Although bankers have successfully put Y2K compliance behind them, regulatory changes under way this year won’t give bankers any time to rest. Banking regulators issued new consumer privacy mandates last week, giving institutions until next summer to come into compliance. Meanwhile, the Federal Deposit Insurance Corp. continued examining ways to use its deposit insurance fund surplus.
The privacy regulations promulgated as a result of the Gramm-Leach-Bliley financial modernization bill will become effective this year on Nov. 13, but regulators will not enforce the new rules until July 1, 2001. The new rules allow customers to opt out of having their personal information shared with third parties. Banks must notify customers each year of their privacy policies and give customers the opportunity to opt out of information sharing.
The 171 pages of regulations will take some time to sort through and will add to banks’ regulatory burden, said Daniel J. Forte, president of the Massachusetts Bankers Association.
I think the regulators have tried to address the concerns of the industry, Forte said. The proof, however, has to be in the implementation of this, how burdensome this is going to be.
The extra time being allotted to banks will allow them to implement the new rules in an orderly fashion, said David Floreen, MBA senior vice president of government affairs. Banks will need to inform new customers of their privacy policies anytime someone opens a new account online, by telephone or in a branch. Banks must also sort through accounts to avoid sending multiple notices to customers that hold more than one account, he said.
Regulators have provided model disclosure forms and language to aid banks in drafting their disclosures.
The banks are going to be very keen on implementing these regulations and making sure that personal information is not distributed, Forte said. Privacy laws and privacy regulations are not going to end the phone calls at dinner and it’s not going to end all the junk mail that we all get in our daily lives because that is coming from publicly available information.
Information that is public at other sources, such as an address of a property at the Registry of Deeds, will be considered public information at banks under the regulations.
Privacy advocates including Massachusetts Rep. Ed Markey have blasted the regulations as too lax. Markey and a group called the Congressional Privacy Caucus have called for more stringent opt-in provisions.
President Clinton criticized the delay in enforcing the regulations, and has written a bill to add opt-out language for information financial firms share with their affiliates. The president’s bill would also create an opt-in provision for the sharing of medical information, which would prevent bank-owned insurance companies from sharing that information with their parent companies. Another provision would give consumers access to their financial information and allow them to correct mistakes.
The president’s bill will probably not advance this year because of the presidential election, said Alan Rice, editor of Pratt’s Letter. However, privacy has the potential to become a hot issue in the election, he said in a keynote speech last week at BankWorld, an industry conference held at Foxwoods Casino in Ledyard, Conn.
Political Agenda
Just as presidential candidates float ideas for using the federal budget surplus, FDIC officials are asking bankers what should be done with surplus money at the agency’s deposit insurance funds. FDIC Director Donna Tanoue is visiting with bank CEOs in cities across the country as the agency considers what to do with the extra money.
In recent years the FDIC has taken in more money than it has paid out, and the agency’s insurance funds stand beyond the required reserves of 1.25 percent of the total deposits insured. The FDIC needs only about $550 million to maintain the reserve ratio, Tanoue said.
At the end of last year, the Bank Insurance Fund had a balance of $29.4 billion. It dropped from $29.6 billion at the end of 1998 because of the failure of seven BIF-insured banks, which held total assets of $1.4 billion. The fund lost $198 million last year, its first annual loss since 1991. The BIF has been fully capitalized since 1995, and its sister fund, the Savings Association Insurance Fund, has been fully capitalized since 1996.
SAIF insures deposits held by thrift institutions, had a balance of $10.3 billion at the end of 1999, up from $9.8 billion the year before. One SAIF-insured thrift failed last year, with assets of $63 million.
The FDIC will likely decide what should be done with the money and make recommendations to Congress, which must authorize any changes. If the banking industry does not come up with a plan, Congress could spend the money on anything from housing to welfare, said Rice.
Another possible use is to refund the excess money to banks. The money could also go toward paying down the interest banks owe on Financing Corporation bonds issued in the savings and loan bailout. According to the Massachusetts Bankers Association, Bay State banks pay about $35 million a year in FICO obligations. A House bill, H.R. 4082, would set the reserve ratio at 1.4 percent and use the excess money to pay down the FICO obligation by 2019. After that the excess funds would be rebated back to banks.
Other scenarios involve insuring more funds, Rice said. Merrill Lynch has chartered two banks, allowing its customers to move money from cash management accounts into insured deposits. Other financial services companies have chartered banks to offer new products to their customers. The Office of Thrift Supervision approved Marsh & McClennan Co.’s application to form an Internet bank based in Framingham last week.
If Merrill Lynch and other securities firms do what they say they’re going to do and convert cash management accounts for their clients into insured bank deposits, then there will be such a volume of new deposits entering the system that the reserve ratio will be lowered and there won’t be any extra money to talk about, Rice said. I think there’s a fairly good chance of that happening.
Several trade associations, including the Independent Community Bankers Association, have pushed for the FDIC to increase the deposit insurance limit from the $100,000 set in 1980 to $200,000. Adjusted for inflation, $100,000 in 1980 equates to $197,000 in 2000, according to the ICBA.
We do expect within the next 10 days to have legislation to increase deposit insurance to $200,000, both within the House and Senate, said ICBA Executive Vice President Kenneth Guenther.
The association has asked both Vice President Al Gore and Texas Gov. George Bush to state their positions on deposit insurance, but the candidates have not yet responded.
I don’t think much is going to happen on the legislative front this year, Guenther said. The name of the game is to set the political agenda for next year.
The FDIC must consider how raising the insured deposit limit would affect consumer behavior and financial institutions. Only about 5 percent of deposits held at banks exceed $100,000, Forte said, and raising the deposit insurance limit could bring more regulatory scrutiny to banks.
We must be mindful of the incentives and the potential for unintended consequences whenever we consider significant changes to the deposit insurance system, Tanoue said. In the end, the question of higher coverage limits boils down to what we consider to be good public policy.
