Treasury May Limit Insured Accounts to Three Per Customer

The Treasury Department is considering restricting each American to three federally insured bank, savings institution or credit union accounts--no matter how little money is in each.

The department asked the Federal Deposit Insurance Corp. to estimate how much the proposal would save and to describe potential problems in administering it, FDIC Chairman L. William Seidman said Wednesday.

Seidman said the idea “has some merits and ought to be looked at,” but a banking trade group, the Independent Bankers Assn. of America, is vigorously fighting it.

The group sent an “alert” to its members quoting unidentified “top policy officials” as saying a limit on multiple accounts is “the reform concept most alive and well in Treasury circles.”

“This is not three accounts within an institution--it is three accounts per individual, period,” it said.

Treasury Secretary Nicholas F. Brady reportedly has not decided on the idea yet, but it is being advanced by Under Secretary Robert Glauber, the official in charge of the Bush Administration’s effort to overhaul the financial system.

A senior Treasury official, speaking on the condition of anonymity, stressed that limiting the number of accounts was “one of a number of proposals floating around” and “we are not in any sense embracing it.”

Glauber is directing the preparation of a department study, due next month. The study is expected to be the basis of an Administration proposal to Congress next year calling for the most sweeping overhaul of the financial system since the Depression.

Economists have cited the broad coverage of deposit insurance as one of the causes of the savings and loan debacle. Shaky institutions have no trouble attracting deposits because the accounts are federally guaranteed, they argue.

Brady in July said the Administration was disturbed by rules that permit depositors to protect far more than the $100,000 insurance limit, either by spreading their money among institutions or by dividing their money among individual, joint and trust accounts at a single institution.

However, the trade group’s letter was the first indication that the Administration is considering imposing restrictions that would affect millions of Americans with much less than $100,000.

Many Americans maintain far more than three accounts. For instance, a depositor with six accounts--$1,000 in checking, $5,000 in savings, $2,000 in a credit union, $10,000 in an IRA retirement fund, and two $1,000 certificates of deposit--would be allowed to designate only three of them as insured, even though the total--$20,000--is far below the $100,000 limit.

“I think tens of millions of people would be adversely affected and their financial life rendered more uncertain at just the wrong time,” said Kenneth Guenther, executive vice president of the independent bankers group, which represents smaller, community banks.

“A lot of CDs (certificates of deposit) would wind up not being insured. That would drive funds from community financial institutions to too-big-to-fail banks,” he said.

However, Seidman said most small depositors likely would consolidate their accounts so that all of their money was guaranteed.

“This is much more likely to cut back on the guy who has quite a bit more money,” he said.

The senior Treasury official said the definition of an account, for insurance purposes, could be changed so that savers could combine all of their certificates of deposit into one savings account with varying maturities.

An option previously discussed by policy-makers was limiting coverage to $100,000 per person. But because people withdraw and deposit funds frequently, that would be more difficult to administer than a flat limit on the number of accounts.

Guenther’s group has been lobbying against any cutback in deposit insurance. It argues that large banks, which regulators believe must be kept from failing to protect the financial system, would have an advantage in attracting deposits over smaller institutions whose failure would not threaten the system.

In an effort to kill the three-account proposal, the trade group on Wednesday sent its members 250,000 protest postcards, to be filled out by bank customers and mailed to President Bush.

“We hope by Monday there will be 100,000 postcards at the White House,” he said.

Bert Ely, an Alexandria, Va., S&L; analyst who favors privatizing deposit insurance, said limiting the number of accounts would accomplish little unless the government also finds a way to allow large banks to fail without endangering the financial system.

And any proposal that affects the insurance of small depositors likely would create a political firestorm, he said.

“I don’t think it will fly. You will hear a howl like you wouldn’t believe,” he said.