next Congress.
The Options Paper is 83 pages in
length, including attachments, and deals with what it considers to be the three
major issues facing deposit insurance today: pricing deposit insurance for
individual banks, funding deposit insurance losses, and deposit coverage limits.
In putting the paper together the FDIC met with representatives of consumer and
trade groups and "industry experts." It retained a consulting firm to help
"explore ways to incorporate 'best practices' from private-sector risk
management into the consideration of FDIC pricing and funding issues." A survey
was completed and the results are now probably available. Apparently the plan is
to conduct a sort of rolling dialogue with the public, which was invited to
comment on questions that will appear on the FDIC's website, and encouraged to
offer additional comments. The FDIC staff will review comments as they are
received, summarizing them each month for public viewing. This clearly is an
ambitious program, designed to seek out reactions to issues and questions
suggested in the "Options Paper," preparatory to arriving at a final set of
recommendations.
I have a much more modest agenda
in mind for this report. The FDIC's news release makes clear that the
Corporation regards the announced program "as a step toward reforming the
[deposit insurance] system." "Reform" can have a variety of meanings and my
objective is to try to understand what the FDIC regards as reform, and to
contrast this with the reasons for other calls for deposit insurance reform,
calls that have been increasing in number and intensity in recent years. With
respect to the OP, I have relied primarily on the "Introduction.
The Oxford English Dictionary
(OED) offers at least three definitions of reform that may apply in this
instance. One of these is: "To make a change for the better; to amend or improve
by removal of faults or abuses." This apparently is what was meant by "reform"
in the FDIC's press release on August 9. The significance of the OP's issues in
the context of this meaning of deposit insurance "reform" is discussed in
Section I. The other two definitions of reform, listed earlier in the OED, are
much more robust; closer, I believe, to the more usual understanding of the
meaning of "reform:" To convert, bring back, or restore (a thing or person) to
the original form or state, or to a previous condition; or To convert to another
and better form.
Putting aside for now the question
of which is the more useful in the case of the present discussion of deposit
insurance reform, it is difficult to make an assessment of any proposal or set
of proposals until the public policy purposes that deposit insurance is intended
to serve - its fundamental objectives - are identified with some precision, and
a judgment is reached as to whether these purposes are, or are not, being
served. As is pointed out later, this approach is not taken in the OP, possibly
for good reason. It is, however, the approach taken in Section II.
The final section (III) contrasts these two approaches to deposit insurance "reform," but does not offer conclusions for any of the issues identified - for example, on the proper level of insurance coverage. It is far more important, I believe, to get straight at the outset the subjects that must be addressed, and what the appropriate issues are, lest we wander more or less aimlessly in the maze of deposit insurance reform. In this connection, a verse from the Rubaiyat conveys, I think, the consequences of failing to select the proper path:
Into the Universe, and why not knowing,
Nor whence, like water willy-nilly flowing;
And out of it, as Wind along the Waste
I know not whither, willy-nilly blowing
Fitzgerald, First Edition, 1859