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Mr. Chairman, I appreciate this opportunity to appear again before your Committee to discuss the condition of the Bank Insurance Fund (BIF). I will share with you the Congressional Budget Office's (CBO's) latest baseline projections of the fund's spending and our analysis of the Administration's budget submission. I will specifically address its overall projection of losses, its proposal to convert the budgetary treatment of deposit insurance from cash to accrual, and its banking reform proposals. I will also offer some comments on the Administration's plan to emphasize open bank assistance.

Our principal conclusions are the following:

• Although a large majority of banks appear relatively healthy, the outlook for a portion of the banking industry remains pessimistic in the near term, primarily because of the delay in the general economic recovery and continuing real estate problems. Bank profits have been depressed, but they are now starting to rebound, and the long-run outlook is more optimistic.
  
  
• CBO projects losses to the BIF to increase in fiscal years 1992 and 1993 before starting to decline. CBO estimates that BIF's net outlays will increase from $7.4 billion in 1991 to $14.5 billion in 1992 and peak at $17.3 billion in 1993. Over the period from 1992 through 1995, CBO projects that BIF will incur losses of $43 billion in resolving failed banks. Under those circumstances, we estimate that BIF's borrowing authority will be sufficient to cover its needs and that the borrowing can be repaid from bank premiums and asset sales over the next decade.
  
  
• The President's budget proposes to convert accounting for federal deposit insurance from a cash to an accrual basis, and to use projected savings from its proposal to offset other spending on the pay-as-you-go (PAYGO) scorecard. CBO agrees that budgetary accounting for insurance programs could be improved, but does not feel that the Administration's proposals are suitable to implement at this time. Furthermore, no PAYGO savings should be scored for the policy changes the Administration proposes.
  
  
• The Administration also proposes legislation to permit interstate banking and branching, and it plans to provide open bank assistance. These proposals deserve serious consideration on their own merit. Interstate banking and branching may improve the overall efficiency of the banking industry in the long term, but it will not necessarily translate into higher bank profits or lower losses to the BIF in the short run. Open bank assistance and other forms of forbearance run the danger of postponing inevitable consolidation, while increasing the future cost to the BIF.

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