FDIC calls for changes in operations
Associated Press
WASHINGTON — All banks should pay for deposit insurance according to their risk of failure and the $100,000 limit on account coverage should be pegged to inflation, the Federal Deposit Insurance Corp. is recommending to Congress.
FDIC Chairwoman Donna Tanoue said yesterday the changes are needed now to protect the safety of the banking industry and keep credit flowing to Americans.
"If we do not begin now to change some of the rules that govern our deposit insurance system, it is likely to take a toll on the safety and soundness of the banking industry," Tanoue said at a news conference.
That could happen, she warned, when a slumping economy brings bank and thrift losses that deplete the federal insurance funds for those institutions.
Tanoue wants to end what she sees as a free ride for the 92 percent of banks and thrifts, or about 9,100 institutions, that get the benefit of the insurance money yet pay no premiums under the current system. The two funds for banks and thrifts are now flush, with a total cushion of $42 billion. Current law prohibits the FDIC from collecting premiums from most institutions that have adequate capital and receive strong ratings from examiners.
The FDIC wants to replace it with a system in which every bank and thrift would chip in, with insurance premiums based on risk. If the funds fell below a certain level, the premiums would gradually be increased. If they grew above the level, banks and thrifts would receive rebates.
In today's relatively strong economy, Tanoue said, more than 40 percent of banks or thrifts, or some 3,900, would receive more money back in rebates than they would pay in premiums.
"The FDIC would rather see most banks pay small, steady premiums over time, which would mean that premiums would be unlikely to climb so high during bad times," she said.
The agency also maintains that the $100,000 per-account limit on insurance coverage has been eroded by inflation to only half of what it was worth in 1980, and should be pegged to the Consumer Price Index. FDIC was established in 1933; the first limit, set in January 1934 was $2,500.
Federal Reserve Chairman Alan Greenspan has strongly opposed an increase in the coverage limit, which has been pushed by the banking industry. Greenspan has said a legislative proposal to double the insurance limit would give "increased subsidies to upper-income individuals" and "would be a major policy mistake."
Sen. Phil Gramm, R-Texas, chairman of the Senate Banking Committee, also opposes an increase in the limit, spokeswoman Christi Harlan said yesterday.
The FDIC is leaving up to Congress the choice of a benchmark year for measuring inflation. If they had started indexing to inflation in 1974, when the coverage limit was $40,000, the current limit would be about $135,000, the FDIC said in an example.
The agency also recommended that coverage limits be in round numbers and not be allowed to decrease.
The American Bankers Association, the industry's biggest lobbying group, supports the FDIC proposals to increase the $100,000 limit and tie it to inflation.
But America's Community Bankers, a group representing smaller banks, questioned why "healthy, well-managed banks should be charged any insurance premiums."
Rep. Michael Oxley, R-Ohio, chairman of the House Financial Services Committee, believes the issues raised by the FDIC merit consideration, said spokeswoman Peggy Peterson.
The agency also is recommending that the bank insurance fund be merged with the fund for savings and loans to create a single, more diverse insurance fund that would be less vulnerable to regional economic problems.
