Support Grows for Billing Bank Rescues to Taxpayers

Support is growing for having taxpayers, rather than the banking industry, bear the extra cost of bailing out uninsured depositors in institutions whose failure could unravel the financial system.

Sen. Donald W. Riegle Jr. (D-Mich.), chairman of the Senate Banking Committee, on Tuesday introduced a broad banking reform bill that, in effect, would have taxpayers share the cost of the biggest bank rescues.

His bill would prevent the Federal Deposit Insurance Corp., financed by banks’ insurance premiums, from protecting deposits in excess of the $100,000 insurance limit after 1994.

However, the Federal Reserve could pay off uninsured depositors if it believed that was necessary to prevent a contagious run on other banks’ deposits, a crash in the value of the dollar or some other financial emergency.

Any money the central bank spent would have to be deducted from the annual revenues it forwards to the Treasury. So, in effect, general taxpayers would bear the cost.

The proposal could prove politically touchy, especially with so many members of Congress being attacked by constituents for supporting a taxpayer bailout of the savings and loan industry.

Sen. Alan J. Dixon (D-Ill.), a member of the banking panel, and Rep. Chalmers P. Wylie of Ohio, the senior Republican on the House Banking Committee, have also proposed plans for tapping the Federal Reserve to pay part of the cost of bank failures.

Under Riegle’s proposal, the FDIC and by extension the banking industry would continue to bear most of the cost of so-called too-big-to-fail bank rescues.

For instance, in the collapse earlier this year of the Bank of New England, regulators attributed roughly $300 million of the $2.3-billion bailout price tag to the cost of protecting uninsured depositors. All deposits were declared safe because regulators feared setting off runs throughout the economically depressed region.

The argument for spreading the cost of such bailouts is that the entire financial system and everyone who uses it benefits, not just banks.

“If what you’re really talking about is an institution that’s gotten so far out of bounds that it threatens to bring down the whole system, then maybe the cost of intervening there ought not to necessarily go against the insurance fund per se but ought to be charged against the government generally,” Riegle said.

He said other changes that his bill would impose should make too-big-to-fail bailouts very rare. He would require regulators to crack down on banks when they first start to weaken and promptly close them as soon as their owners’ capital is exhausted.

“The whole notion of restructuring the system is to avoid failures of huge banks,” he said.

Riegle’s position is supported by five banking industry trade groups, FDIC Chairman L. William Seidman and, at least tentatively, two large bipartisan congressional agencies.

Robert D. Reischauer, director of the Congressional Budget Office, told Riegle’s panel Tuesday that “a good argument can be made that taxpayers in general” should pay the extra cost of protecting uninsured deposits.

In a report Monday, the General Accounting Office advocated involving the Federal Reserve in too-big-to-fail decisions, but it stopped short of saying who should pay.