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The American Banker

Bush Budget Fleshes Out Plan for FDIC

February 4, 2003, Tuesday



The Bush administration tucked its most concrete plan yet for overhauling the deposit insurance system into the $2.23
trillion budget request it sent to Capitol Hill on Monday.

White House officials also used the four-volume, 1,685-page document to scale back previous forecasts of bank
failures, raise concerns about government-sponsored enterprises, tout programs that seek to promote homeownership,
and propose federal backing of more small-business lending. It also reiterated proposals for expanding tax-advantaged
savings accounts.

Though the administration had previously taken positions on deposit insurance reform, the blueprint in the high-profile
budget plan sent the clearest signal to date that reform remains a priority despite many potential distractions. Industry
observers said that once the administration's full plan is revealed it could shape the congressional debate.

"It is an indication that the President's name is behind this," said Karen Shaw Petrou, the managing partner at Federal
Financial Analytics in Washington. It went beyond previous public statements to offer "a clear specific plan, which I
think will be one that the Federal Deposit Insurance Corp. presumably will largely endorse," she said.

"Then you will have a coherent administration position that sets the baseline for the debate."

The budget recommended three essential changes: merge the Bank Insurance Fund and the Savings Association
Insurance Fund; replace the current fixed statutory ratio of federal reserves to insured deposits of 1.25% with a more
flexible range; and allow the FDIC to charge all banks a premium to ensure that fast growers pay their fair share.

"The FDIC has been prohibited since 1996 from charging premiums to 'well-capitalized' and well-run institutions as
long as the insurance fund reserves equal or exceed 1.25% of insured deposits," the budget says. "Therefore, only 9% of
banks and 10% of thrifts pay insurance premiums, allowing a large number of financial institutions to rapidly increase
their insured deposits without any contribution to the insurance fund.

"The administration proposal would repeal this prohibition to ensure that institutions with rapidly increasing insured
deposits or greater risks appropriately compensate the insurance fund." Though the budget made no mention of
proposals by lawmakers to raise coverage to $130,000 per account, Treasury officials have said they are adamantly
opposed to any increase in the deposit insurance coverage levels.

Sen. Tim Johnson, D-S.D., reintroduced his bill last week, and Rep. Spencer Bachus, R-Ala., plans to reintroduce a
similar bill today after a press conference with House Financial Services Committee Chairman Michael G. Oxley and
Rep. Barney Frank, the committee's ranking Democrat.

The budget also dramatically scaled its projection for bank failures. Outlays from the Bank Fund, used mostly to buy
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The American Banker, February 4, 2003

the assets of failed banks, totaled $1.4 billion in fiscal year 2002.

The budget predicts that outlays will reach $1.9 billion this fiscal year and $1.8 billion in fiscal 2004. The last budget
projected outlays of $2.5 billion in fiscal 2002 and $6.4 billion this fiscal year.

The administration also outlined policy goals for government-sponsored enterprises including Fannie Mae, Freddie
Mac, and the Federal Home Loan banks.

"The large size of some GSEs is ... a potential problem," a budget analysis section says. "Financial trouble of a large
GSE could cause strong repercussions in financial markets, affecting federally insured entities and economic activity."

The administration did not offer specific risk-management recommendations.

It used its analysis of the Federal Home Loan Bank System to emphasize that though it "encouraged all GSEs to
voluntarily register their equity securities with the Securities and Exchange Commission" the Home Loan banks "have
not yet decided to register their stock."

The administration also questioned whether the banks are fulfilling with their mission. "The FHLB's evolving member
composition and investment activities raise questions about the degree to which the system continues to promote the
public policy objective of providing liquidity to home mortgage lenders," the budget analysis says.

"As a result of opening membership to commercial banks and credit unions, for example, many member institutions
now have very limited involvement in mortgage lending."

The administration also proposed initiatives through the Department of Housing and Urban Development to expand
homeownership, and it used the budget request to plug its proposal to revamp real estate settlement procedures.

The Small Business Administration would be authorized to guarantee $9.3 billion of 7(a) general business loans in
fiscal 2004. That would be a return to fiscal-2002 levels.

Lobbyists for lenders and small commercial borrowers are still urging lawmakers to increase guarantee authority for the
current fiscal year, which started Oct. 1. President Bush had proposed that the SBA be limited to guaranteeing about
$4.9 billion of 7(a) loans in fiscal '03, but legislation has advanced in the House and Senate that could boost the
program's guarantees to an estimated $11 billion.

Giovanni Coratolo, the small-business policy director for the U.S. Chamber of Commerce, said that small-business
lending interests would push for authority for $11 billion of loans based on anticipated demand.

"Hopefully we won't have as hard a time this year to get the needed funds for small-business lending," Mr. Coratolo

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The American Banker, February 4, 2003

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