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Weekly UpdatesResting below the congressional radar screen are several issues pertaining to banking relations that are of interest to GFOA members. While Congress has moved forward with a bill on the use of electronic checks, lawmakers still have yet to act on three other important issues: overhaul of the FDIC-insured deposits program, payment of interest on commercial checking accounts, and bank tying. This article discusses the status of each of these issues.
FEDERAL DEPOSIT INSURANCE
While the House of Representatives in both the 107th and 108th Congresses approved measures to increase the limit on FDIC-insured deposits, the Senate has failed to hold hearings on the bill. Endorsed by House Financial Services Chairman Michael Oxley, H.R. 522 sailed through the House by a 411-11 vote. The bill would increase deposit insurance from $100,000 to $130,000 and index the limit to inflation starting in 2005 (the FDIC limit has not been increased since 1980). The bill would also double retirement account coverage and merge the Savings Association Insurance Fund with the Bank Insurance Fund, allowing for streamlined administration between banks and savings and loans.
For municipal depositors using in-state financial institutions, H.R. 522 would insure deposits up to $2,000,000 or to the deposit insurance limit plus 80 percent of the deposited amount--whichever is less. Increasing federal deposit insurance coverage would help local governments resolve their collateralization problems and would provide greater flexibility in selecting banks.
The Senate has yet to address this measure for lack of support from Senate Banking Committee Chairman Richard Shelby, Federal Reserve Chairman Alan Greenspan, and the Bush administration. While all of these individuals and institutions support administrative changes to the FDIC, they do not support increasing the deposit insurance limit at this time. "Raising the ceiling now would extend the safety net, increase the government subsidy to depository institutions, expand moral hazard, and reduce the incentive for market discipline without providing any clear public benefit," Greenspan said. (1)
This view differs from a May 2002 study by the Congressional Budget Office, which concluded that depositors would enjoy modest benefits from H.R. 522. This same report specifically addressed the impact of this measure on municipal depositors. The study suggested that raising the federal deposit insurance limit would not only result in greater protection for public deposits, but that it would also result in local governments earning higher yields on their deposits. (2) However, unless lawmakers introduce another comprehensive banking bill during the second session of the 108th Congress, the lack of support from the administration and Senate Republicans makes it unlikely that the bill will move forward anytime soon.
INTERESTING-BEARING CHECKING ACCOUNTS
Like H.R. 522, H.R. 758--the Business Checking Freedom Act of 2003--has passed the House, yet remains untouched by the Senate. Adopted by voice vote in April, H.R. 758 would allow businesses (and public depositors) to earn interest on their checking accounts, which is now prohibited under the Federal Deposit Insurance Act. Despite the introduction of similar legislation in the Senate (S. 553), the Senate Banking, Housing, and Urban Affairs Committee has not held hearings on this matter. Business checking accounts, or negotiable order of withdrawal accounts as they are called, are the only type of account that cannot earn interest from a financial institution. Many banks offer municipal and business depositors other kinds of interest-bearing products, but these accounts usually carry higher administrative costs and are disadvantageous to smaller businesses.
BANK TYING
The General Accounting Office recently sent a report to Congress entitled Bank Tying: Additional Steps Needed to Ensure Effective Enforcement of Tying Prohibitions--a long-awaited publication requested by members of the House Financial Services Committee and Rep. John Dingell, ranking member on the House Energy and Commerce Committee. Bank tying refers to the practice of offering preferred treatment on one financial product if the customer agrees to purchase a second product from the same institution. For example, The Bond Buyer has reported two allegations of bank tying in which underwriters agreed to work on a municipal bond deal on the condition that the issuer agreed to acquire a letter of credit from the same institution.:+ This practice is prohibited under Section 106 of the Bank Holding Company Act Amendments of 1970.
Many have suspected that bank tying occurs throughout the financial services industry. This is very difficult to prove, however, since it is usually accomplished through verbal negotiations that do not leave a paper trail. Over the years, Dingell has alleged that many banks are engaging in this behavior and that regulators are not taking a serious look at the matter. In a letter to Greenspan and John Hawke, head of the Office of the Comptroller of the Currency, Dingell wrote: "Illegal tying is extortion, pure and simple. It is unclear to me that your organizations take this matter seriously." (4)
The GAO report encouraged regulators, specifically the Federal Reserve and the Office of the Comptroller of the Currency, to take additional steps to enforce Section 106. For example, the report recommended the "publication of specific contact points within the agencies to answer questions from banks and bank customers about the guidance in general and its application to specific transactions, as well as to accept complaints from bank customers who believe that they have been subjected to unlawful tying." (5) Sen. Shelby has indicated that he would like to discuss this and other ideas when the Senate Banking Committee holds hearings about the future of the banking industry.
GFOA's Federal Liaison Center will continue to monitor the status of these bills in the Senate. For up-to-date information on these and other federal matters of interest to GFOA members, visit www.gfoa.org/flc/.
Notes:
(1.) Congressional Quarterly Today, February 27, 2003.
(2.) Congressional Budget Office, "Raising the Federal Deposit Insurance Coverage," May 2002 (www.cbo.gov).
(3.) Craig Ferris, "Report on Bank Tying Practices To Be Released to the Public on October 20," The Bond Buyer, October 14, 2003.
(4.) Lyne Hume, "Regulation: Dingell Slams Regulators for Not Taking Bank Tying Seriously," The Bond Buyer, October 21, 2003.
(5.) Government Accounting Office, "Bank Tying: Additional Steps Needed to Ensure Effective Enforcement of Tying Prohibitions," GAO-04-3, October 20, 2003 (www.gao.gov).
SUSAN GAFFNEY is director of GFOA's Federal Liaison Center in Washington, D.C.
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