A top federal bank regulator today will urge that banks be required to pay insurance premiums not only on their domestic deposits but also on deposits they hold in foreign branches.
Irvine H. Sprague, the outgoing member of the board of directors of the Federal Deposit Insurance Corp., said that because regulators have made it clear that they cannot afford to permit major U.S. banks to fail, foreign deposits effectively have the same protection as insured domestic deposits.
Sprague, in an address scheduled for delivery in Boston today, said it would be fairer to reduce overall insurance premiums and assess all deposits held by U.S. banks, whether in domestic or foreign branches.
Sen. William Proxmire (D-Wis.), the ranking minority member of the Senate Banking Committee, has introduced a bill that would lower insurance premiums from one-twelfth of 1 percent of all deposits to one-fifteenth of 1 percent, but would levy that assessment on foreign as well as domestic deposits.
The 10 U.S. banks with the largest international operations have about half of their deposits abroad -- $226 billion in domestic deposits and $222 billion in their foreign offices.
Sprague, who along with FDIC Chairman William M. Isaac is expected to leave office soon, also said he is concerned about the increasing number of potential claims on bank assets that do not show up on a bank's books, such as standby letters of credit and sales of loans that banks might be forced to buy back.
Regulators are forcing banks to boost their capital. The three bank regulatory agencies have ruled that commercial banks must maintain capital equivalent to 6 percent of their assets. As a result, banks are seeking ways to earn money without increasing their assets.
Late last year, in a ruling made public last week, the Comptroller of the Currency said that Citibank could not remove from its balance sheet loans that it made and then sold to a separate company, because the bank "retained liability for 10 percent of any defaulting loans it had sold," Sprague said in his prepared remarks.
Letters of credit are guarantees from banks that if a customer does not pay, the bank will. Banks earn fees for issuing letters of credit, but the letters do not show up on their books because the liability is contingent on a customer defaulting. Most letters of credit are never exercised.
Sprague said off-balance sheet items "in the nation's 40 largest banks now exceed these banks' total book liabilities." Neverthless, he said, they are required to maintain capital based on the assets and liabilities on their books.
Sprague said that the rescue of Continental Illinois National Bank last year is an indication that regulators cannot permit a giant bank to fail because of the repercussions on the rest of the domestic and international financial system. Yet it is mainly big banks that have large numbers of foreign operations.
Sprague noted that Citibank has $79 billion in deposits and Bank of America in San Francisco has $89 billion in deposits. But because more than 60 percent of Citibank's deposits are foreign, it paid only $18.5 million in deposit insurance premiums last year, while Bank of America -- with 65 percent of its deposits domestic -- paid more than $40 million. Furthermore, he said, Bank of America has fewer total liabilities than Citibank.
"Neither paid in proportion to the assessments on smaller banks, which rely completely on domestic deposits," Sprague said.