Memo to the FDIC (Commentary by J. French Hill)

This is an open letter dated March 5 to Sheila C. Bair, chairman of the Federal Deposit Insurance Corp.

The coordination of the federal government’s efforts to assist our economy in a prompt restart continues to stretch the imagination. The Federal Reserve and the U.S. Treasury are working overtime to come up with ways and means to increase liquidity and earnings for the U.S. commercial banking industry in order to aid recovery and increase commercial bank lending. These include a steep yield curve to improve earnings, helping the industry work through troubled loans and, finally, strengthening capital through the TARP’s Preferred Stock Program. Given these massive efforts, it seems completely counterintuitive and counterproductive for the FDIC to announce plans to take $27 billion out of the banking system during 2009 by way of a special assessment. I am certainly familiar with the Deposit Insurance Fund and its operation; and, I fully understand that it is politically difficult for you to charge higher premiums during booming economic times with no bank failures and that it is equally unpleasant to charge ridiculous special assessments in the middle of a crisis. Managing the fund is a special trust and I empathize with your difficult decisions.

However, I liken the Board’s decision to FEMA being put in charge of the FDIC whereby they are shouting through a bull horn from a helicopter to the banker on the roof of his bank, "we’re raising your insurance premiums"; and, the banker shouts back, "yes, but I haven’t even been rescued yet, and my bank and my property are still under water!"

I remain utterly opposed to the proposed special assessment. In my judgment, the FDIC should, if necessary, request from the Congress an increase in the size of your line of credit from the Treasury and supplement the Deposit Insurance Fund through Treasury borrowings during this period of economic crisis. Perhaps, a much smaller special assessment could be levied which would help cover the interest carrying costs for the increased borrowings under the Treasury line of credit. Your memorandum cites that you believe that this is a questionable approach. On the contrary, I believe that was the intent of having a Treasury line of credit – for just such moments as these; and, the line of credit should be large enough to take care of the need. That is, under "normal" economic downturn circumstances, the existing Treasury line of credit might be sufficient; but, no one would claim that the economic climate that we are currently experiencing is "normal."

Removing $27 billion out of the industry this year runs completely counter with the Congress’ shrill mandates that banks (in the face of all of the economic headwinds) should increase lending. Why give the Congress additional excuses to bring bankers to the Hill and excoriate them? Given this climate, I would think the Congress would embrace the idea of an increased and more flexible Treasury line of credit to help the FDIC work with the industry in weathering this unprecedented economic time.

I am supportive of the FDIC Board of Directors’ efforts to use a risk assessment approach in levying deposit insurance premiums; and, I commend the board for that. Also, I believe that the Board should consider structural industry differences in the design of these risk based premiums. Levels of risks taken by the vast majority of institutions are quite transparent (standard credit and interest rate risks). Further, most of our Nation’s community banks are quite sound and have much greater levels of capital than required, have more predictable streams of income and generally do not have complex subsidiaries or off balance sheet activities. Further, no single community banking company offers any systemic risk to our national or global financial system.

Thus, I recommend that banks over $100 billion be subjected to higher premiums due to their complexity and systemic risk potential. An institution of this size could demonstrate that they, in fact, do not present such risks due to their "plain jane" nature of their business strategy, then the Board could grant a waiver and that institution would, in turn, fall under the standard risk based schedule of premiums.

Thank you for the opportunity to offer comment and voice concerns about the proposal. Thanks, too, for your dedicated service to the industry and our valued depositors.             

(J. French Hill is chairman and CEO of Delta Trust & Banking Co. of Little Rock.)