In Surprise Move, Deposit Insurance Overhaul Added to Reform Bill

WASHINGTON — Lawmakers unexpectedly added an overhaul of the deposit insurance system to the final regulatory reform legislation on Tuesday, adding sweeping provisions that were not part of either the House or Senate revamp bills.

The changes would permanently set the deposit insurance limit at $250,000, extend a program to provide unlimited guarantees for certain accounts and give the Federal Deposit Insurance Corp. more flexibility to set premiums.

The new language came as the conference committee also proposed tweaks to provisions that merge the Office of Thrift Supervision into the Office of the Comptroller of the Currency and reform the credit ratings agencies.

But it was deposit insurance that drew most of the attention.

"Making the higher limit permanent is an enormous step forward for the nation's depositors and savers, and the stability of the banking system and community banks," said Kenneth Guenther, a former president of the Independent Community Bankers of America. "The other proposed changes fall to the wayside against this enormous achievement."

Under the conference committee rules, representatives from each chamber can vote to submit a proposal to those on the other side, who can accept it, reject it or make a counteroffer. Once both sides agree, the changes are incorporated into the final bill, which must still be approved by the full House and Senate once the committee is finished.

Ultimately, the House and Senate conferees agreed to make several changes to the bill, but left one deposit insurance item unresolved until the final day of negotiations.

The two sides agreed to make the $250,000 limit permanent and retroactive to cover any failures during 2008. The limit was temporarily increased from $100,000 in October 2008, and is due to return to that level after 2013.

"This is the moment we can give people what they need, that is the security of $250,000" in coverage and "make sure there aren't runs on our banks later on," said Rep. Luis Gutierrez, D-Ill., a member of the committee.

Lawmakers had been expected to eventually make the $250,000 limit permanent, but most observers had thought they would wait to deal with it in another bill closer to the 2013 deadline.

The retroactive deposit insurance increase would benefit IndyMac Bank and five other institutions that failed before the temporary coverage hike was effective.

But the two sides disagreed on how far to extend the Transaction Account Guarantee program, which was set up during the financial crisis to provide unlimited deposit insurance for zero-interest checking accounts. That program is due to expire at yearend.

Both sides said it should be extended, but House conferees sought to make the program permanent, while the Senate members only agreed to keep it going for two more years.

"The temporary program … has helped maintain the confidence of small business," said Senate Banking Committee Chairman Chris Dodd. "There's a value in this as we're going through the effort to get out of the economic crisis we're in."

But Dodd said that Senate conferees rejected a special permanent treatment of "a whole category of deposits from the application of FDIC insurance limits."

House conferees did not accept the Senate's proposed limitation. House Financial Services Committee Chairman Barney Frank said late Tuesday that there could be significant cost savings to the government if the program is made permanent. He said the House planned to consult with the Congressional Budget Office to see if that was true.

"If in fact that is the case, we would disagree in making it temporary, so we would like to hold off on that until we can ask the CBO an answer," Frank said. "We want to wait and see on TAG."

Both proposals would also make the TAG program mandatory (it currently is voluntary.)

During the debate Tuesday, committee member Rep. Scott Garrett, a Republican House member from New Jersey, said the provisions went too far. He proposed an amendment that, while preserving the permanent coverage increase, would not make it retroactive to the start of 2008 and would eliminate the TAG extension.

"What we need to do is get the government out of the economy, out of these blanket guarantees, and let the economy stand on its own two feet again." he said.

House and Senate conferees also agreed to expand the FDIC's ability to raise premiums.

Under current law, the FDIC can set a target ratio of reserves to insured deposits of between 1.15% and 1.50%, but must begin to give banks rebates if the reserve ratio exceeds 1.35%. Under the revised language, the FDIC could set the target ratio as high as it wanted, and the agency would have total discretion about when it could issue rebates.

Industry representatives were mixed on the impact of the changes. James Chessen, the chief economist of the American Bankers Association, warned about giving the FDIC too much power. "We've been outspoken that the $250,000 limit should be permanent," Chessen said.

But, he said, "the removal of the dividend authority and the unlimited opportunity for FDIC to charge very high premiums is very troubling, and could be very expensive to the industry."

But Steve Verdier, the director of congressional relations at the ICBA, said that the Deposit Insurance Fund is still in the red — the reserve ratio was negative-0.38% as of the end of the first quarter — and the effect of the proposal would not be immediate.

"It would be better to leave the cap in place but given the condition of the fund, it's probably not a matter of great urgency," he said. "The question of declaring a dividend is something that can be debated in the future. The history of this is Congress does revisit these matters from time to time. So when the fund is so large that it makes sense for there to be dividends, those of us who are in this business can make that recommendation."

The deposit insurance changes came as the House suggested other alterations to the final bill. The two sides formally agreed to preserve the thrift charter and protect OTS employees for three years.

Other issues also popped up. Sen. Bob Corker, R-Tenn., attempted to add an amendment that would allocate the OTS' board seat to a Federal Reserve Board governor.

Under the current bill, that seat would be taken by the director of a proposed new consumer protection bureau. But the amendment was defeated by Dodd and other Democrats, who said adding the consumer regulator to the board would ensure there were no conflicts between safety and soundness concerns and consumer protection issues.

"The director of the bureau would gain, I think, a much deeper understanding of safety and soundness concerns," Dodd said.

The conference committee is scheduled to meet again on Wednesday to discuss executive compenation limits, whether the Government Accountability Office should audit the Fed and investor protections.