The Congress, administration, savings association trade groups, regulators, and other interested parties have expressed concern that a significant disparity in premium rates between BIF and SAIF could develop when BIF is fully recapitalized if the Federal Deposit Insurance Corporation (FDIC) lowers BIF’s premium rates. Pursuant to the June 10, 1994, request of the now Chairman of the Senate Committee on Banking, Housing, and Urban Affairs and the now Ranking Minority Member of the House Committee on Small Business, we undertook a review of the issues related to the likelihood that an insurance premium rate differential would develop between bank and thrift institutions and the potential impact of such a differential on the banking and thrift industries and their respective insurance funds. Once SAIF is fully capitalized, the moratorium on conversions will be lifted. Objectives, Scope, and Methodology

As directed by the requesters’ June 10, 1994, letter, our objectives were to (1) determine the likelihood, potential size, and timing of a differential in premium rates between BIF- and SAIF-insured institutions, (2) analyze possible effects of the premium rate differential on the thrift and banking industries, (3) assess potential threats to SAIF’s viability, and (4) present various policy options to avoid or mitigate problems which a premium rate differential may create. With the pending significant differential between BIF and SAIF premium rates, the SAIF deposit base available to service FICO bond interest may decline by more than the 2-percent annual rate projected by FDIC. SAIF’s total deposit base has declined by 25 percent since its inception, or an average decline of 5 percent each year, from $948 billion in 1989 to $711 billion in 1994. Reliable statistical estimates are not available to predict banks’ and thrifts’ responses to a premium rate differential. Thrifts would likely incur additional costs in their attempt to match bank actions and remain competitive with banks for deposits. However, in the aggregate, the cushion provided by such substitution is limited because eventually SAIF’s premium rates would need to be increased in response to declines in the portion of SAIF’s assessment base available to pay FICO in order to continue paying the FICO bond interest. Former SAIF Members Continue to Service Combined Fund’s FICO Obligation

The Congress could also pass legislation to merge BIF and SAIF into a combined deposit insurance fund with all members contributing to capitalize the fund but require the former SAIF members to retain responsibility for servicing the annual FICO interest obligation. Under this scenario, BIF premiums would not be reduced until 1997.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Federal Deposit Insurance Corporation's (FDIC) proposed reduction of bank insurance premiums once the Bank Insurance Fund (BIF) is recapitalized, focusing on: (1) the likelihood, potential size, and timing of a premium rate differential between banks and thrifts; (2) the possible effects of the premium rate differential on the two industries; (3) the potential adverse effects on the Savings Association Insurance Fund (SAIF); and (4) various policy options to avoid a premium rate differential between BIF and SAIF members.

What GAO Found

GAO found that: (1) BIF is expected to be fully capitalized during 1995 and FDIC has proposed reducing bank premiums as early as September 1995; (2) SAIF will not be fully capitalized for another 7 years because SAIF premiums are also used to pay the Financing Corporation's (FICO) bond interest; (3) a rate differential of about 19 basis points could exist for up to 24 years; (4) SAIF capitalization may be delayed or thrift insurance premiums may have to be increased if thrift failures increase and the deposit base for FICO payments continues to decline; (5) the SAIF deposit base has declined by 25 percent since 1989 and the portion of the deposit base available for FICO payments has declined by 48 percent; (6) there is no reliable data to predict banks' and thrifts' responses to a premium rate differential; (7) banks could pass some of the savings from reduced premiums to customers by increasing deposit interest rates and improving customer services, while thrifts would incur increased costs of up to 10 percent to remain competitive with banks; and (8) policy options to mitigate rate differential problems include taking no action, merging BIF and SAIF, requiring BIF and SAIF members to share FICO bond interest costs proportionally, using BIF premiums or all SAIF resources to pay FICO bond interest, and using appropriated funds to capitalize SAIF or fund FICO bond interest.