Bank Insurance Fund May Have to Tap Treasury : Finances: The head of the Congressional Budget Office says the fund will be empty before year-end.

The director of the Congressional Budget Office bluntly warned Tuesday that the bank insurance fund will run out of money late this year and will need to borrow cash from the Treasury if it is to continue rescuing depositors in financially crippled banks.

But CBO director Robert D. Reischauer said the banking industry, which supports the fund with annual premiums, should be able to repay such borrowing over the next five years, making a direct taxpayer bailout unnecessary.

A “minimum” of $5 billion to $10 billion in Treasury funds will be needed immediately and “you might consider numbers higher than that,” Reischauer told the Senate Banking Committee.

Committee Chairman Donald W. Riegle Jr. (D-Mich.) described Reischauer’s testimony as “stunning.” Riegle noted pointedly that federal regulators have been insisting that the insurance fund, which protects deposits up to $100,000, would not need to borrow from the Treasury.

“It’s very disconcerting to see that the problems are still larger than any solutions put forward to date,” said Riegle. “What everybody hopes is to find an answer that will avoid a bailout.”

The confidence of Riegle and his committee colleagues was clearly shaken by Reischauer’s report, which assumes that the fund’s losses will be worse than previous predictions by regulators or Administration budget officials. However, the banking industry continues to maintain that a bailout, or even borrowing from the Treasury, will not be necessary.

Committee members are increasingly fearful that a repeat of the savings and loan bailout could confront them if the recession deepens significantly, producing many more bank collapses.

“We’ve been here before,” said Sen. Richard Shelby (D-Ala.). “A lot of us heard the savings and loan story. What have we learned? The taxpayers have learned they don’t want to bail out the banks.” The thrift crisis was marked by the lingering death of many S&Ls;, which could not be shut down because there was not enough cash in the federal insurance fund.

Now, the dismantling of defunct S&Ls; will cost the taxpayers at least $130 billion, without including future interest on bonds used to finance the clean-up.

The banking industry, eager for Congress to allow it to enter fully into new lines of business, is determined to prove that it can provide the financial muscle to protect the fund without tapping taxpayers as the thrift industry did.

Bankers will meet here Thursday in a special summit meeting to “focus on the real condition of the bank insurance fund and what its requirements are apt to be,” said Thomas L. Ashley, president of the Assn. of Bank Holding Companies. “The banking industry understands it has a responsibility,” Ashley said. The meeting will discuss various plans for early intervention to help banks before they fall into deep trouble and must be seized by federal authorities.

“We’re firmly of the view banking structures must be modernized so that banks are able to compete in the marketplace,” Ashley said. The bankers, backed by the Bush Administration, want full freedom to deal in securities and insurance, and the bigger banks are anxious for the power to move across state lines.

Yet bankers’ hopes for success in winning new powers from Congress may be closely linked to the health of the insurance fund. If the banks themselves can keep the fund going, they can argue that the industry, with more than $200 billion in capital, is basically sound.

The insurance fund had $9 billion at the end of last year. It probably will be insolvent in the early part of fiscal 1992, which begins on Oct. 1, Reischauer said.

The recession, accompanied by plunging real estate prices, will cripple more banks, generating increased losses for the deposit insurance fund. The CBO said last year that the fund would suffer losses of $20 billion over 3 1/2 years, a figure that swelled to $30 billion in Tuesday’s report by Reischauer.

“The weakness in regional real estate markets appears to be intensifying and spreading from the Northeast, down the Atlantic Coast and to the West,” the CBO director said.

His report assumes that the economy will begin to recover in the second quarter of this year and will enjoy a healthy 3% growth rate for the year, giving banks improved earnings and the ability to repay Treasury borrowings for the insurance fund.

If the economy takes longer to recover and the banks cannot generate enough earnings to repay the temporary borrowing from the Treasury, then the taxpayers would bear the burden.

The borrowing suggested by Reischauer is a “significant departure” from previous claims by the regulators that the fund could be financed solely by the industry, said Sen. Paul Sarbanes (D-Md.). The decision to borrow is “a Rubicon to be crossed.”