Administration Backs FDIC Plan to Boost Fund

The Bush Administration has agreed to accept a controversial plan to raise $30 billion from the banking industry to strengthen the federal insurance fund that backs up bank deposits, senior Administration officials said Tuesday.

Undersecretary of the Treasury Robert Glauber said the Administration will include the plan in the massive banking reform package that it intends to send to Congress in the next week or so. The plan was proposed by L. William Seidman, chairman of the Federal Deposit Insurance Corp., for refinancing the FDIC’s depleted insurance fund, which protects individual bank accounts up to $100,000.

The Administration has not yet informed congressional leaders who deal with banking issues that it has decided to endorse Seidman’s plan, but officials expect to announce their acceptance within the next few days in congressional hearings on banking reform.

Previously, the Administration had refused to say whether it would back Seidman’s proposal for recapitalizing the fund. Top Treasury officials and other Administration leaders for months have sought to avoid getting involved in the issue of refinancing the insurance fund, declaring that it was up to Seidman and the banking industry to resolve the crisis.

But its refusal to take a position on the emergency recapitalization of the fund was starting to create political problems as the Administration sought to sell its broader and longer-term proposals for banking reform in Congress.

Most observers believe that Congress is far more concerned with the solvency of the insurance fund this year than it is with the Administration’s longer-term proposals for bank restructuring. Amid the worst banking crisis since the Great Depression and with another 180 banks expected to fail this year, Seidman and congressional leaders have warned that a rescue of the fund this year is essential to make sure that it doesn’t become insolvent.

The FDIC fund, financed by insurance premiums paid by banks but depleted by hundreds of bank failures during the past few years, dwindled to just over $8 billion by the end of 1990, less than half its level of three years earlier.

Most congressional leaders say they expect some form of refinancing of the fund to be passed this year unless a taxpayer bailout similar to that undertaken for savings and loans is required.

Seidman’s proposal would call for a government line of credit to be extended to the insurance fund for use in times of crisis, but the plan would still call for the fund to be financed by the banking industry. Seidman has insisted that his plan would not put taxpayer funds at risk.

The plan includes a higher premium to be paid by banks, raising the amount from 19.5 cents to 23 cents for every $100 in deposits, effective July 1. That would cover $10 billion for the fund’s short-term cash needs.

Meanwhile, Seidman wants the authority to borrow up to $20 billion more for unanticipated bank failures, in the form of a line of credit from the Treasury. That money would come through government borrowings, but the interest on the borrowed funds would be paid by the banking industry and the principal would be repaid eventually through premiums paid by banks to the insurance fund.

Seidman has said that he does not believe the FDIC will ever have to tap into the emergency line of credit.