Proposals Include Letting Banks Issue the Insurance

The debate over deposit insurance reform has yielded any number of proposals with appealing features. Now among the leaders:

--Limiting coverage to $100,000 per depositor. Such a cap would reduce the government’s $2.5-trillion liability and would still guarantee most individuals’ savings. Treasury Secretary Nicholas F. Brady has called this idea “a place to start.”

Drawbacks: Limiting deposit coverage would require creation of a huge regulatory apparatus to keep track of each American’s accounts, critics say. The idea is also opposed by small banks, which fear that it could drive money to seemingly safer large institutions. And it would have no meaning unless the government dropped its practice of bailing out big banks, a step considered unlikely.

--Increased capital and earlier closure of weak banks. If banks were required to put more of their own money at stake, they would be less inclined to take risks. Earlier closures could stem government losses. These proposed changes seem to have broad support and a good chance of adoption.

Drawbacks: Regulatory rules can be set aside in a crisis, as happened for thrifts in the early 1980s, critics say. Also, regulators and the industry would probably strongly oppose ideas that limited their flexibility.

--Risk-based premiums. Charging riskier banks higher premiums for deposit insurance than cautious banks would remedy the unfairness of the current uniform premium system, often compared to a system that would charge adults with spotless records as much for car insurance as teen-age drivers with drunk-driving records. Higher premiums for riskier lenders would provide an incentive for all banks to be more conservative.

Drawbacks: The government might not be able to accurately assess the risks of banks’ loan portfolios, critics say. It might prove politically difficult for regulators to penalize some institutions by imposing very high premiums.

--Co-insurance. The American Bankers Assn. has proposed covering depositors fully up to a certain sum--say, $100,000--but requiring them to “eat” a percentage of the losses beyond that in a crisis. Both sides would share some of the pain.

Drawbacks: Small banks fear that, in a crisis, the government would fully bail out big banks but might force depositors to suffer partial losses.

--Cross-insurance. Consultant Bert Ely has proposed putting deposit insurance entirely in the hands of the banks themselves. Banks would be 100% insured by one another and would pay premiums based on their risks.

Drawbacks: Abandonment of government guarantees is too radical a move for the public in the current uneasy atmosphere and could precipitate a wave of bank runs and closures, some argue.

--Limiting coverage to $50,000 per account. Such a drop would also limit the government’s liability and would relieve the heat on Congress from the S&L; crisis.

Drawbacks: Such a reduction would meet enormous resistance from the public and industry and might quickly destabilize the banking system and bring runs and closures.