MASSACHUSETTS AG BLASTS STATE’S MANAGED COMPETITION; OCABR AND INSURERS DISAGREE

Massachusetts Attorney General (AG) Martha Coakley has released a report entitled Automobile Insurance: The Road Ahead, giving her take on the impact insurance deregulation has had on Massachusetts drivers. Prior to deregulation or “managed competition” begun on April 1, 2008, the AG’s office and the Division of Insurance reviewed the expenses and claims’ experience that insurers were required to submit to them and then set insurance premiums “consistently lower than that proposed by the industry – billions of dollars lower over the past twenty years.” In addition, the AG and insurance commissioner limited premium variations across territories and classes, capped charges on urban drivers, considered only variables such as the insured’s vehicle, driving behavior and garaging location, and required insurers to insure all drivers. Since managed competition, according to the Coakley report, insurers are no longer required to disclose their data; the rate ceiling has been eliminated, and caps on urban rates are being phased out; insurers reject drivers who are then randomly assigned to insurers in the residual market; and insurers consider other factors besides driving records, including prior coverage limits, payment history and the purchase of homeowners insurance. As a result, AG Coakley says, “While prices have dropped overall, consumers are paying more than they would have had the market not been deregulated.” While more insurers have entered the market, “most of the new entrants have not offered lower rates overall [and] … new insurers have not caused incumbent carriers to lower statewide prices,” Coakley said. According to the Coakley report, insurers raised their base rates by 10% at the beginning of managed competition, creating “excessive rates in an environment where insurer losses have, on average, decreased over the past several years.” Coakley speculates that Hispanics, low income consumers, the elderly and urban drivers “may” be paying increased prices and that consumers whose rates have decreased paid more than they should have. The AG accuses insurers of omitting data and information in their public filings, including key rating information, and she charges both insurers and the Automobile Insurers Bureau with “refus[ing] to make public data on claims, premiums and expenses necessary to determine whether statewide rates are fair and not excessive.” The Coakley report concludes that “the current experiment in deregulation has thus far not met its goal. Instead, managed competition has caused many drivers to be overcharged and has led to fewer consumer protections.” In light of her findings and responsibility, Coakley said, “The Attorney General’s Office intends to promulgate consumer protection regulations under her G.L. Chapter 93A Consumer Protection regulatory authority.” The Massachusetts Office of Consumer Affairs and Business Regulation (OCABR), which oversees the Division of Insurance, refuted Coakley’s report saying that since “managed competition” began, eleven more insurers have entered the Massachusetts market increasing competition and reducing rates. OCABR Undersecretary Barbara Anthony said, “Rates have decreased 8.2% on average and that’s a fact. About $270 million in premiums have been saved by consumers.” Two years ago, nineteen insurers wrote auto policies in the state. Currently, thirty insurers compete for coverage, led by Commerce Group (31%), Safety Group (11.1%), Arbella Insurance Group (9.3%), Liberty Mutual (8.5%) and MetLife Auto and Home (6.5%). Liberty Mutual Group Chairman, President and CEO Edmund Kelly called the Coakley report “flawed” and said “To better meet increased consumer demand under managed competition, we lowered our prices, added new products and improved service across the state. As a result, we have thousands of new customers and over 10% growth since ‘managed competition’ began.” Kelly said that Liberty Mutual is so committed to the new, more competitive insurance landscape in Massachusetts that it is adding 300 jobs at its Springfield, MA operations, further boosting the economic outlook for Massachusetts consumers. Consumers, he added, don’t want the government making decisions for them; “they want to choose for themselves the company they do business with – based on the quality of the product, service and price.”

3Q BHC ANNUITY FEE INCOME RISES 12.9% OVER 2Q

Annuity fee income generated by U.S. BHCs rose 4% in the third quarter to $669.8 million, up from $644.2 million in third quarter 2008, according to the Michael White-ABIA Bank Annuity Fee Income Report. The 12.9% jump in third quarter earnings over second quarter earnings of $593.1 million helped drive annuity earnings up 2.5% in the first three quarters to $2 billion compared to $1.95 billion in the first three quarters of 2008. Just over 42% of BHCs sold annuities in the first three quarters, led by BHCs with over $10 billion in assets (71.4%), while short of 35% of BHCs with $500 million to $1 billion in assets sold annuities. BHCs with over $10 billion in assets saw their annuity earnings rise 3.5% to $1.89 billion to comprise 94.6% of total BHC annuity earnings. In contrast, annuity fee income fell 12.2% among BHCs with $1 billion to $10 billion in assets to $91.4 million, down from $104.2 million, and annuity earnings among BHCs with $500 million to $1 billion dropped 18% to $16.7 million, down from $20.4 million. San Francisco-based, $1.23 trillion-asset Wells Fargo & Co. ranked first in annuity fee income among all U.S. BHCs, despite reporting a 17.6% drop in these earnings to $504 million compared to $612 million during the same three-quarter period in 2008. New York City-based, $2.04 trillion-asset JPMorgan Chase ranked second, showing a 3.73% slide in annuity fee income to $258 million. Charlotte, NC-based $2.25 trillion-asset Bank of American Corp. ranked third, as annuity fee income, reflecting the Merrill Lynch acquisition, jumped 84.2% to $203.2 million. New York City-based, $767.3 billion-asset Morgan Stanley ($168 million) and Pittsburgh, PA-based, $271 billion-asset PNC Financial Services Group ($98.9 million) ranked fourth and fifth, respectively, with PNC reporting a 99% jump in annuity earnings, helped by its acquisition of National City Corp., the Michael White-ABIA Bank Annuity Fee Income Report shows. Among the top 10 BHC fee income earners, annuity revenue fell among five and achieved the highest growth (235.7%) at Birmingham, AL-based, $140 billion-asset Regions Financial, where $71.2 million in annuity earnings comprised 2.57% of the company’s noninterest income, the largest percentage among the top 10 earners, the White-ABIA Report reveals.

A New Approach to Gauging Inflation Expectations

This Economic Commentary explains a relatively new method of uncovering inflation expectations, real interest rates, and an inflation-risk premium. It provides estimates of expected inflation from one month to 30 years, an estimate of the inflation-risk premium, and a measure of real interest rates, particularly a short (one-month) rate, which is not readily available from the TIPS market. Calculations using the method suggest that longer-term inflation expectations remain near historic lows. Furthermore, the inflation-risk premium is also low, which in the model means that inflation is not expected to deviate far from expectations. Policymakers at the Federal Reserve and other central banks continually face the "Goldilocks" question- is monetary policy too tight, too loose, or just right? It would help if the central bank knew what real interest rates and expected inflation actually were, but these are not easy to observe. Visible indicators of these factors, such as Treasury inflation-protected securities (TIPS), survey measures of expected inflation, and nominal interest rates, are useful, but none of them alone quite tells the whole story. Nominal interest rates change with boda real rates and expected inflation, survey measures ask about only a few horizons, and measures of inflation expectations coming from inflationprotected securities conflate expectations with risk premia. Uncovering a purer measure is possible, but it takes a careful combination of the available data and the application of economic theory.
This Economic Commentary explains a relatively new method of uncovering inflation expectations and real interest rates and describes what light those numbers can shed on die current status of die U.S. economy. People's expectation of inflation enters into nearly every economic decision they make. It enters into large decisions: whedier they can afford a mortgage payment on a new house, whether they strike for higher wages, how they invest their retirement funds. It also enters into the smaller decisions, that, in the aggregate, affect the entire economy: whedier they wait for die milk to go on sale or buy it before die price goes up.
Real interest rates also play a key role in many economic decisions. When businesses invest- or don't- in plants and equipment, when families buy- or don't- a new car or dishwasher, they are making judgments about die real return on die object and die real cost of borrowing. As such, real interest rates can be an important guide to monetary policy. As Alan Greenspan once explained,1 keeping the real rate around its equilibrium level (which is determined by economic and financial conditions), has a "stabilizing effect on die economy" and it helps direct production "toward its long-term potential."
Modeling Interest Rates
For economists, a model is not a toy train or runway star, but radier, a simplified description of reality, usually involving equations. It's a way to describe how die parts of die world (or at least die financial markets) fit together. Our new approach to estimating inflation expectations starts with a model of real and nominal interest rates- in effect making assumptions and writing down equations diat purport to describe how interest rates and inflation move over time.2 The model has two key parts. The first describes how short-term real interest rates and inflation move over time. The model has to capture movements of short-term rates accurately in order to describe die behavior of all interest rates accurately: if short-term rates rise, do they stay high or quickly fall; do they move smoodily or take a few big jumps? The second part of die model describes how those movements in shortterm rates and inflation build up and determine longer-term interest rates and expectations.
Economists think longer-term rates such as 10-year bonds are tied to shorter rates in two ways, and the model reflects both. The first and most influential determinant of longterm rates is market expectations of future short rates. Investing in a two-year bond is a lot like investing in two one-year bonds back to back: one now and another one a year later. The yields shouldn't get too far out of line. But because those two investments are not quite identical, longterm rates are also determined in part by something else. Because of risk, because investors don't know what rates will be next year- longer-term bonds embed a term premium in their rates, a risk factor that makes long-term rates different from the average of expected future short rates.
This means that the model also has to describe how investors incorporate risk into interest rates. This has two parts. One has to do with capturing the amount of risk perceived to exist, which is in effect, capturing how variable short-term rates and inflation are, and the other has to do with estimating the prices of those risks. These considerations introduce several new factors into the model, including separate variability measures for inflation and interest rates, and, because investors might feel differendy about variability in interest rates and inflation, separate prices of risk.

Why Didn't Canada's Housing Market Go Bust?

Housing markets in the United States and Canada are similar in many respects, but each has fared quite differently since the onset of the financial crisis. A comparison of the two markets suggests that relaxed lending standards likely played a critical role in the U.S. housing bust.
Despite their many points of similarity, housing markets in the United States and Canada have fared quite differendy since the onset of the financial crisis. Unlike the U.S., Canada has not experienced a dramatic increase in mortgage defaults, nor has any Canadian bank required a government bailout. As a result, observers such as The Economat have pointed to Canada as "a country that got things right." The different housing market outcomes in Canada and the U.S. can tell us something about the underlying causes of the housing boom and the subsequent bust. In particular, they can be used to evaluate the roles that low interest rates and relaxed lending standards played in the boom and bust.
Some observers blame monetary policy for lowering interest rates over 2002-2005, pushing up housing demand, increasing residential investment, and raising housing prices. In this view, the monetary-policy-induced housing boom set the stage for an inevitable housing bust. Others contend that relaxed lending standards, highlighted by the rise in subprime lending, played a critical role. The loosening of standards led to an increase in housing demand, as mortgages were issued to households that were likely to have trouble making the mortgage payments. This extension of credit to risky borrowers helped fuel a housing boom and set the stage for the resulting surge in defaults, which were a big factor in the housing bust.
The Canada and U.S. housing market comparison suggests that relaxed lending standards likely played a critical role in the U.S. housing bust. Monetary policy was very similar in both countries from 2000 to 2008, but housing prices rose much faster in the U.S. than in Canada. This suggests that some other factor both drove the more rapid appreciation in U.S. prices and set the stage for the housing bust. A likely candidate is cross-country differences in the structure and regulation of subprime lending markets. That mortgage delinquencies began to climb before the recession in the U.S. but only began to rise recendy in Canada (after the economic slowdown began), points to the significance of those structural and regulatory differences in explaining the U.S. housing crash.
Canadian and U.S. Housing Market Trends
Canada and the U.S. experienced significant increases in house prices and residential investment from 2000 to 2006, though prices in Canada appreciated more slowly. Figure 1 plots the S8cP Case-Shiller 20-city composite index and the (Canadian) Teranet-National Bank 6-city composite index. Both series are based on repeat sales, making these series a closer approximation to a "constant-quality" price index of nominal home prices than average house sales prices. The Case-Shiller and Teranet series indicate that over 2000-2006, U.S. prices appreciated nearly twice as much as Canadian houses. However, Canadian house prices continued to appreciate until late 2008 and are now nearly 80 percent higher than in 2000.
The counterpart to rapid house-price appreciation has been an increase in the ratio of mortgage debt to disposable income. While the comparison is complicated by different definitions of the household sector and debt categories in the Flow of Funds accounts, the trends are similar to those of house prices. Between 2000 and 2006, the ratio of mortgage debt to disposable income in the U.S. increased by roughly 50 percent, jumping from two-thirds to over 100 percent. In Canada, the increase was roughly half as large, with the debt-to-income ratio moving from 70 percent to 90 percent.
The potential risks of increased household mortgage debt depend critically upon its distribution across borrowers. To see how the distribution of mortgage debt has changed we examine the distribution of the ratio of die outstanding loan to house value (the LTV) of borrowers. A high LTV implies that a small decline in die house price would leave the owner with negative equity. Negative equity is problematic for homeowners who are unable to meet their mortgage payments, as it removes the option to sell their home to repay the mortgage.
As figure 2 illustrates, there are significantly fewer households in Canada with LTV ratios above 80 percent than in the U.S. Before the housing bust, roughly 21 percent of American households with mortgages had LTV ratios above 80 percent, versus 15 percent of Canadian households. Restricting attention to households with LTV above 90 percent, the comparison is even more striking: roughly 12 percent in the U.S. versus just over 6 percent in Canada.
A surprising fact about these LTV ratios is how little the distribution of U.S. mortgages by LTV changed during the housing boom. This is surprising given that the rapid house-price appreciation acted to lower the LTV ratios of existing mortgages. Working in the opposite direction were two forces. First, some households undid the effect of higher house prices by extracting equity. Second, the rise in subprime and AIt-A mortgage originations from roughly 1.4 million in 2003 to 3 million in 2005 was accompanied by an increase in the median LTV of new subprime mortgages from 90 percent to 100 percent (as documented in Mayer, Pence, and Sherlund, 2009).

Panel Rips Wall Street Titans

WASHINGTON—Comparing Wall Street titans to shady car salesmen, a committee investigating the financial crisis grilled the nation's top bankers Wednesday in the latest example of Washington's smoldering anger at an industry many there feel hasn't atoned for its role in the slump.
"It sounds to me a little bit like selling a car with faulty brakes, and then buying an insurance policy on the buyer of those cars," said former California state Treasurer Phil Angelides, chairman of the Financial Crisis Inquiry Commission, while questioning the chief executive of Goldman Sachs Group Inc.
Bank CEOs did acknowledge their role in the crisis. "It has been clear how poor business judgments we have made have affected Main Street," said Brian Moynihan, Bank of America Corp.'s CEO. But the executives as a group also hedged that position considerably by spreading the blame to policy makers and the economy as a whole.Beyond the theatrics—reminiscent of the Pecora hearings that investigated the 1929 crash that led to the Great Depression—the hearings could bolster legislation being considered by Congress to rewrite financial regulations. The House already has passed its version establishing stronger consumer protections, and Senate leaders hope to take up their bill soon.
Efforts to put new taxes on financial institutions and to curb compensation also could get a boost. President Barack Obama is expected Thursday to propose a new tax on banks to compensate the U.S. for its bailout-related losses. The tax is expected to be based on the banks' exposure to risk.
Banks and their allies worry the hearings could produce evidence exposing them to securities litigation. On Wednesday, commissioners asked probing questions about the banks' possible acts of negligence, their duties to customers and other issues that could crop up in such cases.
At Wednesday's dramatic first hearing of the commission, which was created last year with little fanfare, the confrontation between Wall Street and Washington quickly turned personal. Mr. Angelides, in making his used-car comment, noted Goldman's practice of selling mortgage securities to investors, then betting that those securities would drop in value. "It doesn't seem to me that that's a practice that inspires confidence," he said.
Goldman CEO Lloyd Blankfein appeared caught off guard, interrupting Mr. Angelides to clarify Goldman's duties and responsibilities. "These are the professional investors who want this exposure," he said.
Noting that "people are angry" over Wall Street's bailout-boosted profits, Mr. Angelides vowed that the commission would become "a proxy for the American people–their eyes, their ears, and possibly also their voice….If we ignore history, we're doomed to bail it out again."
Goldman declined to comment on the exchange.
Mr. Angelides also warned CEOs the commission could refer evidence of criminal wrongdoing to law enforcement.
The hearings, which are expected to last the remainder of the year, could raise the profile of its members, in particular Mr. Angelides, a veteran of California's rough-and-tumble politics, who emerged as the toughest questioner. Mr. Angelides served as a trustee of California state pension funds at a time when the funds became national leaders in pursuing securities lawsuits against companies suspected of fraud.
In a brief interview later, Mr. Angelides said he was "troubled by the inability [of the bankers] to take responsibility because I think it's fundamental."
On Thursday the commission will hear about officials' efforts to investigate and prosecute financial wrongdoing in the crisis. Attorney General Eric Holder is expected to testify that the Justice Department is "using every tool at our disposal—including new resources, advanced technologies and communications capabilities, and the very best talent we have—to prevent, prosecute, and punish these crimes." He also will note that the Federal Bureau of Investigation is investigating more than 2,800 mortgage-fraud cases, up almost 400% from five years ago.
Republicans on the bipartisan panel expressed more sympathy for banking-industry leaders. Panel member Keith Hennessey, a former economic adviser to President George W. Bush, said it might be "more interesting" to talk to executives of the firms that didn't survive. He also suggested the government played a role by letting the largest banks take on too much risk.
Among banks, the stakes could be highest for Goldman Sachs and Mr. Blankfein. His bank has been under intense public fire for its decision to pay out billions of dollars in bonuses to its employees just a year after the firm, as well as others, accepted government money to bolster their balance sheets.
In an effort to diffuse the anger, Mr. Blankfein gave a number of interviews and speeches in 2008, although the charm offensive backfired on occasion. In November he told a British-based reporter he is just a banker doing "God's work," a remark that reverberated around the world.
Top Goldman advisers spent hours prepping Mr. Blankfein this week.
Top Wall Street executives started Wednesday's testimony on a conciliatory note, saying their institutions made mistakes that helped lead to the 2008 financial crisis. But they warned in testimony that policy makers shouldn't limit the size of financial entities.
J.P. Morgan Chase & Co.'s CEO, James Dimon, said Wall Street and policy makers need to be "brutally honest" about the causes of the financial crisis, and said the country cannot repeat the events of late 2008.
Mr. Dimon said "the solution is not to cap the size of financial firms." Instead, he said, "we need a regulatory system that provides for even the biggest banks to be allowed to fail, but in a way that does not put taxpayers or the broader economy at risk."
Morgan Stanley Chairman John Mack struck a conciliatory tone. "There is no doubt that we as an industry made mistakes," he said. "The financial crisis also made clear that regulators simply didn't have the visibility, tools, or authority to protect stability of the financial system as a whole."
Initially, the panel invited Kenneth Lewis, Bank of America's former CEO, to appear before it. There was a brief discussion among the bank's executives about whether Mr. Lewis would go before the commission, since he was at the bank for much of the crisis, but executives decided that Mr. Moynihan would do it. Given Mr. Moynihan's recent appointment—he became CEO only in recent weeks—he wasn't on the hot seat Wednesday.
"It gave him the opportunity to reiterate some forward-looking themes," said Bank of America spokesman James Mahoney.
After the hearing, Mr. Blankfein left the room, while Mr. Dimon of J.P. Morgan Chase stayed to answer a few questions. "I felt they were looking for answers," and not seeking to embarrass the CEOs, Mr. Dimon said.—Susanne Craig, Dan Fitzpatrick and Evan Perez contributed to this article.

Savings Association Insurance Fund

The SAIF ended 1998 with a fund balance of $9.8 billion, a 5.0 percent increase over the year-end 1997 balance of $9.4 billion. Estimated insured deposits increased by 2.8 percent in 1998. During the year, the reserve ratio of the SAIF grew from 1.36 percent of insured deposits to 1.39 percent.
For both semiannual assessment periods of 1998, the Board retained the rate schedule in effect for 1997, a range of 0 to 27 cents annually per $100 of assessable deposits. Under this schedule, the percentage of SAIF-member institutions that paid no assessments increased from 90.9 percent in the first semiannual assessment period to 91.9 percent in the second half of the year, as more institutions qualified for the lowest-risk assessment rate category. This rate schedule resulted in an average 1998 SAIF rate of 0.21 cents per $100 of assessable deposits.
The SAIF earned $15 million in assessment income in 1998, compared to $563 million in interest income. In 1998, the SAIF had operating expenses of $85 million and net income of $467 million, compared to operating expenses of $72 million and net income of $480 million in 1997. For the second consecutive year, no SAIF-member institution failed in 1998.
Under the Deposit Insurance Funds Act of 1996, the FDIC must set aside all SAIF funds above the statutorily required Designated Reserve Ratio (DRR) of 1.25 percent of insured deposits in a Special Reserve on January 1,1999. No assessment credits, refunds or other payments can be made from the Special Reserve unless the SAIF reserve ratio falls below 50 percent of the DRR and is expected to remain below 50 percent for the following four quarters. Effective January 1,1999, the Special Reserve was funded with $978 million, reducing the SAIF unrestricted fund balance to $8.9 billion and the SAIF reserve ratio to 1.25 percent.
The SAIF Special Reserve was mandated by Congress in the Deposit Insurance Funds Act. It was not proposed in order to address any deposit-insurance issues. However, by eliminating any cushion above the DRR, the creation of the Special Reserve on January 1, 1999, increases the likelihood of the SAIF dropping below the DRR. This, in turn, increases the possibility that the FDIC would be required to raise SAIF assessment rates sooner or higher than BIF assessment rates, resulting in an assessment rate disparity between the SAIF and the BIF. In 1998, legislation that would have eliminated the Special Reserve was introduced in the Congress but did not pass.

Bank Insurance Fund

With banks experiencing another highly profitable year and only three bank failures, 1998 was another positive year for the BIF, despite adverse trends in the global economic picture. The BIF has grown steadily from a negative fund balance of $7 billion at year-end 1991 to $29.6 billion at year-end 1998. The 1998 fund balance represents a 4.7 percent increase over the 1997 balance of $28.3 billion. BIF-insured deposits grew by 4.1 percent in 1998, yielding a reserve ratio of 1.38 percent of insured deposits at year-end 1998, unchanged from year-end 1997.
Deposit insurance assessment rates in 1998 were unchanged from 1997. For both semiannual assessment periods in 1998, the Board voted to retain rates ranging from 0 to 27 cents annually per $100 of assessable deposits. Under these rates, 95.1 percent of BIF-member institutions, or 8,808 institutions, were in the lowest-risk assessment rate category and paid no deposit-insurance assessments for the second semiannual assessment period of 1998. This rate schedule resulted in an average 1998 BIF rate of 0.08 cents per $100 of assessable deposits.
As in 1997, interest earned on U.S. Treasury investments ($1.7 billion) exceeded assessment revenue ($22 million) and was the primary source of revenue for the BIF in 1998. This was a result of minimal insurance losses and receivership activity, the continued low assessment rate schedule and the concentration of institutions in the lowest-risk category.
Bank failures continued to be minimal in 1998. Only three BIF-member institutions, with assets totaling $370 million, failed during the year. In 1997, one BIF-member institution with assets of $25.9 million failed. Estimated insurance losses of the banks that failed in 1998 were $179 million, compared to $4 million in estimated losses for the one failure in 1997.
For the BIF in 1998, investments in U.S. Treasury obligations continued to be the main component of total assets, at 94.4 percent, compared to 93.8 percent in 1997. The financial position of the BIF continued to improve as cash and investments at year-end were 92 times total liabilities, up from 85.6 times the total liabilities in 1997. In 1998, the BIF had operating expenses of $697.6 million and net income of $1.3 billion, compared to operating expenses of $605 million and net income of $1.4 billion in 1997.
The FDIC administers two deposit insurance funds, the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). The agency also manages a third fund fulfilling the obligations of the former Federal Savings and Loan Insurance Corporation (FSLIC), called the FSLIC Resolution Fund (FRF). On January 1, 1996, the FRF assumed responsibility for the assets and obligations of the Resolution Trust Corporation (RTC).
The economic environment in 1998 remained favorable for the banking and thrift industries, resulting in relatively few problem institutions, high profitability and increased capitalization. During the third quarter, a default in Russian debt and the resulting difficulties with hedge funds, such as those experienced by Long Term Capital Management, LP, illustrated the speed with which financial market volatility and foreign sector developments can affect insured institutions. During 1998, some insured institutions continued to increase their exposures to an economic downturn through higher-risk lending and other practices. This is suggested by evidence of weakening underwriting standards, narrower interest-rate spreads, and increased concentrations in higher-risk loans. The potential effect of these trends on the deposit insurance funds depends on the nature of any national or regional economic downturns.
An overview of the funds’ performance during 1998 follows. (Full details about the funds appear in the financial statements).
For more details on the Bank Insurance Fund (BIF), please click here. For more details on the Savings Association Insurance Fund (SAIF), please click here.

Bank Insurance Fund
With banks experiencing another highly profitable year and only three bank failures, 1998 was another positive year for the BIF, despite adverse trends in the global economic picture. The BIF has grown steadily from a negative fund balance of $7 billion at year-end 1991 to $29.6 billion at year-end 1998. The 1998 fund balance represents a 4.7 percent increase over the 1997 balance of $28.3 billion. BIF-insured deposits grew by 4.1 percent in 1998, yielding a reserve ratio of 1.38 percent of insured deposits at year-end 1998, unchanged from year-end 1997.
Deposit insurance assessment rates in 1998 were unchanged from 1997. For both semiannual assessment periods in 1998, the Board voted to retain rates ranging from 0 to 27 cents annually per $100 of assessable deposits. Under these rates, 95.1 percent of BIF-member institutions, or 8,808 institutions, were in the lowest-risk assessment rate category and paid no deposit-insurance assessments for the second semiannual assessment period of 1998. This rate schedule resulted in an average 1998 BIF rate of 0.08 cents per $100 of assessable deposits.
As in 1997, interest earned on U.S. Treasury investments ($1.7 billion) exceeded assessment revenue ($22 million) and was the primary source of revenue for the BIF in 1998. This was a result of minimal insurance losses and receivership activity, the continued low assessment rate schedule and the concentration of institutions in the lowest-risk category.
Bank failures continued to be minimal in 1998. Only three BIF-member institutions, with assets totaling $370 million, failed during the year. In 1997, one BIF-member institution with assets of $25.9 million failed. Estimated insurance losses of the banks that failed in 1998 were $179 million, compared to $4 million in estimated losses for the one failure in 1997.
For the BIF in 1998, investments in U.S. Treasury obligations continued to be the main component of total assets, at 94.4 percent, compared to 93.8 percent in 1997. The financial position of the BIF continued to improve as cash and investments at year-end were 92 times total liabilities, up from 85.6 times the total liabilities in 1997. In 1998, the BIF had operating expenses of $697.6 million and net income of $1.3 billion, compared to operating expenses of $605 million and net income of $1.4 billion in 1997.

Savings Association Insurance Fund
The SAIF ended 1998 with a fund balance of $9.8 billion, a 5.0 percent increase over the year-end 1997 balance of $9.4 billion. Estimated insured deposits increased by 2.8 percent in 1998. During the year, the reserve ratio of the SAIF grew from 1.36 percent of insured deposits to 1.39 percent.
For both semiannual assessment periods of 1998, the Board retained the rate schedule in effect for 1997, a range of 0 to 27 cents annually per $100 of assessable deposits. Under this schedule, the percentage of SAIF-member institutions that paid no assessments increased from 90.9 percent in the first semiannual assessment period to 91.9 percent in the second half of the year, as more institutions qualified for the lowest-risk assessment rate category. This rate schedule resulted in an average 1998 SAIF rate of 0.21 cents per $100 of assessable deposits.
The SAIF earned $15 million in assessment income in 1998, compared to $563 million in interest income. In 1998, the SAIF had operating expenses of $85 million and net income of $467 million, compared to operating expenses of $72 million and net income of $480 million in 1997. For the second consecutive year, no SAIF-member institution failed in 1998.
Under the Deposit Insurance Funds Act of 1996, the FDIC must set aside all SAIF funds above the statutorily required Designated Reserve Ratio (DRR) of 1.25 percent of insured deposits in a Special Reserve on January 1,1999. No assessment credits, refunds or other payments can be made from the Special Reserve unless the SAIF reserve ratio falls below 50 percent of the DRR and is expected to remain below 50 percent for the following four quarters. Effective January 1,1999, the Special Reserve was funded with $978 million, reducing the SAIF unrestricted fund balance to $8.9 billion and the SAIF reserve ratio to 1.25 percent.
The SAIF Special Reserve was mandated by Congress in the Deposit Insurance Funds Act. It was not proposed in order to address any deposit-insurance issues. However, by eliminating any cushion above the DRR, the creation of the Special Reserve on January 1, 1999, increases the likelihood of the SAIF dropping below the DRR. This, in turn, increases the possibility that the FDIC would be required to raise SAIF assessment rates sooner or higher than BIF assessment rates, resulting in an assessment rate disparity between the SAIF and the BIF. In 1998, legislation that would have eliminated the Special Reserve was introduced in the Congress but did not pass. FSLIC Resolution Fund
The FRF was established by law in 1989 to assume the remaining assets and obligations of the former FSLIC arising from thrift failures before January 1,1989. Congress placed this new fund under FDIC management on August 9, 1989, when FSLIC was abolished. On January 1,1996, the FRF also assumed the RTC’s residual assets and obligations.
Today, the FRF consists of two distinct pools of assets and liabilities. One pool, composed of the assets and liabilities of the FSLIC, transferred to the FRF upon the dissolution of the FSLIC on August 9,1989 (FRF-FSLIC). The other pool, composed of the RTC’s assets and liabilities, transferred to the FRF on January 1, 1996 (FRF-RTC). The assets of one pool are not available to satisfy obligations of the other. The FRF-FSLIC had resolution equity of $2.098 billion as of December 31, 1998, and the FRF-RTC had resolution equity of $8.224 billion as of that date.