Banks Must Pay 62% More for Insurance on Deposits in 1991

The directors of the Federal Deposit Insurance Corp., concerned about the deteriorating health of the banking system, voted Thursday to raise the deposit insurance premiums that commercial banks must pay by 62%.

The five-member board voted unanimously to raise 1991 premiums to 19.5 cents per $100 of deposits. The action, proposed last month, came after an FDIC report Thursday showed that the government’s bank insurance fund is suffering losses at a greater rate than previously thought because of the rising rate of failures among large banks.

The insurance fund’s reserves have declined by 14%, from $13.2 billion at the end of 1989 to $11.4 billion by the end of June. FDIC officials said they expect large bank failures to cut as much as $3 billion from the insurance fund for all of 1990, $1 billion more than they had expected.

“There are no two ways about it,” said FDIC Chairman L. William Seidman. “The insurance fund is under strain because of the increased costs of handling bank failures.”

The widely anticipated move to raise premiums to 19.5 cents, the maximum under current law, should provide an extra $1.1 billion for the fund over the next year, according to the FDIC. The premium, currently 12 cents per $100 in deposits, previously was scheduled to rise to only 15 cents in 1991.

Congress and the Bush Administration are debating a series of dramatic measures to reform the structure of the banking industry to avert a repeat of the savings and loan crisis. On Thursday, Sen. Donald W. Riegle Jr. (D-Mich.), chairman of the Senate Banking, Housing and Urban Affairs Committee, warned that the failure of one major bank could virtually wipe out the federal insurance fund.

An FDIC spokesman said the agency believes that it would take at least two major bank failures to decimate the fund. But Seidman, who testified before a subcommittee of the House Banking, Finance and Urban Affairs Committee, acknowledged that the insurance system and the banking industry are both under enormous stress and could crack under further pressure.

“A number of extraordinary events, such as a substantial downturn in the economy . . . could further deplete the insurance fund,” he warned.

To give bank regulators greater flexibility, Congress is in the process of removing the ceiling on the level of insurance premiums that the FDIC can charge member banks. Under current law, the FDIC is not allowed to increase premiums beyond the level approved Thursday until 1992.

The House has passed a bill that would remove the ceiling, and Riegle has vowed to push the measure through the Senate Banking Committee next week. A number of alternative measures also have been offered, including one House bill that would raise another $25 billion for the insurance fund by requiring banks to pay the equivalent of 1% of their deposits in premiums.

“The FDIC bank insurance fund is facing a dire crisis,” said Rep. Frank Annunzio (D-Ill.), chairman of the House Banking subcommittee on financial institutions and author of the bill calling for the 1% premium level. “The Congress cannot play chicken with the fund and hope there is not another bank failure in the next few months.”

Seidman, however, warned that higher insurance premiums alone will not cure the worsening crisis in the bank and thrift industries.

“If there are to be lasting improvements in the deposit insurance system, structural problems in the banking industry also must be addressed,” Seidman said. “The purpose of deposit insurance should not be to hold together an antiquated industry.”

In fact, Seidman and other regulators seem increasingly convinced that a comprehensive restructuring of the nation’s financial sector is needed. Earlier this week, Seidman proposed repealing laws that prevent banks from engaging in a wide range of nonbanking businesses--as long as they operate those businesses outside their core banking units with funds that are not covered by federal deposit insurance.

Meanwhile, Timothy Ryan, director of the Office of Thrift Supervision, told the Senate Banking Committee that he believes that the savings and loan industry will survive its current debacle, but in a much smaller form.

“For some of the healthier institutions, it looks like this (the thrift industry) could be a very good niche business,” he said. “But whether in the long run it is still called the thrift industry, or the banking business, I don’t know . . . we’ll just have to see.”