Bank Insurance Fund Could Lose $2 Billion in ’90 : Regulation: About $13 billion now insures $2 trillion in savings at banks. But FDIC chief L. William Seidman says reserves appear ‘adequate.’

The federal insurance pool that protects bank depositors from losses on savings remains under “very substantial stress” and could lose another $2 billion this year, L. William Seidman, chairman of the Federal Deposit Insurance Corp., told Congress on Tuesday.

In comments before the Senate Banking Committee, Seidman said such a loss could send the FDIC’s reserves plunging to 50 cents for each $100 of insured deposits, down from 70 cents now.

Such a loss would mark the third consecutive annual deficit for the fund, which has a balance of only about $13 billion to guarantee more than $2 trillion in savings. Seidman confined his testimony to banks and did not touch on savings and loan institutions.

While bank failures are continuing at roughly the same rate as last year, Seidman said a review of the nation’s roughly 1,000 “problem” banks has persuaded FDIC officials that “the fund is adequate to handle any problems we can identify.”

At the same time, Seidman cautioned that the ability of federal regulators to forecast the health of the banks is limited, and he acknowledged that the recent weakening in real estate markets across the country could cause the situation of many banks to worsen.

“There is a continued erosion . . . in large areas of the country,” Seidman said. He noted that even once-fast-growing areas of California have seen prices flatten or fall this year.

On another topic, Seidman raised doubts about current proposals to limit the total amount of federal deposit insurance per depositor, warning that they could prove to have unpredictable consequences.

Depositors are now insured for $100,000 in savings in each lending institution where they have accounts, as well as for additional $100,000 coverages per person for other categories of accounts. The system has effectively given depositors unlimited insurance, and--to the extent that it has helped lure depositors to poorly run financial institutions that have made speculative investments--has been a major factor in the S&L; crisis.

U.S. Treasury Secretary Nicholas F. Brady said last week that the Administration is leaning toward a proposal to limit each depositor to a total of $100,000 in guaranteed savings. The Treasury Department is now completing a study of the deposit insurance system and is expected to make it public early next year.

Seidman said the idea of limiting deposit insurance deserved consideration but suggested that the proposal may have several important drawbacks.

He noted that some critics have argued that putting ceilings on deposit insurance would badly hurt small banks by driving depositors to large banks on the assumption that the government would not permit the biggest banks to fail.

But Seidman warned that the proposal could also entail massive administrative costs, because it could necessitate huge data-processing systems to store information on tens of millions of accounts.

Some critics have also argued that depositors could easily sidestep such curbs--for example, by establishing accounts in the names of their children. “There’s a question of whether this kind of thing is really enforceable,” Seidman said.

He also said the proposal might be ineffective in cutting the government’s vulnerability to losses unless the government ended its so-called too-big-to-fail policy. The phrase refers to perceptions that the government is committed to covering all losses at large banks in order to prevent the spread of any damage to other parts of the economy.

Seidman said any reform of the deposit insurance system should include curbs on the too-big-to-fail policy, but he warned that such restrictions would work only if other nations also agreed to limit bailouts of their major banks.

Seidman said the government should limit the kinds of investments that financial institutions may make using insured deposits. Investments for riskier activities should be handled through separate bank subsidiaries that are not funded with bank guarantees, he said.