Putting a Premium on Trust

Confidence is crucial in banking, so it’s important to quell any anxiety over the fund that insures the deposits in commercial banks.

Recently, there has been mounting concern over the fragility of that fund, which protects each bank deposit up to $100,000.

Worried that the rapid depletion might lead to another taxpayer bailout like the savings and loan debacle, Democrats and Republicans have joined the Bush Administration in proposing that bank regulators be given the discretion to raise premiums that banks pay to the Federal Deposit Insurance Corp.

Premium increases are now limited to 7.5 cents per $100 in deposits every year. So next year banks will pay 19.5 cents per $100 in deposits, up from the current 12 cents. The fund may need more.

Troublesome real estate loans and plunging property prices have caused big losses for some banks nationwide. California banks so far have escaped the troubles experienced by northeastern banks.

But nationwide, 15 banks have folded, and another 20 could fail by the end of the year. The insurance fund is down to $13.2 billion from $18.3 billion two years ago.

The General Accounting Office Tuesday warned that an economic slump--a recession--could bankrupt the fund. The Congressional Budget Office released a study on Wednesday predicting that 631 banks could fail in the next four years resulting in cumulative losses of $20 billion to the insurance fund.

The banking industry is not in as bad a shape as the thrifts. It has a stronger capital base. Bank regulators have been more stringent in their oversight and have moved more quickly on problem banks.

But the banking situation is worrisome enough--and we don’t need another bailout burden.

Bankers have argued that higher premiums will be onerous, especially if the credit crunch worsens and the cost is passed on to depositors.

And bankers are hungering for reforms to expand financial services in order to be more globally competitive; Congress should listen to the industry.

But bankers need to go along with the premium hikes to maintain confidence.