White House, Senator Urge Action on FDIC : Banks: President Bush and Donald Riegle want regulators to be able to boost the amount paid for deposit insurance. The fund is shrinking fast.
The Bush Administration and the chairman of the Senate Banking Committee, alarmed by the deterioration in the insurance fund for bank deposits, on Wednesday endorsed emergency action to allow regulators to increase premiums paid by banks for federal deposit protection.
“We have taken ourselves into the danger zone,” Sen. Donald W. Riegle Jr. (D-Mich.), the committee chairman, told a meeting of his panel. “We’d better understand how quickly we could burn through the rest of this (insurance) fund.”
Riegle’s staff hastily drafted a bill to give new discretion to bank regulators to raise premiums after an ominous General Accounting Office report Tuesday warned that an economic slump could bankrupt the insurance fund. That would necessitate a taxpayer bailout of the system that protects deposits up to $100,000.
The Treasury, meanwhile, promised that it would send its own plan to Congress within a few days. The Federal Deposit Insurance Corp. “should have all the tools it needs to act responsibly if it reaches the conclusion that higher assessments are necessary,” Treasury Secretary Nicholas F. Brady said in a statement issued Wednesday evening. “We strongly support providing additional flexibility now,” he said.
More bad news came to the Banking Committee Wednesday as the Congressional Budget Office unveiled a study predicting that, even in a healthy economy, 631 banks could fail in the next four years, with cumulative losses of $20 billion to the insurance fund. A recession would further swell the number of failures, with dire results for the insurance fund, the CBO warned.
“Surprises cannot be ruled out,” CBO Director Robert D. Reischauer told the committee. Banks “that appear to be well-capitalized can and do fail, even within one or two quarters.”
Banks now pay 12 cents for every $100 in deposits as premiums for the insurance fund. The FDIC recently proposed an increase of 7.5 cents, the maximum hike permitted in a single year, effective next year.
However, Riegle is convinced that the banking fund is in such a precarious condition that Congress should provide discretion to the FDIC to raise additional money.
His plan would abolish the 7.5-cent annual limit on premium increases and give the FDIC freedom to decide on the amount and timing of increases.
If the legislation is approved by Congress and signed by the President, the FDIC could make the scheduled increase effective immediately, instead of waiting until Jan. 1, for example. Or it could raise rates beyond the 19.5-cent level.
“The FDIC might well decide that a 23-cent level is necessary soon to replenish the fund,” a Banking Committee staff member said. But massive increases are unlikely if they would threaten the health of individual banks.
A spokesman for the American Bankers Assn., the industry’s chief trade group, said, “We feel it’s premature to talk about another increase when the 19.5-cent (charge) hasn’t kicked in yet. If you’re trying to lose 30 pounds, you are better off to lose it gradually than by starving yourself to death in one month.”
Congress is scheduled to adjourn for the year early next month, but Riegle is hoping that the gravity of the fund problem will stimulate rapid action on his legislation. The legislation has not yet drawn a reaction from House Banking Committee Chairman Henry B. Gonzalez (D-Tex.).
The insurance fund contains $13 billion, down from $18 billion two years ago. This shrinking balance could disappear entirely if plunging real estate prices force banks to report big losses, the committee chairman said.
A similar fund for S&L; deposits became insolvent under a barrage of thrift failures. A massive taxpayer bailout will pay off depositors and replenish the fund.
Riegle and his committee colleagues, joined by other members of Congress, are anxious to avoid a repeat of the S&L; debacle, which will cost taxpayers between $90 billion and $132 billion.
Riegle and four other senators have been personally and politically embarrassed for their roles in intervening with regulators on behalf of Charles H. Keating Jr., former chairman of American Continental Corp., which owned the now-defunct Lincoln Savings & Loan of Irvine. The collapse of Lincoln will cost taxpayers an estimated $2 billion.
The Senate Ethics Committee is investigating the so-called Keating Five--Sens. Riegle, Alan Cranston (D-Calif.), John Glenn (D-Ohio), Dennis DeConcini (D-Ariz.) and John McCain (R-Ariz.)--in connection with contacts they made on behalf of Keating.
On the House side, a bill introduced Wednesday would limit insurance to $100,000 per individual, forbidding the current practice of allowing depositors to insure multiple accounts of $100,000 at various institutions.
The proposal by California Rep. Richard Lehman (D-Sanger) and Rep. Gerald D. Kleczka (D-Wis.) would also limit full insurance to the first $50,000 and insure 90% of the remaining $50,000.
The idea of limiting deposit insurance is likely to be among those discussed today as the House Banking Committee begins hearings on reforming the federal deposit insurance system.
