Make The Banks Insure Themselves

Washington is in the midst of its biennial guessing game about what legislation will get the green light when the 108th Congress convenes next month. Many Committee chairpersons, of course, are just waiting to get their marching orders from the White House and their friends among the army of lobbyists (aka campaign contributors).

But at least one new Committee Chairman — Senator Richard Shelby of Alabama — is making it very clear that he isn’t waiting on instructions from anyone. The votes had hardly been counted from the November 5 election when Senator Shelby announced an agenda for his Banking Committee that sent an early wintry chill through the ranks of big lobbying firms on K Street in Washington.

Shelby is talking about “safety and soundness” of financial institutions, a phrase that had been all but dropped from the vocabulary of most of the members of the House and Senate Banking Committees in the rush to meet the demands of the financial industry for more power and less regulation. And he is making it clear that federal regulators charged with safety and soundness responsibilities meet those responsibilities. It sounds like the regulators better be prepared to make lots of trips to the Senate next year.

In interviews, the new Chairman has announced plans for hearings on whether Congress went too far in the passage of the financial modernization legislation (Gramm-Leach-Bliley Act) in 1999 and, in the process, jeopardized the safety and soundness of the banking system and the taxpayer-backed deposit insurance funds. The key component of the legislation was authority for banks, securities firms and insurance companies to merge and form giant financial conglomerates.

Now the corporate scandals involved in the collapse of corporations like Enron and World Com are raising new questions about the conflicts of interest created by the legislation. Are banks making risky loans to corporations to assure that their securities affiliates can peddle lucrative investment banking services to the same corporation? Are there other tying arrangements involving loan and investment products that could jeopardize safety and soundness of insured banks? Shelby is giving every indication that he intends to explore these questions fully.

His inquiry will add new heat to various investigations of lending and securities underwriting relationships already underway involving banks such as Citigroup, Suisse First Boston, and J. P. Morgan Chase.

Senator Shelby was assigned to the Senate Banking Committee in the late 1980s just as the savings and loan industry was collapsing, something that undoubtedly influences his concern over the safety and soundness of banks and the health of deposit insurance.

“It all goes right back to the insurance funds,” he said in an interview with the American Banker. “I believe that we have to look at setting banking policy from the context of making sure the funds are sound, so we will not visit the taxpayers again, like we did in the thrift debacle.”

Shelby opposes increasing the current $100,000 insurance limit on individual accounts and questions the “free ride” that banks are receiving through the 1995 suspension of premiums for deposit insurance for all but the most risk-prone banks.

“I never have insurance on any building I have unless I pay the premium…I don’t know what the premiums should be, but to just let a few people pay the bank insurance premium and give everybody insurance…that ought to be looked at,” Shelby said when asked about deposit insurance by a reporter.

Shelby is right. There is no legitimate rationale for the banks to escape paying for their own insurance when the taxpayers are on the hook for hundreds of billions of dollars for a bailout when the fund is depleted. As the Senator points out that is exactly what happened in 1989 to the savings and loan insurance fund. Although largely overlooked at the time and seldom mentioned, the bank insurance fund also fell into the red in 1991, forcing Congress to adopt provisions for a $30 billion contingency fund for commercial banks which is still on the books.

But, for all of his concern about safety and soundness and the viability of deposit insurance funds, very high on his agenda is privacy — the safeguarding of financial, medical and other personal data of individuals.

During the consideration of the financial services legislation in 1999, he and Representative Ed Markey, Democrat from Massachusetts, fought hard to include a strong privacy provision that would have required consumers to have agreed in writing before any personal data could be released by a bank, credit card company or other financial institution. The consumer would have to “opt in” specifically to any data being sold or otherwise distributed to any third party under the Shelby-Markey provisions.

After strong privacy language failed on the floor of the Senate, Shelby renewed the battle when the House and Senate versions of the bill were being reconciled in a joint conference.

Once again, the pro bank forces from both the Senate and House, pushed hard by a horde of financial lobbyists, blocked Shelby’s efforts and adopted a privacy provision that provides no real privacy for the personal information of financial consumers.

The weak privacy language was one of the big factors in Shelby casting one of only eight votes in the Senate against the adoption of the conference report for final passage of the financial services modernization bill. Opponents of financial privacy may find the going much tougher with Richard Shelby wearing the chairman’s hat.

None of this is to suggest that consumers will not have reasons to disagree with the Senator from Alabama on issues in coming months, for example items like bank redlining and the Community Reinvestment Act. But, Senator Shelby does come into the Chairmanship with a solid understanding of the Senate Banking Committee’s responsibility for insisting on the safety and soundness of insured financial institutions, tough oversight of regulatory agencies and the protection of citizens’ privacy. Those are some welcome and big steps forward.


Ralph Nader is a consumer advocate, lawyer and author of Only the Super-Rich Can Save Us!