Gonzalez Urges Reduced Cap on Insured Funds : Would Instill Caution, House Panel Chief Says

Now that Congress has passed the savings and loan rescue, it should consider changes in deposit insurance, including a reduction in the $100,000 coverage limit, the chairman of the House Banking Committee says.

“I believe it wouldn’t hurt any to reduce it a few thousand dollars. I think it’ll make the stockholders and the depositors a little bit more careful about what they’re doing with their institution,” said Rep. Henry B. Gonzalez, (D-Tex.).

The S&L; bill, signed into law Aug. 9 by President Bush, directs the Treasury Department to finish a study of the deposit insurance issue in 18 months. But Gonzalez says action may be needed sooner.

“They’ve had studies galore. . . . The pressure on the deposit insurance fund continues,” he said in an interview Tuesday.

The S&L; legislation provided taxpayer dollars to rescue failed thrift institutions and shored up the commercial bank fund by nearly doubling insurance premiums charged to banks, but Gonzalez said the system is still vulnerable to “unexpected but not unforeseen events” such as a dramatic deterioration of heavily indebted corporations or Third World countries.

Gonzalez said he wants to hear testimony on the issue before making up his mind but said he currently favors reducing the maximum insurance coverage from $100,000 and limiting the number of insured accounts per depositor.

However, proponents of the current system argue that it has successfully prevented a recurrence of the wave of bank failures that struck the nation in the Depression.

And they argue that reducing deposit insurance would favor large banks over small ones. Depositors would shift their money to big institutions, believing that regulators would not close a big bank for fear of the shock of a large failure to the financial system, they say.

Gonzalez said he also favors examining uninsured money market mutual funds, which he called the “loose cannon” of the financial system.

Commercial banks hold about $2.4 trillion in deposits, followed by S&Ls; with $960 billion, money market mutual funds with $330 billion and credit unions with $195 billion. All except mutual funds are federally insured.