Fed Chairman Sees Continuing Stress on FDIC Fund : Banking: Greenspan cautions Congress about overreacting.

Federal Reserve Chairman Alan Greenspan said today that the fund that protects bank depositors will likely “remain under stress for some time to come,” but he cautioned Congress against hastily passing legislation that could only make the situation worse.

Greenspan noted that the reserves in the Federal Deposit Insurance Corp. fund stand at their lowest level ever after a near-record string of bank failures.

“There remain all too many problems in the banking system, problems that have been growing of late as many banks, including many larger banks, have been experiencing a deterioration in the quality of their loan portfolios, particularly real estate loans,” Greenspan told a House committee.

“It thus seems clear that the insurance fund likely will remain under stress for some time to come,” he said. “Moreover, pressures would intensify if real estate market conditions were to weaken further or a recession were to develop in the general economy.”

Greenspan’s warning was similar, although less specific, than reports earlier this week from the congressional General Accounting Office and the Congressional Budget Office.

Both agencies warned that one large bank failure or a further downturn in the economy could wipe out the remaining $13.2 billion in the FDIC insurance fund and force taxpayers to provide a bailout.

It was the depletion of a separate insurance fund for deposits in the savings and loan industry that prompted legislation last year that is expected to cost taxpayers hundreds of billions of dollars over the next 30 years.

Members of Congress, alarmed by the reports that the FDIC fund is also in trouble, have rushed to introduce legislation to boost its resources and thus avert a similar bailout for the bank fund.

Greenspan cautioned that although “reform is needed, so is caution.”