July 31, 2002
Senators Warner and Allen
Senators Warner and Allen
PO Box 8208
Alexandria, VA 22306-8208
July 31, 2002
The Honorable John William Warner
United States Senate
225 Russell Senate Office Building
Washington, DC 20510-4601
The Honorable George F. Allen
United States Senate
204 Russell Senate Office Building
Washington, DC 20510-4604
Dear Senators Warner and Allen:
Deposit insurance reform legislation has passed the House and may soon come up in the Senate. Both bills (H.R. 3717 and S. 1945) include good features, including merging the FDIC’s two funds into a single, stronger, fund and giving the FDIC the ability to set reasonable premiums when the fund needs to be replenished.
Unfortunately, neither bill deals with the free riders. These are securities companies that have shifted billions of their customers’ dollars from uninsured mutual funds they control into their affiliated insured banks. They pay no premiums to the FDIC for the coverage they receive. These new deposits threaten to stretch the FDIC’s resources to the point that all insured banks will have to pay sharply increased premiums.
This is unfair to my bank and others in our state that paid substantial premiums in the 1990s to replenish the FDIC. I do not believe we should be asked to pay additional premiums just to cover these free riders. Instead, the FDIC should have the authority to impose a special premium on banks that grow at an especially high rate and in such amounts that they trigger a need for new premiums. Simply put, those that impose the cost on the system should pay for it.
The pending legislation includes inadequate attempts to deal with this issue. A one-time assessment credit – based on institutions’ deposits as of December 31, 1996 – deals only fractionally with the costs imposed by past free riders, and not at all with likely future free riders. Future assessment credits – based on premiums that will be paid – would amount to a fraction of the total cost free riders would impose on the industry. Banks like mine would still have to make up most of any shortfall caused by the free riders.
Please support including language in the bill that would allow the FDIC to assess the free riders, and contact your colleagues on the Banking Committee.
Sincerely,
James Landrith